‘Litigation funding’, also known as ‘third-party funding’ allows individuals and groups who would otherwise lack the financial resources, to pursue litigation. Recently, it received some attention, due to the fact that Russian billionaires close to President Putin would have secretly financed US lawsuits through third-party litigation funding.
Bloomberg law notes about the subject: ‘With no reporting requirements and few rules, high-money investors can pour millions of dollars into a case without ever appearing on a court’s agenda. This has led to a new kind of cross-border money funnel used to circumvent international law and the spirit of sanctions.” Given the geo-strategical risks involved, both in the United States and in Europe, legislation is currently being prepared, aiming to introduce transparency requirements.
It is not only Russia. Also Chinese actors are active in this regard. For example, a Chinese company clandestinely funded intellectual property lawsuits against Samsung. This involved using a Florida technology company as a front in an attempt to prove that Samsung had allegedly used its intellectual property in its popular audio products.
Chinese firm Purplevine IP is funding 4 US patent-infringement suits as Congress members scrutinize the role of foreign investment in American courts and seek to ban the practice in some instances.
I chipped in, but @EmilyRSiegel did the heavy lifting.https://t.co/yZfIII4HIU pic.twitter.com/SI9ZkKEUaY
— Christopher Yasiejko 🌻🇺🇦 (@yasiejko) November 6, 2023
Criminal conduct
A prominent case in this regard concerns a dispute over Malaysia’s territorial boundaries, in which the country was legally challenged by the Filipino alleged heirs of the Sultan of Sulu – now known as the Malaysian province of Sabah – to pay them compensation based on an 1878 colonial treaty between the British and the Sultan. Malaysia had continued the British arrangement to pay compensation after independence, but had stopped doing so in 2013, after an armed invasion from the Philippines killed at least 60 people. These people managed to get a Spanish arbitration court to award $15 billion in compensation to Malaysia. Promptly afterwards, assets of the state energy company Petronas in Luxembourg were frozen.
Behind all this is reportedly one of the world’s largest companies specialising in litigation funding, Therium, based in the UK, which is said to have invested more than $20 million in the lawsuit. A noteworthy fact here is that the Spanish arbitration judge in the case, Gonzalo Stampa, was criminally sentenced to six months in prison, for moving the case from Madrid to Paris, against a Spanish court order. Experts say this means the entire trial could well be annulled.
Petronas has now subpoenaed litigation funder Therium Capital Management in the U.S., accusing it of misconduct by ignoring that Stampa’s authority as arbitrator had been revoked because the company had requested that he move the case to Paris.
Legislative action
In a letter from major pharmaceutical companies Bayer and Johnson & Johnson to the US Congress in October, they demand more transparency, complaining that the litigation funding industry ‘goes to great lengths to operate in the deepest secrecy’. They thereby accuse third party funders of ‘often manipulating civil lawsuits for their own purposes.’ On top of that, the US Chamber of Commerce alleges that third party funding could allow US geopolitical rivals to get their hands on confidential information about sensitive technologies. This may well be the case, as third-party litigation funding all too often involves lawsuits related to intellectual property.
A proposed US bill now aims to address this, by more tightly restricting the ability of foreign entities to finance lawsuits in the U.S. It is sponsored by U.S. Representative Mike Johnson, a senior member of the House Judiciary Committee, who commented: “Foreign states and sovereign wealth funds should not meddle in our justice system. This bill prevents foreign actors like China from financing malicious lawsuits, protects critical industries, and prioritizes the interests of Americans in court.”
BREAKING: Today, Sens. John Kennedy & Joe Manchin, and Rep. Mike Johnson introduced a landmark bill that would bring much-needed transparency to the third party litigation funding industry.
More: https://t.co/bknRUp1ydK pic.twitter.com/4cblawaWo8
— U.S. Chamber Institute for Legal Reform (@LegalReform) September 14, 2023
Legal action is also in the pipeline in Europe. Last year, the European Parliament proposed that the European Commission issues a directive to regulate third-party funding in the EU. This would involve a variety of specific disclosure and transparency obligations, as well as a fiduciary duty of care by the funder towards the funded party, and it would limit the financial interest of funders to 40 per cent of the amount of damages awarded, except in exceptional circumstances.
It is certainly not a bad idea to require transparency on who is ultimately financing a particular lawsuit, although care should be taken not to jeopardise access to justice. In itself, third-party funding is useful to help less wealthy actors to go to court and seek justice. Then, Instead of the EU’s bureaucratic approach, it might be better to allow judges to decide on a case-by-case basis to what extent claimants should be transparent.
