Protecting Our Courts from Foreign Manipulation Act of 2023

September 28, 2023 / 19 min read

In an important development on the Third-Party Litigation Funding (TPLF) front, the Protecting Our Courts from Foreign Manipulation Act of 2023 has been introduced in the United States Senate as S.2805 and in the House of Representatives as H.R. 5488. Senators John Kennedy (R-LA) and Joe Manchin (D-WV) introduced the bill in the Senate, while Mike Johnson (R-LA) introduced an identical companion version of the bill in the House. This proposed legislation seeks to provide greater transparency regarding TPLF involving foreign persons, foreign states, and foreign sovereign wealth funds, and, in certain instances, banning this practice altogether.

protecting our courts

To help assess this development, the author breaks down the proposed legislation into the following sections below: (1) “Nutshell Summary” – this section provides a very general overview of the proposed legislation; (2) “Detailed Overview” - this section presents a more detailed analysis into the proposals’ key points; and (3) “Bigger Picture Considerations” – this section takes a broader view regarding foreign involvement in TPLF practices, including the arguments asserted by the bills’ sponsors, current industry group support for the proposals, and other recent information regarding this issue.

Nutshell Summary

Overall, H.R. 5488 and S.2805 seek “[t]o amend chapter 111 of title 28, United States Code, to increase transparency and oversight of third-party funding by foreign persons, to prohibit third-party funding by foreign states and sovereign wealth funds, and for other purposes” as those terms are defined within the proposed legislation.^[1]The provisions contained in the proposed bills “shall apply to any civil action pending on or commenced on or after the date of enactment of this Act.”^[2]

Very generally, H.R. 5488’s and S.2805’s key proposals include:

Banning TPLF by foreign states and sovereign wealth funds;
Requiring a “Foreign Source Certification by Foreign Persons, Foreign States, and Sovereign Wealth Funds” to be submitted to the court in certain situations;
Requiring disclosure of certain information regarding foreign TPLF, as well as the TPLF agreement itself, to the court, to the Attorney General, and to the Principal Deputy Assistant Attorney General for National Security;
Requiring the Attorney General to file an annual report to Congress providing certain information involving foreign third-party funding in the Federal courts; and
Potential sanctions under the Federal Rules of Civil Procedure for failing to comply with the required disclosure provisions.

The proposed bills have been referred to the Senate and House Committees on the Judiciary for further review.^[3] We will now need to monitor what action, if any, these committees may take and whether these proposals will ultimately be presented for a full Congressional vote.

Detailed Overview

For those interested in a more detailed overview of the “Protecting Our Courts from Foreign Manipulation Act of 2023” (H.R. 5488 and S.2805), the following is presented:

Intent/Applicability

The proposed amendments seek “[t]o amend chapter 111 of title 28, United States Code, to increase transparency and oversight of third-party funding by foreign persons, to prohibit third-party funding by foreign states and sovereign wealth funds, and for other purposes” as those terms are defined within the proposed legislation.^[4] The proposals set-forth in H.R. 5488 and S.2805 “shall apply to any civil action pending on or commenced on or after the date of enactment of this Act.”[^5]

Definitions

The proposed bills define the term “foreign person” to mean “any person or entity that is not a United States person, as defined in section 101 of the Foreign Intelligence Surveillance Act of 1978 (50 U.S.C. 1801); and does not include a foreign state or a sovereign wealth fund.”^[6]The term “foreign state” is noted as “hav[ing] the meaning given that term in section 1603,”^[7]while the term “sovereign wealth fund” is defined as “an investment fund owned or controlled by a foreign state, an agency or instrumentality of a foreign state (as defined in section 1603), or an agent of a foreign principal (as defined in section 1 of the Foreign Agents Registration Act of 1938, as amended (22 U.S.C. 611)).”^[8]

TPLF by foreign states and sovereign wealth funds -- prohibited

Under the proposed legislation, third-party litigation funding by foreign states and sovereign wealth funds (as those terms are defined in the bill) would be banned.^[9]Specifically, the proposals state that it would be unlawful “for any party to or counsel of record for a civil action to enter into an agreement creating a right for anyone, other than the named parties or counsel of record, to receive any payment that is contingent in any respect on the outcome of a civil action or any matter within a portfolio that includes the civil action and involves the same counsel of record or affiliated counsel, the terms of which are to be satisfied by money that has been or will be directly or indirectly sourced, in whole or in part, from a foreign state or a sovereign wealth fund.”[^10] Any agreement in violation of the above “shall be null and void” under the proposed bills.^[11]

Foreign Source Certification

The proposed bills also require what is referenced as a “foreign source certification by foreign persons, foreign states, and sovereign wealth funds” to be submitted to the court in situations “involving an agreement creating a right to receive any payment by anyone, other than the named parties or counsel of record, that is contingent in any respect on the outcome of the civil action by settlement, judgment, or otherwise, or on the outcome of any matter within a portfolio that includes the civil action and involves the same counsel or affiliated counsel.”[12]

This certification must certify that “(i) the money that has been or will be used to satisfy any term of the agreement has been or will be directly or indirectly sourced, in whole or in part, from a foreign person, foreign state, or sovereign wealth fund, including the monetary amounts that have been or will be used to satisfy the agreement; or (ii) that the disclosure and certification criteria set forth in … this subparagraph do not apply to the civil action.”^[13] Further, the required disclosures outlined above are to “be made in the form of a declaration under penalty of perjury pursuant to section 1746 and shall be made to the best knowledge, information, and belief of the declarant formed after reasonable inquiry.”^[14]

In terms of timing, the certification would need to be disclosed “not later than the later of (i) 30 days after execution of [the foreign source certification]; or (ii) the date on which the civil action is filed.”^[15] In addition, the bills contain supplemental disclosure requirements which are outlined in the endnote to this sentence^[16]and a provision which would subject a party to sanctions under the Federal Rules of Civil Procedure for failure to disclose the certification, or issue supplemental disclosure as required.^[17]

TPLF disclosure requirement

The proposed bills require the disclosure of certain information regarding the existence of third-party litigation funding, including the production of the actual TPLF agreement itself.

As proposed, each party, or the counsel of record for the party, shall disclose, in writing, the following information to the court, to all other named parties, the Attorney General, and to the Principal Deputy Assistant Attorney General for National Security:

the name, the address, and, if applicable, the citizenship or the country of incorporation or registration of any foreign person, foreign state, or sovereign wealth fund, other than the named parties or counsel of record, that has a right to receive any payment that is contingent in any respect on the outcome of the civil action by settlement, judgment, or otherwise, or within a portfolio that includes the civil action and involves the same counsel of record or affiliated counsel;
if the party or the counsel of record for the party submits a foreign source certification by foreign persons, foreign states, and sovereign wealth funds as outlined above, the name, the address, and, if applicable, the citizenship or the country of incorporation or registration of the foreign person, foreign state, or sovereign wealth fund that is the source of the money; and
a copy of the TPLF agreement, except as otherwise stipulated or ordered by the court.^[18]

The required disclosures outlined above are to “be made in the form of a declaration under penalty of perjury pursuant to section 1746 and shall be made to the best knowledge, information, and belief of the declarant formed after reasonable inquiry.”^[19]In terms of timing, similar to the foreign source certification, the information outlined above would be required to be disclosed “not later than the later of (i) 30 days after execution of [the TPLF] agreement; or (ii) the date on which the civil action is filed.”^[20] In addition, also similar to the foreign source certification, the bills propose supplemental disclosure requirements which are outlined in the endnote to this sentence^[21]and a provision which would subject a party to sanctions under the Federal Rules of Civil Procedure for failure to disclose the certification, or issue supplemental disclosure as required.^[22]

Annual report to Congress

Under the proposed bills, the Attorney General is required to submit an annual report to the House and Senate Committees on the Judiciary providing various information obtained from the bill’s disclosure provisions discussed above, including such items, in general, as follows: (i) the identities of the foreign funders, (ii) the identities of foreign person, foreign states, or sovereign wealth funds “that have been the sources of money for [TPLF] in federal courts; (iii) the judicial districts in which foreign TPLF has occurred; (iv) an estimate of the total amount of foreign-sourced money used for TPLF in Federal courts (including an estimated amount of such money sourced from each country); and (v) a summary of the subject matters for which foreign sourced money has been used for TPLF.”^[23]

Bigger Picture Considerations

In the bigger picture, as outlined above, H.R. 5488 and S.2805 seek to address growing concerns regarding foreign involvement in TPLF practices, including concerns that foreign countries may potentially use third-party funding to threaten U.S. economic and national security interests. The following outlines the arguments asserted by proponents of the proposed legislation, as well as other recent activity regarding this issue.

Arguments in support of H.R. 5488 and S. 2805

A press release issued by the bills’ sponsors alleges that “[c]urrently, foreign entities flood courts with billions of dollars in litigation financing in order to achieve a particular outcome in a case. Hostile foreign governments or companies that are connected with those governments could fund lawsuits in federal courts in order to achieve their geopolitical objectives and undermine America’s national security, especially by targeting proprietary commercial and military technology and exploiting U.S. disclosure requirements.”^[24]

On these points, Senator Kennedy argues, in part, that the proposed legislation “’would put necessary safeguards in place to ensure that foreign nations, private equity funds and sovereign wealth funds linked to hostile governments are not tipping the scale in federal courtrooms.’”^[25] Likewise, Senator Manchin comments that “[f]oreign actors such as China and Russia use third-party litigation funding to support targeted lawsuits in the United States, undermining our economic and national security. This legislation would provide a commonsense strategy to protect our legal system by requiring greater transparency and accountability from third-party groups and preventing third-party litigation funding from foreign states and sovereign wealth funds. I urge Senators on both sides of the aisle to support this bipartisan bill to ensure that our federal courts are protected from foreign influence.’” Echoing similar concerns, Rep. Johnson comments that “[f]oreign 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.’”[26]

Industry support for H.R. 5488 and S. 2805

The U.S. Chamber of Commerce Institute for Legal Reform (ILR) is one group supporting the proposed legislation.^[27] As part of the sponsors’ press release, Harold Kim, ILR’s president, comments that “[t]he U.S. Chamber of Commerce applauds Sens. John Kennedy (R-LA) and Joe Manchin (D-WV), and Rep. Mike Johnson (R-LA) for introducing this landmark bill, and we urge Congress to quickly pass it to protect consumers, businesses, and U.S. national and economic security.”[28]

Of note, in November 2022, ILR released a detailed report titled a “New Threat: The National Security Risk of Third-Party Litigation Funding” which outlines various concerns about third-party funding by foreign parties and entities. While a detailed review of this report is beyond the scope of this article, in general, this report argues that there are growing concerns “that a large volume of foreign-sourced money may be pouring into U.S. civil litigation against U.S. companies and industries (including those in defense and other highly sensitive sectors), raising significant national and economic security risks; a foreign government could fund litigation to advance its strategic interests against the U.S.; and that though the U.S. government has taken action to limit foreign access to U.S. technology, there is no measure currently in place to prevent foreign adversaries from using TPLF to circumvent existing safeguards.” ^[29]

R Street Institute is another industry group supporting H.R. 5488 and S. 2805.[30] As part of the sponsors’ press release, Anthony Lamorena, R Street’s Senior Federal Affairs Manager, is quoted as stating that “’[t]he R Street Institute is excited to support and endorse Senator Kennedy’s legislation that will shine a light on the shadowy funders of third-party litigation, and limit the ability of foreign governments to negatively impact various U.S. industries by tying them up in anonymous third-party litigation. The current third-party litigation funding laws lack much needed transparency, and they could open the door to foreign entities detrimentally impacting our national security. We applaud the Senator for his leadership on this issue, and we urge more lawmakers to join him in this effort.’”^[31]

Senator Kennedy’s letter to Attorney General Garland and Chief Justice Roberts

Prior to H.R. 5488’s and S. 2805’s recent introduction in Congress, Senator Kennedy, as member of the Judiciary Committee, sent a letter earlier this year to Attorney General Merrick Garland and Chief Justice John Roberts regarding this issue.

In this letter, Senator Kennedy expressed, in part, his “grave concern about the growing the threat to national security from foreign entities funding litigation in our nation’s courts” noting that “hostile foreign governments or companies closely connected to them could use control of lawsuits in federal courtrooms to harm the United States’ national security.”^[32]Senator Kennedy further asserted that “[m]erely by financing litigation in the United States against influential individuals, corporations, or highly sensitive sectors, a foreign actor can advance its strategic interests in the shadows since few disclosure requirements exist … .”^[33] On this point, Senator Kennedy commented that “[i]f, for example, a foreign entity finances multiple lawsuits impacting a particular industry, it could even ‘destabilize entire sectors of the U.S. economy that are vital to American national and economic security.’”^[34] In addition, Senator Kennedy expressed concern that “foreign entities could also access sensitive technologies and information by circumventing existing controls embedded in federal law, like those enforced by the Committee on Foreign Investment in the United States, that exist to protect our security interests.”^[35]

Senator Kennedy ultimately requested that the Department of Justice “provide details about any course of action that has been taken to mitigate this threat” and further recommended “that the Judicial Conference of the United States consider proactively providing guidance to courts from coast to coast as means of preventing foreign entities from hijacking our federal judiciary.”[36] Further, Senator Kennedy commented that “Congress may be forced to consider amending the Foreign Agents Registration Act – among other actions – to protect the integrity of our nation’s judicial system at the end of the day.”^[37]

What’s Next?

The proposed bills have been referred to the House Committee on the Judiciary and the Senate Committee on the Judiciary, respectively, for further review.^[38] The author will be monitoring these bills and will provide updates as warranted. In the interim, please see the author’s prior TPLF articles for further information on other current TPLF issues.

[1] This information is stated in H.R. 5488 and S.2805 under a header titled “A Bill.”

[2] H.R. 5488, Sec. 4 and S.2805, Sec. 4.

[3] See, https://fastdemocracy.com/bill-search/us/118/bills/USB00079657/ and https://www.congress.gov/bill/115th-congress/senate-bill/2815/all-actions

[4] This information is stated in H.R. 5488 and S.2805 under a header titled “A Bill.”

[5] H.R. 5488, Sec. 4 and S.2805, Sec. 4.

[6] H.R. 5488, Sec. 2 (a)(1)(A) and (B) and S.2805, Sec. 2(a)(1)(A) and (B).

[7] H.R. 5488, Sec. 2 (a)(2) and S.2805, Sec. 2(a)(1)(2).

[8] H.R. 5488, Sec. 2 (a)(3) and S.2805, Sec. 2(a)(3).

[9] Regarding the definitions of “foreign states” and “sovereign wealth funds,” H.R. 5488, Sec. 2 (a)(1) and S.2805, Sec. 2, (a)(1) state, in pertinent part, as follows:

(a) In General. Chapter 111 of title 28, United States Code, is amended by adding at the end the following:

Sec. 1660. Transparency and limitations on foreign third-party litigation funding

(a) Definitions. In this section-

(1) the term ‘foreign person’-

(A) means any person or entity that is not a United States person, as defined in section 101 of the Foreign Intelligence Surveillance Act of 1978 (50 U.S.C. 1801); and

(B) does not include a foreign state or a sovereign wealth fund;

(2) the term ‘foreign state’ has the meaning given that term in section 1603; and

(3) the term ‘sovereign wealth fund’ means an investment fund owned or controlled by a foreign state, an agency or instrumentality of a foreign state (as defined in section 1603), or an agent of a foreign principal (as defined in section 1 of the Foreign Agents Registration Act of 1938, as amended (22 U.S.C. 611)).

[10] H.R. 5488, Sec. 2(c)(1) and S.2805, Sec. 2(c)(1).

[11] H.R. 5488, Sec. 2(c)(2) and S.2805, Sec. 2(c)(2).

[12] H.R. 5488, Sec. 2 (b)(1)(C) and S.2805, Sec. 2 (b)(1)(C).

[13] H.R. 5488, Sec. 2 (b)(1)(C)(i)(ii) and S.2805, Sec. 2 (b)(1)(C)(i)(ii).

[14] H.R. 5488, Sec. 2 (3) (A)(i) and S.2805, Sec. 2(3)(A)(1).

[15] H.R. 5488, Sec. 2 (2)(A)and s.2805, Sec. 2(2)(A)

[16] The proposals contain a provision regarding “parties served or joined later” which states: “[a] party that enters into an agreement described in paragraph (1) that is first served or joined after the date on which the civil action is filed shall make the disclosure and certification required by paragraph (1) not later than 30 days after being served or joined, unless a different time is set by stipulation or court order.” H.R. 5488, Sec. 2 (2)(B) and s.2805, Sec. 2(2)(B).

[17] On this point, the bills contain a provision which states that “[a] disclosure, production, or certification under subsection (b) is deemed to be information required by rule 26(a) of the Federal Rules of Civil Procedure and subject to the sanctions provisions of rule 37 of the Federal Rules of Civil Procedure.” H.R. 5488, Sec. 2 (c )(2) and s.2805, Sec. 2(c)(2).

[18] H.R. 5488, Sec. 2 (a)(1)(b) and s.2805, Sec. 2(a)(1)(b).

[19] H.R. 5488, Sec. 2 (3) (A)(i) and S.2805, Sec. 2(3)(A)(1).

[20] H.R. 5488, Sec. 2 (2)(A)and s.2805, Sec. 2(2)(A).

[21] The proposals contain a provision regarding “parties served or joined later” which states: “[a] party that enters into an agreement described in paragraph (1) that is first served or joined after the date on which the civil action is filed shall make the disclosure and certification required by paragraph (1) not later than 30 days after being served or joined, unless a different time is set by stipulation or court order.” H.R. 5488, Sec. 2 (2)(B) and s.2805, Sec. 2(2)(B).

[22] On this point, the bills contain a provision which states that “[a] disclosure, production, or certification under subsection (b) is deemed to be information required by rule 26(a) of the Federal Rules of Civil Procedure and subject to the sanctions provisions of rule 37 of the Federal Rules of Civil Procedure.” H.R. 5488, Sec. 2 (c )(2) and s.2805, Sec. 2(c)(2).

[23] In full, H.R. 5488, Sec. 3 and S.2805, Sec. 3 state as follows:

Sec. 3. Report to Congress

Not later than 1 year after the date of enactment of this Act, and annually thereafter, the Attorney General shall submit to the Committee on the Judiciary of the Senate and the Committee on the Judiciary of the House of Representatives a report on the activities involving foreign third-party litigation funding in Federal courts, including, if applicable-

(1) the identities of foreign third-party litigation funders in Federal courts, including names, addresses, and citizenship or country of incorporation or registration;

(2) the identities of foreign persons, foreign states, or sovereign wealth funds (as such terms are defined in section 1660 of title 28, United States Code, as added by section 2 of this Act) that have been the sources of money for third-party litigation funding in Federal courts;

(3) the judicial districts in which foreign third-party litigation funding has occurred;

(4) an estimate of the total amount of foreign-sourced money used for third-party litigation funding in Federal courts, including an estimate of the amount of such money sourced from each country; and

(5) a summary of the subject matters of the civil actions in Federal courts for which foreign sourced money has been used for third-party litigation funding.

[24] Kennedy, Manchin introduce bipartisan Protecting Our Courts from Foreign Manipulation Act to end overseas meddling in U.S. litigation

[25] Id.

[26] Id.

[27] See ILR’s website for information on this group: https://instituteforlegalreform.com/

[28] Kennedy, Manchin introduce bipartisan Protecting Our Courts from Foreign Manipulation Act to end overseas meddling in U.S. litigation

[29] See, U.S. Chamber of Commerce Releases New Report on the National Security Ramifications of Third Party Litigation Funding “November 2, 2022”

[30] See R Street’s website for information on this group: https://www.rstreet.org/

[31] Kennedy, Manchin introduce bipartisan Protecting Our Courts from Foreign Manipulation Act to end overseas meddling in U.S. litigation

[32] Letter from Senator Kennedy to Attorney General Garland and Chief Justice Roberts (January 6, 2023).

[33] Id.

[34] Letter from Senator Kennedy to Attorney General Garland and Chief Justice Roberts (January 6, 2023), citing, Donald J. Kochlan, Keep Foreign Cash Out of U.S. Courts, WALL ST. J. (Nov. 24, 2022), https://www.wsj.com/articIes/keep-foreign-cash-out-of-u-s-courts-litigation-courts-foreign-cash-profit-legaI-reformfunder-lawsuit-monev- I 16692"7764.

[35] Letter from Senator Kennedy to Attorney General Garland and Chief Justice Roberts (January 6, 2023).

[36] Id.

[37] Id.

[38] See, https://fastdemocracy.com/bill-search/us/118/bills/USB00079657/ and https://www.congress.gov/bill/115th-congress/senate-bill/2815/all-actions