The U.S. Intellectual Property System and the Impact of Litigation Financed by Third-Party Investors and Foreign Entities

Introduction

The U.S. Chamber of Commerce Institute for Legal Reform (“ILR”) supports federal legislation that would increase the transparency of third-party litigation funding (“TPLF”) usage. As a program of the U.S. Chamber of Commerce (the “Chamber”), ILR’s mission is to champion a fair legal system that promotes economic growth and opportunity. The Chamber is the world’s largest business federation, representing the interests of millions of businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations, and it is dedicated to promoting, protecting, and defending America’s free enterprise system.

TPLF is a rapidly growing business model in which non-parties invest in litigation by paying money to a plaintiff or his/her counsel in exchange for a contingent interest in any proceeds from the lawsuit. At present, virtually all TPLF activity in U.S. courts occurs in secrecy because there is no generally applicable statute or rule requiring disclosure.¹ Moreover, to the extent defendants seek this information through ordinary discovery, plaintiffs generally resist strenuously, and courts often do not compel production of the requested information.

Thus, the existence of TPLF in a particular civil action typically becomes known to the court and the parties only if there is compliance with a local rule or standing order requiring disclosure (or a public dispute emerges between the plaintiff and the funder). Despite this secrecy, it is clear that the amount of litigation being funded by non-party investors has grown by leaps and bounds over the last decade.

According to one industry report, during 2023, litigation funders had $15.2 billion in assets allocated to U.S. commercial investments.²

TPLF and Patent & Mass Tort Litigation

Of most relevance to today’s hearing, third-party litigation funders have zeroed in on patent litigation. An analysis conducted in 2022 by Texas A&M University shows that from 2015–2021, at minimum, almost 25% of patent lawsuits in the U.S. were funded by third parties.³

The same data show that from 2000–2021, Non-Practicing Entities (“NPEs”) initiated almost half of all patent cases. Additional sources estimate that 50%–60% of all patent litigation involves NPEs.⁴

While much public attention has focused on the patent space, litigation investors have increasingly entrenched themselves in mass tort litigation. Flush with cash, plaintiffs’ lawyers and their investors work with claim aggregators (lead generators) to generate claims through aggressive advertising campaigns. “Advertising is the main method to find claimants… handled by an ecosystem of lawyer-specific ad agencies.”⁶

These campaigns have fueled litigation involving talcum powder, military ear plugs, baby formula, and weedkillers.⁸ The 3M Combat Arms earplug litigation became the largest mass tort in U.S. history, generating nearly 300,000 claimants.⁹ Plaintiffs’ counsel openly credited digital marketing, litigation funding, and capital for the surge in volume.¹⁰

Foreign Investment and National Security Risks

The ubiquity of TPLF has also raised concerns about foreign actors using litigation funding to influence U.S. lawsuits. Due to secrecy, the full extent of such involvement is unknown. However, sovereign wealth funds (“SWFs”) are increasingly active in this space.¹²

• Burford Capital partnered with an undisclosed SWF from at least 2018–2023.¹³
• Therium has also maintained a relationship with an undisclosed SWF.¹⁴
• PurpleVine IP, a China-based entity, has funded multiple U.S. patent suits against Samsung affiliates.¹⁵

The Executive Branch has recognized these risks. DOJ officials have stated that foreign litigation funding may implicate FARA requirements, and the SEC now requires private equity firms to disclose capital allocated to litigation finance.¹⁸

Despite these developments, there is no nationwide disclosure requirement.¹⁹

Why a Uniform Federal Disclosure Law Is Necessary

1) Uncovering Potential National and Economic Security Risks

Scholars and lawmakers have warned that foreign sovereign wealth funds could use litigation to extract sensitive trade secrets or advance strategic objectives.²² Senator John Kennedy warned that foreign actors can pursue strategic goals “in the shadows” using litigation funding.²³

Investigations have also shown that TPLF may be used to evade sanctions laws, including by Russian-linked entities involved in U.S. litigation.²⁴²⁵ Transparency is therefore a national security necessity.

2) Ensuring Compliance with Ethical Obligations and Avoiding Conflicts

Disclosure allows courts to identify conflicts of interest and improper fee-sharing. In the Steven Donziger/Chevron litigation, disclosure revealed that Burford Capital funded the case, triggering previously undisclosed relationships involving a court-appointed special master.²⁷–³³

TPLF arrangements may also violate Model Rule of Professional Conduct 5.4, which prohibits fee-sharing with non-lawyers and protects attorney independence.

3) Assessing Control or Influence Over Litigation

Despite funders’ claims of passivity, cases show funders often exert control:

• In Boling v. Prospect Funding Holdings, funding agreements granted the funder effective control over litigation and settlement decisions.³⁶
• ABA reports warn against funder control over litigation strategy.⁴⁰
• In Sysco Corp. litigation, allegations showed Burford vetoed settlements and sought to prolong litigation.⁴¹–⁴⁶

These examples demonstrate why actual funding agreements must be disclosed, not just their existence.

4) Relevance to Settlement Efforts

TPLF can make cases harder and more expensive to settle.⁴⁸ Funding agreements often incentivize rejection of reasonable settlement offers or grant funders first-dollar recovery advantages.⁴⁹⁵⁰

In mass torts, settlement pressure is amplified by volume-driven litigation funded through advertising and TPLF. The 3M MDL Wave 1 review showed a significant percentage of claims lacked evidentiary support.⁵³–⁵⁵

5) Detecting Violations of State Champerty Laws

Courts increasingly invalidate TPLF agreements that violate state champerty prohibitions. In Boling, agreements were voided under Kentucky law due to funder control.⁵⁹–⁶² Disclosure ensures courts can identify illegal arrangements early.

6) Relevance to Class Certification

TPLF is highly relevant to Rule 23 adequacy of representation. In Gbarabe v. Chevron, the court compelled disclosure because funding terms affected class adequacy.⁶³–⁶⁷

Northern District of California standing orders now require disclosure in class actions, but this is not a substitute for a nationwide rule.⁶⁹

7) Proportionality, Cost-Shifting, and Sanctions

TPLF affects discovery proportionality under Rule 26(b)(1) because funders should be considered part of the parties’ resources.⁷⁰

In Abu-Ghazaleh v. Chaul, litigation funders were held liable for attorneys’ fees because they exercised control over the case.⁷¹–⁷³ Disclosure enables courts to impose sanctions appropriately.

Conclusion

The litigation funding arrangements that have come to light demonstrate that TPLF can:

• Create conflicts of interest
• Enable unethical fee-sharing
• Undermine plaintiff control
• Frustrate settlement
• Facilitate foreign interference
• Threaten national and economic security

The only way to detect and address these risks is through mandatory disclosure of the existence and terms of TPLF agreements. Accordingly, ILR urges Congress to enact a uniform federal TPLF disclosure law applicable to all civil litigation.