Third-party litigation funding (TPLF), the practice of allowing outside investors to finance lawsuits in exchange for a share of any recovery, has long drawn scrutiny for distorting the civil justice system. A new report from the U.S. Navy’s Office of Naval Research now adds a more urgent dimension to that concern: TPLF is a national security threat.
The Navy’s findings are striking. Entities from just three adversary-aligned jurisdictions appear in roughly ten percent of all national security-related intellectual property disputes across federal district courts, the International Trade Commission (ITC), and the U.S. Patent and Trademark Office (USPTO). Those cases are not random. They involve technology with relevance scores nineteen percent higher than other patent litigation, meaning adversaries are targeting America’s most strategically important innovations. At least one TPLF firm has explicitly built a business strategy around partnering with Chinese firms to assert Chinese IP rights against U.S. companies and has announced plans to open an office in an adversary-adjacent jurisdiction to fund Chinese-owned patent claims against American businesses. The Navy’s broader survey of 387 TPLF firms found that this is not an isolated concern. Five percent carried elevated adversary connection risk and another eleven percent carried medium risk. Yet courts have no reliable way to detect when an adversary-connected funder is present in the case.
The U.S. Chamber’s Institute for Legal Reform (ILR) has been warning about this very scenario for years. As we noted in our 2022 research on TPLF and national security, adversarial governments can use litigation funding to target American companies, drain their resources, and access their sensitive business information, all without appearing in court. The Navy report confirms this is not a hypothetical. Because TPLF does not require public disclosure, foreign adversaries can steer litigation while remaining entirely concealed. The Navy identifies three specific consequences: adversaries extract U.S. technology through the discovery process, profits from U.S. litigation are reinvested to fund harmful activities, and foreign actors manipulate royalty rates for standards-essential patents, which account for twenty-three percent of all U.S. patent disputes. Adversary-backed litigation also forces U.S. companies to divert resources away from research and development.
The report acknowledges these risks of adversarial involvement are conservative given TPLF’s opacity, which reaffirms the point ILR has been making. As we argued in our recent proposal for a uniform federal disclosure rule, without knowing who is driving a lawsuit, courts and litigants are flying blind.
ILR is calling for meaningful reform: mandatory disclosure and passage of the Protecting Our Courts from Foreign Manipulation Act, as well as multiple other TPLF reform bills at the federal and state levels. ILR has also called for closing the federal tax loophole that lets foreign funders avoid U.S. taxes on litigation profits entirely, a subsidy for adversarial behavior that Congress should end.
The Navy report warns that without reform, the U.S. justice system risks being perceived as “for sale” to foreign governments. Congress should act to close these national security loopholes.
