Foreign state sponsors of litigation should lose sovereign immunity from being sued

Foreign states increasingly find creative ways to influence U.S. domestic policy, to shift cultural debates and to destabilize our institutions for strategic geopolitical or even commercial advantages over the U.S. and its businesses.    

The nation’s courtrooms risk becoming new battlefields in these ubiquitous soft wars. This warning bell rings in the November 2022 report by the U.S. Chamber of Commerce Institute for Legal Reform (ILR) titled “A New Threat: The National Security Risk of Third Party Litigation Funding.” The report highlights that litigation financing could be very attractive to foreign adversaries as a channel through which to accomplish its disruptive goals. 

In third-party litigation funding (TPLF), just like dabbling in stocks or commodities, funders see litigation, with the potential for big money settlements or judgments, as an investment vehicle.    

In TPLF, the typical third-party bankrolling litigation expects a return on its investment by getting a cut of any award or settlement received by its funded plaintiff. It is not that much different than attorneys taking cases on contingency. In the fast-growing field of TPLF, however, the resources to bring the lawsuits and the percentage payouts are going to sophisticated non-attorney investors who are typically in it just for the money. And these funders develop diverse portfolios of litigation, assess and spread risk and want to exert whatever pressures in the litigation they can to maximize the return on their investments.   

TPLF is already encouraging more frivolous litigation. And it changes settlement dynamics because funders want to press on beyond what the parties without their influence might have agreed was a good settlement point.  

Further, adding funders with interest in litigation creates extraordinarily complicated issues of conflicts that might need to be resolved for the courts and attorneys involved. Worse yet, in almost every state and federal court in the United States, there is not presently any obligation to disclose which third parties are funding any piece of litigation or even whether or not there is any third-party funding in the case. 

Much has been written about the havoc TPLF is bringing and promises to bring, including ethics concerns highlighted in an American Bar Association August 2020 report on “Best Practices for Third-Party Litigation Funding.”

Now, the new ILR report warns that foreign adversaries may want to get in on this game, and the chance for money gains may matter less than the other ways they can manipulate the U.S. system through financing litigation. We have already learned that nations have targeted all aspects of our economy, communications and politics for strategic disruption. They see these outlets as places they can stir up the polarization pot and destabilize critical institutions. The conduits for influence are anything they can infiltrate, most notoriously including social media, bots and algorithmic manipulation. 

The courts provide significant opportunities to accomplish similar harmful results. Funding cases that might not otherwise be brought could be used to further clog an already overburdened court system, taxing judicial resources and consequently delaying or denying justice in all cases. The types of cases could be ones that push theories that seek to change U.S. law. Disinformation like that filling social media might be placed inside court briefs to try to legitimize or further publicize and disseminate the claims. 

Cases could also be funded simply to target specific defendants, like U.S. businesses important for U.S. national security or those that are in competition with commercial operations by or in the foreign nation. Such lawsuits would divert resources of those industries away from productive activity critical to our economy and national defense. 

The ILR report also highlights that adversaries might use courts’ discovery process, where plaintiffs get to demand records from defendants, as a way to access sensitive or confidential business or government information that could not be obtained any other way. 

Among other recommendations, the report suggests creating disclosure and transparency requirements to expose foreign funders that today remain hidden.    

In an op-ed published in the Wall Street Journal last week, I introduced one additional policy recommendation: Congress can strip foreign adversaries who engage in TPLF of the sovereign immunity they get from being sued in U.S. courts. How might this work? 

Right now, the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §1604 provides that “a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States,” with only a very few exceptions. This means that, for most matters, aggrieved individuals suffering harm at the hands of foreign states cannot sue foreign nations in federal or state courts in the United States. 

However, already under the FSIA, if a foreign state chooses to voluntarily make an appearance as a party in a lawsuit in the federal or state courts in the United States, then their sovereign immunity is usually deemed waived by implied consent, at least for that case. In such instances, the foreign state’s choice to enter our courts is perceived as exhibiting a general trust in our courts and it expresses a willingness to be bound by our courts’ judgments. 

The TPLF-related amendment to the FSIA could be written as follows: “Any foreign sovereign that directly or indirectly, including through its agents or assigns, engages in or sponsors funding third party litigation in the federal or state courts in the United States shall be deemed to have generally waived, for any and all lawsuits or counterclaims brought against them, in state and federal courts, any immunity from suit otherwise granted by the Foreign Sovereign Immunities Act or recognized in any other statute or the common law.” 

There should be a tradeoff if foreign states sponsor litigation in the U.S. courts. Can these nations really say that the courts are good enough as a place to invest their money but too risky a threat to their sovereignty so as to be entitled to be immune from suit in them? 

Donald J. Kochan is a professor of law and deputy executive director of the Law & Economics Center at George Mason University’s Antonin Scalia Law School.