You signed an NDA and shared case materials with your funder. Then you negotiated and signed a term sheet . Now it’s time to negotiate the litigation funding agreements. Funding agreements sit at the intersection of law, finance, and business. They’re not equity transactions, and they’re not debt transactions either. For most people, they’re new: Most funded parties we encounter—even the most experienced operators—have never before negotiated or signed a funding agreement. Here are some tips as you navigate the funding agreement process. Make Sure the Funding Agreement Tracks the Term Sheet The term sheet sets the commercial deal, but the funding agreement is the binding contract. The funding agreement should accurately reflect the economics and key terms you agreed to. Pay close attention to ensure the return structure, waterfall, and budget closely track what was agreed to in the term sheet. Small deviations from the term sheet can have big economic consequences. Confirm that the final agreement memorializes the deal you negotiated. Control and Decision-Making Litigation funders do not control litigation strategy or settlement decisions. Some court rules, including those in the District of New Jersey , request a disclosure that a funder’s approval is not necessary for case strategy or settlement. Certum’s contracts expressly disclaim control. Consider whether an express disclaimer of control, frequently tracking the language of the District of New Jersey rule, is appropriate. As repeat players in the litigation space , litigation funders can and do still provide valuable advice to funded parties, who are often involved in their first and only litigation. Thus although funders cannot control litigation, funded parties typically consult with funders for advice during the course of the litigation. Define “Case Proceeds” Clearly Litigation funding agreements are typically non-recourse, which means the funder recovers only if there are case proceeds. So the definition of “case proceeds” is quite important, and it’s something you should pay close attention to. Cash recoveries are straightforward, but not all litigations resolve solely or exclusively for cash. What happens if there is a non-cash settlement—for example, if the funded party receives stock, real estate, IP rights? What happens if the settlement is structured as a payment over time? Or if there is a sanctions award entered against the defendant? It’s best to address all these issues ex ante at the time of the funding agreement. Funding agreements typically provide a mechanism for valuing consideration other than an immediate payment of cash from the defendant to the plaintiff. Resolving this issue today can help avoid ambiguity tomorrow. Address Other Customary Provisions Several boilerplate provisions deserve attention: Representations and warranties: As with all financial transactions, the recipient of funds needs to provide certain customary representations and warranties. Make sure you study those reps and warranties, to ensure you can stand behind them. Termination rights: When can the funder withdraw? Funders typically have termination rights, for example in instances where the funded party commits a material breach of the agreement. Make sure you understand the consequences of a termination. Consider Hiring Experienced Deal Counsel Litigation funding agreements are specialized contracts. They combine elements of finance, litigation, and insurance. Most generalist lawyers—and even many litigators—have never negotiated one. Certum typically recommends that funded parties retain an independent deal counsel who understands the funding market. Experienced advisors can streamline the process and increase the likelihood that the deal will close. And you can typically negotiate with the funder to have the deal counsel’s fees covered as a closing cost of the investment.
When Americans think about civil litigation, we tend to imagine its bilateral form: Company A sues Company B, or John Roe sues Jane Doe. That model works when disputes are discrete, parties are evenly matched, and harms are easily traced. It breaks down, however, when injuries are widespread, claims are too small to justify individual pursuit, and thousands of plaintiffs confront a single, well-resourced defendant. Those conditions gave rise to what we now call mass actions—procedural mechanisms that aggregate claims without extinguishing individual rights. This post traces the evolution of American mass actions from their equitable origins, through Rule 23 class actions, to the modern dominance of multidistrict litigation (“MDL”). Its purpose is to explain how, across each stage of its development, the system moved and evolved in order to tackle the same core problem: how to capture the efficiencies of collective adjudication while preserving individualized justice. The Equitable Origins of Mass Actions For roughly the first 150 years of American civil practice, what we would now recognize as class actions existed in equity, borrowing from English Chancery traditions. Former Equity Rule 48 permitted representative litigation where a common or general interest affected a class so numerous that joinder was impracticable. Courts used these bills in equity to cluster related claims, creating an early—if imperfect—form of aggregation. These tools, however, were ill-suited to large-scale disputes. Among other things, they offered no uniform standard for representation, limited mechanisms for managing individualized issues, and little guidance for balancing efficiency against fairness, including whether absent parties would be bound. As collective harms grew larger and more complex, these limitations became more pronounced. The Adoption of Rule 23 and the Birth of the Class Action The adoption of Federal Rule of Civil Procedure 23 in 1938 marked a turning point. Rule 23 replaced ad hoc equitable practices with a codified framework defining when a small number of plaintiffs could litigate on behalf of many. Rule 23 introduced a new codified framework in 1938, later refined by the 1966 amendments into today’s familiar certification requirements—numerosity, commonality, typicality, adequacy, predominance, and superiority—meant to ensure that aggregation serves both efficiency and fairness. Rule 23 works best where common questions truly drive the case. But as mass disputes expanded—particularly in products liability and antitrust—its limitations became apparent. Variations in exposure, injury, causation, damages, and governing law strain the class model. Under Rule 23(b)(3), courts certify a class only if common questions predominate—a demanding standard that frequently defeats certification in mass torts. Beyond doctrine, this mismatch raises fairness and due-process concerns, as aggregation risks resolving individualized questions of liability and damages through procedural shortcuts ill-suited to protect either side’s substantive rights. The Creation of the JPML and the Rise of the MDL Congress responded in 1968 by creating the Judicial Panel on Multidistrict Litigation. That structure authorizes transfer of civil actions with common factual questions to a single federal court for coordinated pretrial proceedings. Unlike class actions, MDLs preserve the separateness of each plaintiff’s case while centralizing work that benefits from scale, including motions to dismiss, summary judgment, and Daubert proceedings. In practice, transferee judges appoint leadership counsel, coordinate discovery, resolve common dispositive and evidentiary motions, conduct bellwether trials, and facilitate global settlement discussions. The MDL’s central innovation is procedural coordination without substantive consolidation. Each plaintiff formally retains an individual claim, remedy, and trial right, while the system avoids duplicative rulings and inconsistent outcomes and preserves Article III adjudication of individual disputes. Amchem, Ortiz , and the Limits of Settlement-Only Class Actions Supreme Court decisions in Amchem Products, Inc. v. Windsor and Ortiz v. Fibreboard Corp. sharply limited the availability of settlement-only mass tort class actions . The Court held that Rule 23’s requirements apply with full force even when certification is sought solely to effect a global settlement, emphasizing rigorous scrutiny of adequacy, predominance, and intra-class conflicts in heterogeneous litigations. In other words, settlement convenience could not cure structural mismatches between the class device and the individualized nature of mass tort claims. These decisions did not eliminate class actions. But they underscored why mass torts rarely fit comfortably within them—and why MDLs emerged as the system’s primary alternative. Their practical import was to effectively close the door to using Rule 23 as a vehicle for mandatory, one-shot global peace in tort, channeling resolution toward MDL-based private ordering—bellwethers, negotiated matrices, and opt-in inventory settlements—while preserving each plaintiff’s trial right. They also shifted innovation elsewhere: toward issue classes under Rule 23(c)(4) , parens patriae actions by sovereigns, and, in some instances, bankruptcy or “Texas two-step” strategies to obtain non-class global resolutions—developments that further entrenched the MDL as the central forum for mass tort resolution. Why MDL Endures MDL’s durability reflects institutional alignment rather than doctrinal accident. For plaintiffs, MDLs offer scale—shared discovery, coordinated motion practice, and settlement leverage—without forfeiting individual claims or trial rights. For defendants, they provide predictability and efficiency by centralizing pretrial proceedings, reducing duplicative costs, and mitigating inconsistent rulings across jurisdictions. For courts, MDLs conserve scarce judicial resources while preserving adjudicatory limits by restricting consolidation to the pretrial phase. For the justice system, MDLs supply a flexible framework that absorbs heterogeneity without collapsing into either unmanageable fragmentation or overinclusive aggregation. That convergence explains why the MDL has become the default architecture for modern mass tort litigation—and why it has proven resilient despite critique. The Design Challenge That Endures Modern practice selects among procedural tools based on fit. Class actions remain essential where common issues predominate. MDLs dominate where common facts justify coordination but individualized harms demand separation. Together, these mechanisms keep the civil justice system workable—and meaningful—when harms scale beyond the individual case. The enduring challenge is deploying these tools with discipline, judiciously retaining the benefits of individual justice, while capitalizing on the benefits of aggregation.
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.