Why would we allow a legal situation that puts our national security at risk and potentially exposes proprietary information of American defense contractors and businesses to an adversarial government? What about the livelihood of all the employees in those American businesses that would be at risk of job and income loss – not to mention the risk to our nation’s security?
Envision this scenario: an unfriendly foreign government is seeking to undermine an American defense contractor – say, an aerospace company. The antagonistic foreign entity finances a bogus lawsuit through a domestic activist group against an American business. During the process, the foreign competitor gains valuable information through discovery, succeeds in forcing the American aerospace company to pay potentially millions of dollars in a settlement, and enjoys a significant return while incurring little to no tax on their windfall. The foreign entity benefits far more than any American litigant would gain.
This is not a fiction-based movie plot. This is the reality we live in, happening with alarming frequency. It is unconscionable that a hostile foreign government can do this, but again, that is the reality. Fortunately, there is long-overdue legislation being introduced at both the federal and state levels to address this abuse.
The TPLF is both a byproduct and an accelerant of the hyper-litigiousness that has consumed American society over the past several decades, and its occurrence has increased significantly in recent years. While it can sometimes be a useful way for individuals or small groups to fund legal claims against deep-pocketed entities, the potential for abuse by foreign governments is evident, as predatory lawsuits become an easy and lucrative investment. There is currently more than $15 billion invested in commercial litigation financing in the U.S., with returns averaging 25%, or even more if the lawsuit goes to jury trial. The risk to the integrity of the legal system is a concern with TPLF in general. Still, when the financing entity is a foreign firm or an adversarial foreign government, then the risk becomes a national security concern.
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Foreign governments could easily finance lawsuits against a wide range of American strategic interests, such as energy, mining, aerospace, artificial intelligence, drone, and counter-drone technology. The opportunity for a foreign entity to inflict harm is almost unlimited. We are aware that Russian oligarchs have utilized opaque litigation finance vehicles to circumvent sanctions and secretly fund lawsuits in the U.S. and the U.K., thereby repatriating assets and influencing proceedings. But Russia is far from alone. Chinese firms have also increasingly turned to litigation finance as a strategic weapon, with companies like PurpleVine IP, a Shenzhen-based firm with ties to the Chinese state, bankrolling a series of patent infringement cases against major U.S. technology companies.
But it gets even worse because these foreign entities get a tax incentive to do this. Proceeds from litigation are taxed as capital gains, and foreigners are largely exempt from capital gains tax. Foreign beneficiaries of lawsuits pay no tax on the pound of flesh they exact from the American companies they help sue. It is absurd that our adversaries can legally manipulate our tort system against American interests and our national security.
Fortunately, some legislative proposals are being floated to establish long-overdue guardrails against this practice. These generally take two forms: one is transparency, which requires the disclosure of foreign funders of lawsuits.
The Protecting Our Courts from Foreign Manipulation Act (H.R. 2675), introduced by Representative Ben Cline (R-VA), would ban foreign governments and sovereign wealth funds from investing in U.S. litigation and require full disclosure of foreign funding. This would prevent adversaries from covertly influencing U.S. legal outcomes.
Meanwhile, the Litigation Transparency Act (H.R. 1109), introduced by Representative Darrell Issa (R-CA), would mandate disclosure of all TPLF agreements in federal civil cases. Judges, plaintiffs, and defendants would know who is funding a case, ensuring transparency, exposing hidden agendas, and protecting sensitive information that might otherwise be revealed in discovery.
The other approach is being pushed by Senator Thom Tillis (R-NC) with his “Tackling Predatory Litigation Funding Act” (S. 1821), co-sponsored by Representative Kevin Hern (R-OK) in the House (H.R. 3512). This bill would close the absurd tax loophole that allows foreign litigation funders to avoid paying taxes on any profits they generate from engaging in this practice. This would at least limit the perverse incentive that currently exists for foreign governments to bankroll frivolous and expensive lawsuits. While the bill did not make it into the “One Big Beautiful Bill,” there is hope that it will gain traction in Congress as awareness of the national security risks continues to grow.
There must be a financial deterrent for engaging in this sort of underhanded behavior, which carries the potential for causing extraordinary damage to our national security. Like any legislation, these bills may require some finessing, but they are a good start. If Russia, Iran, or the Chinese Communist Party are intent on undermining our national security by manipulating our hyper-active tort system against American businesses and strategic industries, then we should at least level the financial playing field with the same taxation as we do for American businesses.
Anthony Hartsook is a Colorado State Representative and the Minority Caucus Chair. He served with honor and distinction during a highly successful 26-year career as an intelligence officer in the U.S. Army. He is a decorated combat veteran with deployments to Iraq, Afghanistan, and the first Gulf War, along with tours in Italy, Korea, and the Pentagon Joint Staff Intelligence Directorate. He retired with the rank of Lieutenant Colonel.
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