Think your license agreement effectively specifies the law of your choice? Think again.

Choice of law is often a contentious point in license negotiations.  Each party fights for that party's home country's laws to be applied exclusively in the event of any disputes between the parties later.  In order to resolve the impasse that arises in this context, it is quite common for parties to agree on a neutral forum's laws as a compromise.  Whether this neutral choice would actually be enforceable, however, may depend on whether there is a reasonable or logical basis for this choice.

Some nations are willing to enforce contractual choice of law provisions regardless of whether any logical or reasonable basis for that choice exists. European Economic Community states generally subscribe to the 1980 Rome Convention on the Law Applicable to Contractual Obligations, which generally enforces the contractual choice of law provisions negotiated by the parties except for certain "mandatory rules" of the host forum country.  Courts in Singapore will nearly always apply the parties' bona fide choice of law, so long as there is no evidence of a bad faith intent to circumvent a specific nation's laws that would otherwise control.  Courts in other countries will enforce a contractual choice of law provision if there exists a reasonable relationship between the forum selected, on the one hand, and the parties, the transaction, the subject matter of the contract, and/or the place of performance on the other.

For example, courts in the US will presumptively apply the parties' contractual choice of law, unless the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice; or unless the application of the chosen law would violate a fundamental public policy of the state whose law would otherwise govern.  However, some states within the US have statutes that permit contracting parties to specify application of that state's laws even in the absence of a reasonable relationship.  For example, New York has a special statute that allows for the enforcement of a contractual provision specifying New York law (for non-personal contracts) even in the absence of any relationship between the contract and New York, so long as the contract's value is $250,000 or more.  NY Gen. Oblig. L. § 5-1401.  California has a similar statute.  Cal. Civ. Code § 1646.5.

Even if a given choice of law provision would generally be applied, the next step in the analysis is to determine whether the specific dispute at issue is covered by the contractual choice of law.  In New York, clauses providing for the agreement to be "governed by" and "construed in accordance with" a particular law have been construed as applying only to disputes concerning the agreement itself, and not to all disputes arising out of the relationship; whereas choice of law clauses applying to controversies "arising out of" or "connected to" the contract are construed to include tort or fraud claims. In California, "governed by" is construed as encompassing all causes of action arising out of or related to the agreement, including tortious breaches of duties arising out of the agreement.

A federal copyright and breach of contract case in the United States, Philips v. Audio Active Ltd. (2d Circuit 2007), is instructive.  In that case, the parties entered into a music recording contract specifying that "the validity, construction, and effect of this agreement … shall be governed by English law" and that " any legal proceedings that may arise out of [the agreement] are to be brought in England." As a result of this clause, the court ruled that the musician's breach of contract claims against Audio Active must be dismissed as they should have been brought in England, controlled by English law.  However, the court retained jurisdiction over the musician's copyright infringement claims, reasoning that the copyright claim was not predicated on any contractual provision and therefore did not "arise out of" the contract.

The lesson to be learned from this case: to ensure maximum certainty in the enforcement of a negotiated choice of law provision, the parties should adopt language requiring that "any dispute arising out of or in connection with the agreement" (as well as disputes concerning the validity and enforceability of intellectual property rights) be controlled by the chosen state's or country's laws, and that a reasonable relationship can be shown to exist between the chosen law and the parties and/or the contract.

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