Judge Bibas’ Recent Opinion in Design With Friends v. Target Continues the Trend of Courts Limiting Discovery into Funding Arrangements

When a claimant and a litigation funder agree that a case merits further consideration, the next step in the funding process is typically the issuance of a term sheet. Term sheets are familiar instruments in finance, M&A, and investment transactions. In litigation finance, they serve a similar function: outlining the key economic and structural terms of a proposed funding arrangement before the parties incur the time and expense of full diligence and documentation. Most litigation finance term sheets are short—often just a few pages—and non-binding. They are designed to confirm alignment on the principal terms of a transaction, not to finalize it. What a Term Sheet Is — and Is Not A term sheet is not a funding agreement. It does not obligate either party to proceed with a transaction. Instead, it provides a framework for diligence and negotiation by identifying the essential elements of a proposed deal. At a minimum, a litigation finance term sheet typically addresses: The parties to the proposed transaction The specific claims or cases to be funded The amount of capital to be committed How that capital will be used How proceeds will be distributed if the case resolves successfully While many provisions are later refined, the term sheet sets expectations that shape the remainder of the process. Scope of Funding One of the first items addressed is the scope of the funded matter. The term sheet will identify which claims or cases are included—particularly important where a claimant or law firm submits a portfolio for consideration. Not every case under review necessarily meets a funder’s underwriting criteria, and the term sheet should make clear which matters are included and which are not. Amount and Use of Capital The term sheet will specify the total amount of capital the funder proposes to commit and how that capital is allocated. In most funded matters, capital is earmarked for: Legal fees , often funded in part, with the law firm responsible for the balance (e.g., 50% of its fees) and subject to a cap. The law firm is typically responsible for all fees incurred above the cap. Case expenses , such as experts, discovery vendors, and court costs, often funded at a higher percentage but also subject to a cap. The claimant is usually responsible for all case expenses incurred above the cap. Claim monetization / working capital , in appropriate cases. This is non-recourse financing that may be used by the claimant for general corporate purposes, secured by the funded matter. The term sheet allocates both the amount of fees and costs, and responsibility for costs incurred above agreed caps. These provisions underscore the importance of a realistic litigation budget, as overruns are typically borne by the law firm or claimant rather than the funder. Returns and Waterfalls A central feature of any term sheet is the return structure—how proceeds will be distributed if the case resolves successfully. Most term sheets include a waterfall, a priority-based distribution mechanism commonly used in finance. While structures vary, waterfalls typically provide that: Funders recover their deployed capital before profits are distributed Law firms may recover deferred fees or earn contingent compensation Claimants receive the balance of proceeds, often representing the largest share of the recovery The precise sequencing and economics depend on the risk profile of the case, the amount of capital deployed, and the parties’ respective contributions. Importantly, waterfalls matter most in downside or mid-range outcomes. In strong recoveries, the parties often reach their target economics well before the waterfall’s final tiers come into play. Additional Common Provisions Term sheets may also address: Transaction or underwriting fees payable upon closing Exclusivity periods during diligence Rights of first refusal relating to future matters Circumstances under which either party may withdraw, and whether withdrawal results in a break fee payable by the claimant. These provisions are typically refined during diligence and documentation but are useful to surface early. From Term Sheet to Funding Agreement After a term sheet is executed, funders usually enter an exclusivity period—often 30 to 45 days—during which they conduct comprehensive diligence and negotiate a definitive funding agreement. That agreement, not the term sheet, governs the parties’ rights and obligations. Understanding the term sheet, however, is essential to navigating what follows. Closing Thought  A well-drafted term sheet does not merely summarize economics. It reflects a shared understanding of risk, incentives, and strategy at an early—but critical—stage of the litigation. Approached thoughtfully, the term sheet process can set the foundation for a productive funding relationship aligned with the goals of both counsel and client.

Our legal system has long recognized that candid communication between client and counsel is essential to the fair administration of justice. The U.S. Supreme Court has recognized that the attorney-client privilege has a noble purpose—“to encourage full and frank communication between attorneys and their clients, and thereby promote broader public interests in the observance of law and administration of justice.” The same is true of the work product doctrine: the Supreme Court has recognized that it protects against “unwarranted inquiries into the files and the mental impressions of an attorney,” and that “the interests of the clients and the cause of justice would be poorly served” if the work-product doctrine were violated. These doctrines exist for a simple reason. Clients must be able to share complete and unvarnished information with their legal representatives in order to receive sound advice and effective representation. Attorney–client privilege and work-product protection are the legal mechanisms that make that possible. Extending Confidentiality to Litigation Funding As litigation finance has become a more established feature of the civil justice system, courts have increasingly recognized that communications between litigants and litigation funders warrant similar protection from disclosure. Courts have generally rejected attempts to obtain discovery into communications between funded parties and their capital providers, recognizing that confidentiality is essential to securing the resources necessary to retain top-tier counsel and prosecute complex claims. In this way, confidentiality in the funding process serves the same systemic function as privilege itself: it preserves access to justice. The Critical First Step: Non-Disclosure Agreements The foundation for protecting confidentiality in the funding process is laid at the very beginning of the relationship. Before any substantive information is exchanged, claimholders and prospective funders should enter into a non-disclosure agreement (NDA). An NDA establishes clear ground rules for how sensitive information will be treated and helps ensure that communications made during diligence do not later become targets of discovery. NDAs promote precisely the “full and frank communication” the Supreme Court has deemed essential to effective legal representation. They allow parties to speak openly while reducing the risk that defendants will later argue—often opportunistically—that confidentiality has been waived. Key Components of an Effective NDA: 1. A Precise Definition of “Confidential Information” At the core of any NDA is a clear definition of what constitutes confidential information. Most litigation finance NDAs are mutual, protecting information shared by both the claimholder and the funder. They may be limited to a single matter or drafted broadly to cover multiple cases under evaluation. Information shared under NDAs typically include: • Case theory and legal analysis • Evidence and documentation • Financial models and damage calculations • Settlement discussions and valuation • Funding terms and negotiations NDAs also typically exclude information that is already public or independently known to the receiving party. 2. Information Sharing Protocols. Effective NDAs address how confidential information may be shared in the ordinary course of diligence. They usually permit disclosure to affiliated entities, outside diligence counsel, and potential investors—provided those recipients are bound by confidentiality obligations at least as protective as those in the NDA itself. This allows funders to conduct thorough diligence without compromising the claimant’s confidentiality interests. 3. Provisions Tailored to the Litigation Context. Litigation finance NDAs often include provisions that would be unusual in a generic commercial NDA. For example, they may acknowledge that the parties share a common legal interest in the litigation, reinforcing arguments against waiver. They also typically allow disclosure if required by court order or law. Because of these litigation-specific considerations, experienced funders generally rely on bespoke NDAs rather than off-the-shelf templates. Moving Forward with Confidence NDAs rarely require extensive negotiation. In most cases, they reflect a shared understanding that confidentiality is a prerequisite to meaningful engagement—not a point of contention. When thoughtfully drafted and properly used, NDAs serve as the essential first step in a collaborative process aimed at evaluating risk, allocating capital, and pursuing a fair resolution on the merits. At Certum, we treat client information with the same seriousness we bring to legal and financial risk. Our approach to litigation finance is grounded in both capital discipline and information security—making us trusted partners throughout the litigation journey.