Chinese-funded lawsuits fuel backlash against litigation financiers

The revelation that a Chinese company is funding several US patent lawsuits has put the $13bn litigation finance industry on the defence over claims that Beijing could exploit the American legal system and spy on corporations.

Court filings in Delaware show that Shenzhen-based Purplevine IP is backing two related intellectual property suits brought against a subsidiary of Samsung Electronics. The suits allege that JBL Bluetooth earbuds infringe on several voice detection and noise reduction innovations, as does an in-car sound system.

Purplevine is reportedly backing three other cases in Texas, brought by the same Florida-based wearable tech company. Litigation finance companies pay legal costs upfront in exchange for a share of damages that may be awarded.

“The cost of allowing foreign actors, especially foreign adversaries, to take advantage of the American court system is high,” Florida’s Republican senators Marco Rubio and Rick Scott wrote to their state’s chief federal judges shortly after the initial Purplevine disclosure, urging them to force parties in their courts to divulge the backing of foreign investors.

While they did not mention Purplevine by name, the senators claimed third-party litigation funding could allow foreign actors to “exploit the openness of American institutions and undermine critical infrastructure” using tactics that are frequently employed by “foreign adversaries, particularly China”.

The litigation finance industry has boomed in recent years as firms’ ability to pick lawsuits likely to deliver a substantial return became ever more sophisticated. It has long claimed such fears of foreign interference are unfounded, and stoked by corporations desperate to stem the tide of well-funded, multi-district lawsuits that have ended in eye-watering payouts.

“The idea that China is going to try and conduct industrial espionage by getting a litigation finance firm to get information is . . . so far fetched as to be preposterous,” said Christopher Bogart, the founder of Burford Capital, the now-public company credited with developing the nascent litigation finance industry into a commercial juggernaut.

He added that Burford only had “one sovereign wealth fund investor . . . and it’s clearly not a Chinese fund”. The group describes that investor, with which it has an $872mn funding arrangement, as being a US “partner nation”.

Mithaq Capital, a Saudi investment firm, is listed as Burford’s largest shareholder, with a stake representing more than 10 per cent of the company. Burford said in a statement that it did not tell investors “anything more than we tell the public markets”.

Burford’s share price has soared by more than 50 per cent this year, amid a series of favourable judgments that culminated in a $16bn win for a case it backed against Argentina over the expropriation of oil major YPF, marking the largest ever award in Manhattan federal court. 

The judge in that case, Loretta Preska, railed against Argentina’s legal team for implying that litigation funders’ involvement was a relevant factor, writing that the nation owed “no more or less because of Burford Capital’s involvement”.

In its disclosure of Purplevine IP’s involvement in Delaware, the Florida company suing Samsung also emphasised that the Chinese funder’s approval “is not necessary for litigation or settlement decisions in this action”. Purplevine did not immediately respond to a request for comment.

Yet scrutiny of the industry is growing on Capitol Hill; a bipartisan bill has been introduced in the Senate with the aim of forcing the disclosure of foreign investment in US litigation. Only a few states, including Montana and Wisconsin, currently require such disclosures, while some individual judges also mandate disclosures. Newly-appointed House speaker Mike Johnson has introduced similar legislation.

Companies including Germany’s Bayer and Johnson & Johnson, both of which have been forced to pay billions of dollars in the US to settle thousands of legal claims over allegedly carcinogenic products, have strongly backed efforts to force more transparency on the litigation finance industry.

In a letter to the heads of a US congressional committee in October, they argued that the sector “goes to great lengths to operate in complete secrecy,” and that funders “often manipulate civil litigation for their own purposes”.

Burford’s Bogart said such pleas were a ploy by lobbyists “trying to constrain what we do”. Disclosures “add to the cost and add to the length” of litigation, he said, citing the Argentina case, in which he claimed the naming of Burford led to additional legal work that cost $2mn in fees.

Maya Steinitz, a professor at Boston University who researches litigation finance said disclosures were sometimes sought as a tactical advantage, “in order to figure out how much funding a plaintiff has so as to outspend them”.

Others in the industry said forced disclosures would deter outside investors and mean “less access to legal finance”.

A report published last November by the US Chamber of Commerce warned that litigation financing could allow the US’s adversaries to obtain confidential information about sensitive technologies during the course of the cases.

But it was “not realistic based on the role of investors and how litigation actually works and there is no evidence to back it up,” said Gary Barnett of the International Legal Finance Association, which represents the industry.

He said the paper was “based on speculation and hypotheticals,” adding: “It has been a year since that paper was made public and they still have no examples [of foreign adversaries manipulating the legal system].”

Nathan Morris, senior vice-president for legal reform advocacy at the US Chamber, said any opportunity for the justice system to be exploited was cause for concern.

“Historically, there hasn’t been a way for foreign actors to become invested in US litigation, at least as easily as it is now,” he said. “Whether it’s for the purpose of getting access information or a simple way to cause harm to American business interests, there’s an incentive to do that.”

Steinitz, who advocates that judges decide on disclosures, was sceptical that there was a “systemic problem” of foreign investors “flooding our court system with non meritorious cases which they are funding for nefarious reasons”.

She added it was “unlikely” that US courts are being used for corporate espionage, but that “in litigation, sometimes unlikely things do happen”.