Why defense companies are exposed to litigation risk on multiple fronts

Companies in the defense value chain are exposed to the threat of litigation from many angles. 

For U.S. defense contractors and their suppliers, the False Claims Act is one of the primary drivers of litigation. The act permits the federal government to recover triple the value of any false claim and also has a provision that allows private whistleblowers to initiate cases and share in recoveries. In 2025 alone, the government recovered USD5 billion in False Claims fines. 

What makes the False Claims Act particularly challenging for investors is that claims frequently arise not from deliberate fraud by contractors but from the ambiguities inherent in government contracts, such as allegations that a company has failed to meet its cybersecurity obligations, or that a component’s performance falls marginally short of contractual standards (provided that the alleged non-compliance is material to the agreement). 

Flow-down requirements impose extensive DFARS compliance obligations

Layered on top of this is the burden applied by DFARS, a set of obligations that apply to Department of War (DOW) contractors that handle sensitive information or provide certain defense components. Through flow-down requirements, government contractors are required to include DFARS clauses in their subcontracts, making the regulations binding for businesses across the defense supply chain.

While the title “supplement” might suggest a relatively limited set of rules, in reality DFARS runs to several thousand pages. U.S. defense contracts typically incorporate DFARS obligations by reference, often condensing this extensive body of requirements into a single page of listed provisions. For private capital firms conducting due diligence on defense-related targets (including those outside America that rely on U.S. components and are therefore also subject to DFARS) assessing whether the business is in full compliance is a significant challenge. Even inadvertent non-compliance can expose investors to substantial litigation risk, making specialist regulatory diligence an essential component of any defense sector transaction.

Intellectual property rights present a further source of litigation risk. Governments across the world will look to assert control over technologies they deem critical to national security (an issue we explore in more detail here), and when they do, it often leads innovators to sue to protect their inventions. 

Export controls create cascading risks across international supply chains

Geopolitical shifts are another driver. U.S. export controls create cascading risks through international supply chains. U.S. primes will typically provide in their contracts that if the U.S. government changes its export control position, the contract will terminate with no mitigation available. 

For investors acquiring companies dependent on U.S. suppliers, the risk of contract termination or delivery delays due to export control changes is a material due diligence issue. European defense contracts (many of which rely on U.S.-manufactured components) increasingly include substantial contractual penalties for late delivery, and the recent surge in European defense orders is expected to generate significant disputes as companies struggle to meet delivery schedules, whether or not export controls are a factor in non-performance.

ESG frameworks amplify reputational threats

Defense investments also carry inherent reputational sensitivities, amplified by ESG frameworks and institutional investors’ exclusionary policies. Against this backdrop we are seeing an emerging body of litigation grounded in human rights law, in which defendants, including victims of armed conflict and non-governmental organizations, seek to hold defense companies liable for alleged complicity in human rights abuses committed using their products.

In the United States, Yemeni civilians have sued U.S. primes over weapons that were subsequently deployed in attacks on the country by the Saudi-led coalition. Lawsuits have also been filed against U.S. chipmakers over the use of their products in Russian weapons allegedly used to target civilian neighborhoods, schools, and evacuation routes.

In the UK, the key cases that have come before the courts involve challenges to government export licensing decisions through judicial review rather than commercial lawsuits, as illustrated by the Campaign Against Arms Trade’s challenge over Saudi Arabia and the Al-Haq/GLAN case involving Israel.

Controversial uses cases create exposure

Involvement in a value chain can also generate significant publicity and cause companies to become the target of pressure or litigation from campaign groups. This is relevant not only when investing in prime contractors, but also for subcontractors and dual-use businesses. Investors need to understand that reputational risk can crystallize through litigation not directly aimed at them, but in which their name or products become publicly associated with a controversial use case.

Investors may be able to reduce their exposure by favoring companies with comprehensive end-user monitoring programs, clear policies on sales to high-risk jurisdictions and demonstrated adherence to international humanitarian law standards. Assessing insurance coverage for product liability claims and monitoring legislative developments in corporate accountability is also prudent.

The litigation landscape that surrounds the defense sector is complex, and in many respects unique. The investors best placed to succeed are those that understand the multifaceted sources of risk, conduct sophisticated due diligence of targets prior to committing capital, and continue to monitor potential threats throughout their asset hold periods.