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This article is published with the permission of Alex Modelski to provide information to attorneys and contract service personnel. It is intended to be informational and does not constitute legal advice regarding any specific situation. It may be reprinted without the express permission of Alex Modelski so long as it is reprinted in its entirety including this title page.If you have any questions or would like additional information, contact Alex using the contact information provided below.

DRAFTING LICENSE AGREEMENTS
TIPS FOR SUCCESSFUL TRANSACTIONS

October 1, 2001

Copyright ã 2001 Alex Modelski

TABLE OF CONTENTS

Tip No. 1: Clearly identify the property being licensed

Tip No. 2: Clearly define the scope of use and restrictions on use

Tip No. 3: Know the parties

Tip No. 4: Licensors: Make sure you have carefully crafted the online contracting process and retained sufficient records to prove effective offer and acceptance (including authority and conspicuousness)

Tip No. 5: Understand the revenue model and what threatens it

Tip No. 6: Limitations upon contractual damages must be handled with care

Tip No. 7: Limitations and exclusions of warranties must be handled with care

Tip No. 8: Carefully spell out Indemnification provisions

Tip No. 9: Carefully consider whether assignment of the license should be permitted by either licensee or licensor. If not, specifically VOID such an assignment

Tip No. 10: Draft Licenses with Bankruptcy in Mind

Tip No. 11: Incorporate Choice of Law and Choice of Forum Clauses

Tip No. 12: Use a checklist

Tip No. 13: Obtain signed copies of all agreements and make sure that the client follows your advice

Tip No. 1. Clearly identify the property being licensed.

Online businesses typically find themselves in the roles of both licensor and licensee.They obtain licenses to use software and content and then provide those properties to end users pursuant to licenses.The attorney representing the online business must be very clear about what legal restrictions apply to such properties.They may be protected/protectable by patent, trademark, privacy laws, trade secret laws, or copyright.They may come in the form of text, software, image, sound, etc. Further, the attorney must be able to clearly define the scope of the licenses being granted to end users.In order to succeed, the attorney must work very closely with the client to identify the licensed property.

When possible, the license should reference registrations that identify the work being licensed, and they should be attached. If the work is textual, photographic or graphic in nature, copies should be attached.Video and audio works should be described with specificity. Are different versions in existence? If so, those being licensed should be specified.If trademarks or servicemarks are licensed, the agreement should specify the goods/or services regarding which the licensee may use the marks.

Restrictions on scope of a grant are often located in the description of the property being licensed.Licensors of rights in audio or video works often limit the length of audio or video segments that a licensee may utilize on a Web Site or in an online application.The same applies to derivative works.Otherwise, extended use of the audio or video segments in the derivative work could reduce demand for future exploitations of the licensed work.Other restrictions may involve limitations on the ability to translate, modify or distribute the works.

On the other hand, licensees are often concerned that they have rights in future releases of works that fall out-of-date. In such cases, the licensee will define the "licensed work" to include all future updates, enhancements and sequels.

If the content being licensed is a changing database, the licensee should take care to adequately describe the qualities of the database that make up the essence of the bargain. Otherwise, the licensor might change the nature or quantity of the information.For example, if the licensee is interested in obtaining legal case law for all 50 States and federal courts, but merely licenses the “Mead Legal database”, they might not be able to prevent Mead from discontinuing 25 of the States.In such an instance, the licensee would do well to describe the database being licensed with reference to the licensor’s sales literature, describing the extent of the licensed database in detail.

As to technology, such as software, the attorney must obtain detailed information from the persons who understand the technology. He should ask about the media, method of transfer, most important functions, required inputs, form of output, applications, functionality, etc. For example, if source code is being provided, the licensor must take care to contractually protect confidentiality and prevent turn-over of the software in cases of merger and bankruptcy. If source code is not being provided, the licensee’s attorney may wish to demand that the source code be placed into escrow.

Sometimes, in the rush of contract negotiation and approval, clients will submit license agreements without attachments describing the licensed properties.The attorney should never allow anyone to add unseen descriptions of the licensed property to a license agreement and should caution the client that if the software changes, so might the license.

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Tip No. 2. Clearly define the scope of use and restrictions on use.

Online businesses typically combine their own materials with third party content.Issues arise as to the scope of permitted uses of the property.

Content license agreements typically focus on the rights granted under copyright law, including the rights to:

  1. copy or reproduce the copyrighted work;
  2. prepare derivative works based on the copyrighted work;
  3. distribute copies of the work to the public;
  4. perform the work publicly;
  5. display the work publicly
If one of these rights isn’t granted, subject to certain exceptions, the use is not permitted.
In many cases, though, trademark, trade secret, know-how or even patent licenses are controlled by online licenses. Further, releases or waivers of publicity, privacy or moral rights or privileges are included.

Licensees of content may wish to obtain licenses to:

  1. duplicate and modify the work (and any derivatives thereof) in order to incorporate the work into the online application;
  2. distribute copies of the work and any derivatives based on the work, by sale, lease,licenseor other means;
  3. transmit, download or otherwise transfer or distribute the work to third parties;
  4. publicly perform and display the work;
  5. 5.if the work incorporates music, sound and video, the licensee may need to obtain synchronization and videogram licenses.
  6. 6.sublicense use of the work and derivatives.

Also, licensors may wish to provide that they retain some level of editorial or artistic control over the use of their content in works, including a pre-production right of approval over any use of the licensed content.

The problem is that a licensor’s artistic control could effectively prevent production of the licensed work, particularly in projects that incorporate content from many sources. One tip may be to include a notice-response mechanism whereby the licensor is notified of the proposed use and given a limited time to complain.

Following are some examples of content licenses that describe the scope of use:

  1. Content

      SECTION 2: GRANT OF LICENSES

      2.1 Grant of Licenses. Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee, under Licensor's Intellectual PropertyRights:

    1. A non-exclusive, worldwide license to use, modify, reproduce, distribute, display and transmit the Licensor Content in electronic form inconnection with Licensee Properties via the Internet, and to permit users ofthe Licensee Properties to download and print the Licensor Content forpersonal use. Licensee's license to modify the Licensor content shall belimited to modifying the Licensor Content to fit the format and look andfeel of the Licensee Property.
    2. A non-exclusive, worldwide, fully paid license to use, reproduce anddisplay the Licensor's Brand Features: (i) in connection with thepresentation of the Licensor Content on the Content Pages in the LicenseeProperties; and (ii) in connection with the marketing and promotion ofthe Licensee Properties.
    3. Subject to the restrictions and obligations herein, Licensee shall beentitled to sublicense the rights set forth in this Section 2.1 (1) toits Affiliates only for inclusion in Licensee Proper ties, and (2) inconnection with any mirror site, derivative site, or distributionarrangement concerning a Licensee Property.

  2. Content and Software

    1. GRANT OF LICENSE. Upon receipt of the fees set forth in Section4, below, and subject to the terms and conditions of thisAgreement, Owner grants Licensee a [*], worldwide,nontransferable, license for the duration of this Agreement(including any extensions) to use, reproduce, store, distributeand display the information, data, content, Software or other intellectual property provided by Owner to Licensee, for thesole purpose of providing the Service.

      Owner further grants to Licensee a [*], non-transferableworldwide license to publicly perform and publicly display theService or other intellectual property provided by Owner attrade shows, exhibitions, and to prospective Customers, as longas such performance or display is of the Service as implementedon Search Engine Service.

    2. LICENSE RESTRICTIONS. Except as specifically granted in this Agreement, Owner owns and retains all right, title and interest in all information, data, content, software or other intellectual property provided by Owner to Licensee in connection with the Service.This Agreement does not transfer ownership rights of any description in Owner' intellectual property to Licensee or to any other third party.Licensee will install, reproduce and render the Service operational only for the purposes of implementing it on Search Engine Service.Licensee agrees not to modify, reverse engineer or decompile any intellectual property of Owner, or to intentionally create derivative works based on such intellectual property.Licensee agrees not to distribute the Service to any person or entity other than as contemplated by this Agreement or to make any other use of the Service.Licensee agrees to display Owner' copyright and trademark notices on the Software and Service as stated in Section 11.b. "Copyright Notice" and to take other steps necessary to protect Owner' intellectual property rights as specified within Section 12.2 "Confidentiality."

At times, the end user provides content to the Online Business.In such cases, the Online Business is wise to include grants of rights from the end user to the Online Business:

    Internetco does not claim ownership of the Content you place on your internetco.com Site. By submitting Content to internetco.com for inclusion on your Site, you grant Internetco the world-wide, royalty-free, and non-exclusive license to reproduce, modify, adapt and publish the Content solely for the purpose of displaying, distributing and promoting your internetco.com Site . This license exists only for as long as you continue to be a internetco.com member and shall be terminated at the time your internetco.com Site is terminated. You acknowledge that Internetco does not pre-screen Content, but that Internetco and its designees shall have the right (but not the obligation) in their sole discretion to refuse or remove any Content that is available via the Service. Without limiting the foregoing, Internetco and its designees shall have the right to remove any Content that violates the TOS or is otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of any Content, including any reliance on the accuracy, completeness, or usefulness of such Content.

If the licensee owns the copyright to collective works, but the author owns the copyright in the individual work within a collection, the owner of the collective work likely does not have the right to publish the work on the Internet as a separately searchable and accessible work. Tasini vs. New York Times, 2001 U.S. LEXIS 4667 (6/25/01).

Does the licensee have the right to utilize the material with future technologies? PDA’s? Cell phones? The license should carefully delineate rights with regard to future technologies and opportunities.

    All other rights with respect to the Works (and any reproductions or derivative works thereof), whether now existing or which may hereafter come into existence, which are not expressly granted to Licensee herein, including, but not limited to print publication, communication through any means other than as expressly set forth herein, electronic, magnetic or other forms of publication in all media and formats other than those addressed herein, and video, movie, and audio rights, are reserved to Licensor. Without limiting the foregoing, and except as provided herein, Licensor specifically reserves all rights, whether now existing or which hereafter may come into existence, to: make any derivative works of the Works or derivative works thereof; combine the Works or derivative works thereof, in while or in part, with any other materials; transmit or download the Works or derivative works thereof through electronic, telephonic, optical or any other means; alter or modify in any way the Works or any derivative works thereof or publicly perform or display in any way the Works or any derivative works thereof.

Derivative works include properties developed by Licensees that are based on or incorporate any part of the Licensed property.Licenses should be very clear as to what constitutes a "derivative" or "derivative work" and what rights each of the parties has in such properties.A definition such as the following should be included in the license:

    "Derivative Works" shall mean any software programs and copies hereof which are developed by the Licensee and which are based on or incorporate any part of the Program licensed hereunder including without limitation any revision, modification, translation (including compilation or recompilation by computer), abridgement, condensation,expansion, or any other form in which the Program may be recast, transformed or adapted.

Rights in the derivatives should be carefully spelled out, as in the following:

    the Company may develop, use and register new derivatives of the Property not developed while Licensor was in Control, so long as such new Derived Marks (as defined in paragraph 5(a)) are substantially consistent with the image, look and goodwill of the Property at the time when Licensor ceased to be in Control or to which Licensor (or her legal representative, heirs or estate) have consented in writing (such businesses and derivatives, "New Uses"). For clarity, New Uses shall not include reasonable extensions of the lines of business in which the Company is engaged or planned to be engaged at any time that Licensor is in Control, which extensions shall be included in the license contained herein. After Licensor's death or disability, the Company may use the Property for additional New Uses, provided that any such businesses and derivatives are substantially consistent with the image, look and goodwill of the Property at the time at which Licensor ceased to be in Control, or to which Licensor (or her legal representative, heirs or estate) have consented in writing.

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Tip No. 3: Know the parties

Regarding the license of properties needed by the Online Business, the attorney must know the relationship between the licensor and licensee.He should go to the relevant online sites.He should predict likely conflicts.He might note potentials for additional cooperation.If the licensor and licensee are likely competitors, the attorney should counsel special precautions.If a licensee does not have adequate resources, a licensor may not be able to recover damages for breach of the license.Furthermore, an indemnification with regard to title may be worthless. The licensor should know if the identification of the licensee includes subsidiaries and affiliates. If the property being licensed is essential to the licensee’s business, warranty and damage limitations and exclusions become key.Is the licensee a consumer?If so, the attorney must consider the applicability of consumer protection laws.

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Tip No. 4: Licensors: Make sure you have carefully crafted the online contracting process and retained sufficient records to prove effective offer and acceptance (including authority and conspicuousness)

Online transactions are particularly susceptible to claims of defects in offer and acceptance. End users might claim that:

  1. They did not know the offer.

    1. It wasn’t available for review. ("I clicked the link for ‘terms of use’ and got an error message.")
    2. Key terms were not conspicuous

      1. "The "terms of use" section didn’t say it had anything to do with the transaction, just with the use of the site."
      2. "There was no button saying ‘I agree to the terms’, just a link to some page I didn’t have to read." In this regard, the recent case of Specht v. Netscape Communications Corp., 00 Civ. 4871, 2001 U.S. Dist. LEXIS 9073 (S.D.N.Y. 7/3/01) is instructive (downloaded software not subject to license terms where license was referenced at the bottom of a web page in the form of an icon asking the user to "please review…the license agreement").
      3. Prior to the transaction, but after the end user reviewed the site’s “terms of use”, relevant terms change without adequate notice to the end user.

  2. They did not assent to the offer.

    1. Someone did it from their computer, but not them.
    2. It wasn’t their computer and it wasn’t them.Someone stole their identity or their credit card.
    3. They accidentally struck the wrong key.
    4. They clicked "I don’t accept" and the software downloaded anyway.

  3. These were not the terms.
    1. The offer was different when the end user agreed than those sought to be enforced by the licensor. (E.g., the end user may have printed the terms of use at the time of the transaction and is able to prove that the terms sought to be enforced by the licensor are different. This happens when the licensor does not keep meticulous records of exact dates and terms of contractual revisions)
    2. The "terms of use" provide that use of the site indicates acceptance of the terms, but the end user forwards an email to the website administrator proposing modifications to the terms of use with the statement that “If licensor fails to object to these amendments within 10 days, licensor is deemed to have accepted such amendments." The disputed transaction occurs after such deadline passes.

  4. The licensee lacked authority to bind the licensee.

  5. The licensor’s employee lacked authority to bind licensor to amendments to the license.


The enumerated scenarios are the subject of sometimes conflicting provisions of the Electronic Signatures in National and Global Commerce Act, EU directives, The Uniform Electronic Transfers Act (UETA) and Sec. 112 of the Uniform Computer Information Transactions Act (UCITA). Yet, many of these attacks can be defeated through careful crafting of the online contracting process and retention of computer files relevant to the functioning of the site through all revisions in the past.

Sections 112 and 209 of UCITA provide clues as to steps that should be taken and the types of evidence which should be created in order to prove offer and acceptance:

    SECTION 112. MANIFESTING ASSENT; OPPORTUNITY TO REVIEW.

  1. A person manifests assent to a record or term if the person, acting with knowledge of, or after having an opportunity to review the record or term or a copy of it:
    1. authenticates the record or term with intent to adopt or accept it; or
    2. intentionally engages in conduct or makes statements with reason to know that the other party or its electronic agent may infer from the conduct or statement that the person assents to the record or term.

  2. An electronic agent manifests assent to a record or term if, after having an opportunity to review it, the electronic agent:
    1. authenticates the record or term; or
    2. (2) engages in operations that in the circumstances indicate acceptance of the record or term.

  3. If this [Act] or other law requires assent to a specific term, a manifestation of assent must relate specifically to the term.

  4. Conduct or operations manifesting assent may be proved in any manner, including a showing that a person or an electronic agent obtained or used the information or informational rights and that a procedure existed by which a person or an electronic agent must have engaged in the conduct or operations in order to do so. Proof of compliance with subsection (a)(2) is sufficient if there is conduct that assents and subsequent conduct that reaffirms assent by electronic means.

  5. With respect to an opportunity to review, the following rules apply:
    1. A person has an opportunity to review a record or term only if it is made available in a manner that ought to call it to the attention of a reasonable person and permit review.
    2. An electronic agent has an opportunity to review a record or term only if it is made available in manner that would enable a reasonably configured electronic agent to react to the record or term.
    3. If a record or term is available for review only after a person becomes obligated to pay or begins its performance, the person has an opportunity to review only if it has a right to a return if it rejects the record. However, a right to a return is not required if:
      1. the record proposes a modification of contract or provides particulars of performance under Section 305; or
      2. the primary performance is other than delivery or acceptance of a copy, the agreement is not a mass-market transaction, and the parties at the time of contracting had reason to know that a record or term would be presented after performance, use, or access to the information began.
    4. The right to a return under paragraph (3) may arise by law or by agreement.

  6. The effect of provisions of this section may be modified by an agreement setting out standards applicable to future transactions between the parties….

Thus, UCITA presents practitioners with a roadmap for avoiding disputes by, for example, structuring the transaction so that the end user manifests assent specifically with regard to critical provisions and providing the end user with an opportunity to review the terms of the agreement for errors and reaffirming assent.

Regarding authority, UCITA simply applies the common law. Some practitioners are now including text screens on web sites that require the assenting party to specifically click a button which states some variant of the statement “I have authority to bind my employer”.Later denials of authority by an end user company would presumably be met with allegations of apparent authority, estoppel, fraud, quasi-contract, implied contract, etc. However, if the "installer" does not have actual authority, a court may be loathe to bind the company despite the installer’s representations to the contrary.

In ongoing online relationships, licensors can strengthen their ability to prove authority by structuring the vending process in such a way that an authorized representative of the licensee undertakes to disseminate passwords and payment information only to authorized contracting agents. From a business perspective, however, one can imagine a situation in which the licensor would rather risk unauthorized purchases than create administrative roadblocks to additional sales.

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Tip No. 5: Understand the revenue model and what threatens it.

An attorney must understand the limits of the law to protect the revenue model and explain those limits to the client. If the licensor is being paid for each download of software or an image, there may be no realistic protection against unlawful copying and distribution. In such cases, perhaps the property should be provided to the licensee in a manner different from that proposed.Perhaps a digital watermark or other digital rights mechanism could be inserted. Also, with regard to a database, the most sensitive IP may be retained on the licensor’s server with only specific inquiries being permitted, with payment due for each inquiry.

If the licensor is receiving royalties, the license should specify the basis and frequency of payment.If royalties are based upon the licensee’s revenues, the client must understand and participate in the definition of gross and net. Also, the client should be counseled regarding the availability of minimum royalties and guaranteed payments.Otherwise, the licensor may incur the risks attendant to making its property available to a licensee without the minimum expected compensation.

The licensor should always have a way of auditing the uses of the property to assure compliance with license terms and receipt of the contracted for compensation. Audit provisions can address issues such as location of records, accessibility of records, choice of auditor, confidentiality of records, payment for audit, definitions of material discrepancies.

The licensee typically fights to avoid too much intrusion, interference, inconvenience and cost.

Sample royalty provision:

    (b) The use of the Property by the Company pursuant to this Agreement shall be on a royalty-free basis except as set forth in the next sentence of this Section 2(b). In the event that Licensor's employment with the Company is terminated by the Company without Cause, or Licensor terminates her employment for Good Reason (each as defined in any employment agreement between Licensor and the Company or its subsidiaries or, if there be no such agreement, the last such agreement) (such a termination, a "Termination Trigger"), Licensor (or her legal representative, heirs or estate, as the case may be) shall receive a royalty in perpetuity of 3% of revenues (whether products, advertising, publication sales, distribution fees or any other revenues) derived from Licensed Products or Licensed Services of any kind, or which in any way include any of the Property (including as a portion of any Derived Marks) (as defined in paragraph 5(a)). Payment of the royalty amounts shall be accompanied by reasonable written detail of the basis therefore. Such royalty amounts shall be payable each calendar quarter, shall be subject to a late payment fee of the greater of 10% or 2% over the Company's then-applicable cost of borrowing (such amount, the "Interest Rate") in the event not paid within 60 days of the end of the applicable quarter, Licensor (or her legal representative, heirs or estate, as the case may be) shall have the right to audit the royalty payments no more than once per year, and any underpayments shall be immediately due and payable upon conclusion of the audit, plus interest at the Interest Rate from the 60th day following the end of the applicable quarter with respect to which the underpaid amount was due.

Sample Audit clause:

    AUDIT RIGHTS. Each party agrees that it will keep, for a minimum of two years, proper records and books of account relating to its activities under this Agreement. Once every month, either party may inspect the accounting records of the other party to verify, reports and/or payment amounts. Any such inspectio will be conducted in a manner that does not unreasonably interfere with the inspected party's business activities. Such inspection shall be performed by an independent accounting firm chosen and compensated by the requesting party, for purposes of audit. Such accounting firm shall be required to sign an agreement protecting the party's confidential information and shall be authorized to report only the amount of royalties due and payable for the period requested.

    REPORTS AND REPORTING. Owner will provide Licensee with user log analysis tools that will allow Licensee to determine the number of questions asked and answered in a given period as well as determine the number of times a given Answer Template was selected (by both total count and percentage.) Search Engine Service will, on a weekly basis, provide Owner with copies of its Service user logs for Owner' internal use.

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Tip No. 6: Limitations upon contractual damages must be handled with care.

The contractual limitation of damages clause may be the Licensor’s most important contractual protection.

    Example: IN NO EVENT WILL LICENSOR BE LIABLE TO YOU FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, INCLUDING ANY LOST PROFITS OR LOST SAVINGS, EVEN IF LICENSOR’S REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

On the other hand, the licensee will want to oppose such one sided exclusions or may propose that the exclusion be mutual.

Also, depending on the relevant jurisdiction, if a Court finds that the licensed items are "consumer goods" or "goods purchased primarily for personal, family or household use or of any services related thereto," contractual exclusions of consequential and incidental damages may be deemed unconscionable. Licensees may effectively argue such prohibitions in order to negotiate limitations on such exclusions of damages. In fact, Licensors risk having such a contractual exclusion stricken. Therefore, licensors will often insert the following language:

    SOME STATES OR JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, OR THE EXCLUSION OF IMPLIED WARRANTIES OR LIMITATIONS ON HOW LONG AN IMPLIED WARRANTY MAY LAST, SO THE ABOVE LIMITATIONS MAY NOT APPLY TO YOU.

In the event that agreement cannot be reached, the parties may compromise by specifying liquidated damages.

Even if a jurisdiction allows exclusion of incidental, consequential and special damages generally, a court may find it to be unconscionable in a particular case. The licensor would therefore be well served by adding the following language:

    IN NO EVENT SHALL LICENSOR’S LIABILITY UNDER OR IN CONNECTION WITH THIS AGREEMENT EXCEED THE AGGREGATE AMOUNT OF SERVICE FEES ACTUALLY PAID BY LICENSEE UNDER THIS AGREEMENT.

Under UCITA, Consequential damages and incidental damages may be excluded or limited by agreement unless the exclusion or limitation is unconscionable. Exclusion or limitation of consequential damages for personal injury in a consumer contract for a computer program is prima facie unconscionable, but exclusion or limitation of damages for a commercial loss is not. [UCITA Sec. 803]. Damages for breach of warranty may be liquidated only to the extent reasonable in light of the anticipated or actual harm caused by the breach, difficulties in proving resulting loss, and the non-feasibility or inconvenience of obtaining another remedy that is adequate [UCITA Sec. 804(a)].

Further, pursuant to UCITA Sec. 803, failure of an agreed remedy invalidates an exclusion of consequential damages unless the agreement expressly provides otherwise:

    SECTION 803. CONTRACTUAL MODIFICATION OF REMEDY.

    (b) Subject to subsection (c), if performance of an exclusive or limited remedy causes the remedy to fail of its essential purpose, the aggrieved party may pursue other remedies under this [Act].

    (c) Failure or unconscionability of an agreed exclusive or limited remedy makes a term disclaiming or limiting consequential or incidental damages unenforceable unless the agreement expressly makes the disclaimer or limitation independent of the agreed remedy.

Accordingly, one is beginning to see the following type of clause:

    (b) LIMITATION ON LIABILITY. NEITHER PARTY SHALL BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS (HOWEVER ARISING, INCLUDING NEGLIGENCE) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. THIS SHALL BE TRUE EVEN IN THE EVENT OF THE FAILURE OF AN AGREED REMEDY.

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Tip No. 7: Limitations and exclusions of warranties must be handled with care.

Magnuson-Moss

The enforceability of warranty disclaimers and limitations of liability with regard to licenses arguably should not be subject to the Magnuson-Moss Warranty Act.It applies to “tangible personal property which is distributed in commerce and which is normally used for personal, family, or household purposes” [15 U.S.C. Sec. 2301(1)].

However, until the law of the many states and foreign jurisdictions is settled, the online business should comply with the requirements of Magnuson-Moss to the extent possible.The stated purpose of the Act is to “improve the adequacy of information available to consumers, prevent deception, and improve competition in the marketing of consumer products…” [15 U.S.C. Sec. 2302(a)]. The Act provides that a warranty must be “clearly and conspicuously” presented so as not to mislead the “average consumer” [15 U.S.C. Sec. 2302(b)(1)(B)].

The Act does not require any business to provide a written warranty. It allows businesses to determine whether to warrant their products in writing. [15 U.S.C. Sec. 2302(b)(2)] However, once a business decides to offer a written warranty on a consumer product, it must comply with the Act. The Act and the Rules establish three basic requirements that may apply to the Online Business:

  1. A written warranty must be designated, or titled, either "full" or "limited". . [15 U.S.C. Sec. 2303]

  2. A warranty must state certain specified information about the coverage of the warranty in a single, clear, and easy-to read document.
  3. The warrantor must ensure that warranties are available for reading where the warranted consumer products are sold so that consumers can read them before buying.

The titling requirement, established by the Act, applies to all written warranties on consumer products costing more than $10. [15 U.S.C. Sec. 2303] However, the disclosure and pre-sale availability requirements, established by FTC Rules, apply to all written warranties on consumer products costing more than $15.

Magnuson Moss prohibits anyone who offers a written warranty with regard to a consumer product from disclaiming or modifying implied warranties. [15 U.S.C. Sec. 2308]. If one offers a "limited" written warranty, the law allows them to include a provision that restricts the duration of implied warranties to the duration of the limited warranty. [15 U.S.C. Sec. 2308(b)]. However, if one offers a "full" written warranty, they cannot limit the duration of implied warranties.

Washington Law

Washington’s law with regards to goods is non-uniform with regard to exclusion or modification of warranties:

    RCW 62A.2-316
    Exclusion or modification of warranties.

    (4) Notwithstanding the provisions of subsections (2) and (3) of this section and the provisions of RCW 62A.2-719, as now or hereafter amended, in any case where goods are purchased primarily for personal, family or household use and not for commercial or business use, disclaimers of the warranty of merchantability or fitness for particular purpose shall not be effective to limit the liability of merchant sellers except insofar as the disclaimer sets forth with particularity the qualities and characteristics which are not being warranted. Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy ( RCW 62A.2-718 and RCW 62A.2-719 ) .

Accordingly, specific warranty disclaimers such as the following have come to be used with regard to services and licenses:

    DISCLAIMER OF WARRANTY

    YOU EXPRESSLY UNDERSTAND AND AGREE THAT:

  1. YOUR USE OF THE SERVICE IS AT YOUR SOLE RISK. THE SERVICE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS. INTERNETCO EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.

  2. INTERNETCO MAKES NO WARRANTY THAT
    1. THE SERVICE WILL MEET YOUR REQUIREMENTS,
    2. THE SERVICE WILL BE UNINTERRUPTED, TIMELY, SECURE, OR ERROR-FREE,
    3. THE RESULTS THAT MAY BE OBTAINED FROM THE USE OF THE SERVICE WILL BE ACCURATE OR RELIABLE,
    4. THE QUALITY OF ANY PRODUCTS, SERVICES, INFORMATION, OR OTHER MATERIAL PURCHASED OR OBTAINED BY YOU THROUGH THE SERVICE WILL MEET YOUR EXPECTATIONS, AND
    5. ANY ERRORS IN THE SOFTWARE WILL BE CORRECTED.

  3. ANY MATERIAL DOWNLOADED OR OTHERWISE OBTAINED THROUGH THE USE OF THE SERVICE IS DONE AT YOUR OWN DISCRETION AND RISK AND THAT YOU WILL BE SOLELY RESPONSIBLE FOR ANY DAMAGE TO YOUR COMPUTER SYSTEM OR LOSS OF DATA THAT RESULTS FROM THE DOWNLOAD OF ANY SUCH MATERIAL.

  4. NO ADVICE OR INFORMATION, WHETHER ORAL OR WRITTEN, OBTAINED BY YOU FROM INTERNETCO OR THROUGH OR FROM THE SERVICE SHALL CREATE ANY WARRANTY NOT EXPRESSLY STATED IN THE TOS.

Therefore, where Washington law applies, the Licensees may be inclined to agree to a licensor’s broad and sweeping exclusions of warranties in the hopes that the exclusion will be wholly invalidated.On the other hand, it isn’t clear that such statutory prohibitions apply to licenses. Therefore, the licensee is best served by fighting for some warranties, even if limited in time or scope.

Just as with the UCC, UCITA provides that affirmations or promises made in advertising are express warranties. [UCITA Sec. 402(a)(1)] Similarly, any description of the goods or information made a part of the basis of the bargain is transformed into and express warranty that the goods or the information will conform to the description. [UCITA Sec. 402(a)(2)] Further, UCITA provides for implied warranties of merchantability (as to computer programs, but not access contracts) [UCITA Sec. 403(a)], implied warranty of fitness for a particular purpose [UCITA Sec. 405], and implied warranty of informational content [UCITA Sec. 404]. As with the UCC, exclusions and limitations are possible using language substantially similar to that which is effective under the UCC. [UCITA Sec. 406]

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Tip No. 8: Carefully spell out Indemnification provisions

If an Online Business obtains rights to use property online, whether copyrighted content, trademarks, software, etc, it may not be certain that the entity which licensed the use owns the requisite rights.Further, the licensor may have already license the work to another on an exclusive basis. Perhaps the licensor does not have the right to license use of the property online. As a result, the Online Business typically relies upon an indemnification from the licensor. This is prudent if the licensee can be sure of the financial resources of the licensor.If not, the indemnification may be worthless.In those cases, the licensee may be wise to require the licensor to provide insurance coverage for the licensee in case of infringement.

Typically, the indemnification should provide that the use contemplated by the license is lawful, does not infringe, and that licensor will indemnify licensee against any claim of infringement. Such clauses should specify: which party will pay damages; which party will choose counsel and control the defense; obligations of assistance or cost sharing; and rights regarding settlement approval and obligations of confidentiality.

Licensors also fight for indemnification against claims arising out of the licensee’s misuse of the licensed work—especially where the licensor has little or no control over the licensee’s use of the property.

    Indemnification

    6. Indemnity.
  1. The Company hereby saves and holds Licensor, her heirs, estate, successors and assigns (the "Indemnified Parties") harmless of and from, and indemnifies and agrees to defend them against any and all losses, liability, damages and expenses (including, without limitation, reasonable attorney's fees and expenses) which they may incur or be compelled to pay, or for which they may become liable or be compelled to pay in any action, claim or proceeding against her, for or by reason of any acts, whether of omission or commission, that may be committed or suffered by the Company or any of its officers, directors, employees, agents or servants in connection with the Company's performance of its obligations under this Agreement, the use (including sublicensing) of the Property and the Derived Marks or the breach by the Company of any covenant contained herein. The indemnification rights provided for herein shall also apply to any use by the Company of the Property or any Derived Marks prior to the date hereof.
  2. In the event that an Indemnified Party receives notice of a claim as to which indemnification is sought, such party shall reasonably promptly notify the Company thereof, except that the failure to so notify shall not exempt the Company from its obligations hereunder, except to the extent that such failure has actually prejudiced the Company's legal position with respect to the claim. Upon receipt of notice, the Company shall advise the Indemnified Party that it has assumed the defense thereof. The Indemnified Party shall have the right, at the expense of the Company, to retain legal counsel to participate in and monitor the defense of the claim, provided that the Company shall have the right to direct and control such defense. The Company shall not, without Licensor's written consent, settle or compromise any claim or consent to entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such claim, nor shall the Company settle or compromise any claim relating to the Property or the Derived Marks which would limit the use by Licensor of the Property in any manner whatsoever without Licensor's consent.
  3. In connection with any action by the Company to enforce, protect or defend the Property or the Derived Marks, Licensor may elect to retain counsel of her own choosing, in addition to Company counsel, in order to monitor and participate in such action. The Company agrees to consider in good faith the views of such counsel and to keep Licensor and such counsel reasonably informed of the progress of any such action, subject to the preceding sentence. The reasonable fees and expenses of such counsel shall be paid for by the Company.
  4. The Company shall maintain in effect at all times errors and omissions insurance, in customary amounts taking into account the size of the Company, the value of the Property and the obligations of the Company hereunder, and shall name Licensor and the other Indemnified Parties hereunder as beneficiaries thereof for purposes of this Agreement.

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Tip No. 9: Carefully consider whether assignment of the license should be permitted by either licensee or licensor.If not, specifically VOID such an assignment.

Should a Licensor be allowed to assign the license agreement?Language can be inserted to allow assignment with regard to buy-outs and mergers.

More troublesome is the case of a Licensee assigning its rights.Licenses and fees are often negotiated with regard to the degree of exploitation anticipated by the licensee, and with regard to the fact that the licensee may not be a competitor.Contracting parties should carefully consider the ramifications of an assignment against the interest of the Licensor.This is especially true in light of the recent case of Gardner v. Nike Inc. , 110 F.Supp.2d 1282 (C.D. Cal. 2000), in which the Court determined that the license of “exclusive perpetual world-wide English language rights” to a character did not imply the right to assign the license to a third party.Licensees are well advised to include explicit provision for assignment.

In some states, an assignment may be made even if the contract provides otherwise. In these states, the license must provide that an attempted assignment is VOID.Otherwise, the assignment is a breach of contract, but nonetheless effective.

Examples of Assignment clauses:
    (b) This Agreement is assignable by the Company to any successor of the Company which acquires all or substantially all of the assets or businesses of the Company or to an acquiror, whether by sale, merger, recapitalization or other business combination, of all or substantially all of the assets or businesses of the Company without Licensor's consent, provided that any such successor or assignee shall provide Licensor with a written agreement that it shall be bound by all the terms of this Agreement. This Agreement shall be assignable by Licensor to any entity controlled by her, and inure to the benefit of and be binding upon the successors, legal representative, heirs and assigns of Licensor. Except as specified in this Section 8(b), this Agreement is not assignable and shall be void.

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Tip No. 10: Draft Licenses with Bankruptcy in Mind

Bankrupt Licensees

With the rising tide of bankruptcies among both licensors and licensees, clauses dealing with bankruptcy are of particular interest. Generally, if a licensor wishes to license the use of its technology to a start-up venture, it must be concerned with the possibility that the licensee may become insolvent. If license fees are late, the licensor can declare the licensee to be in default and terminate the license. Often, however, licensors fail to terminate the license prior to bankruptcy filing. Even so, in many instances, insolvency of the licensee is not a disaster for the licensor. In many cases, the license fees were paid up front. In others, the licensee may fail to pay required license fees or royalties, but it will also no longer use or sublicense the property.

On the other hand, if a petition in Bankruptcy is filed, the Court will almost certainly issue an automatic stay, precluding the licensor from taking any action to recover its property. Further, the licensor may be concerned that the licensee (now referred to as the "debtor in possession") will be allowed by the Court to continue using the Licensor’s property without compensation during the pendency of a protracted bankruptcy proceeding. In the event of a Chapter 11 Reorganization, this may take years. Even worse, the licensee might continue to use the property while flaunting contractual restrictions and limitations. For example, a debtor in possession might begin sublicensing software in the US, despite the fact that it is only licensed to market the software in Europe. Finally, licensors are concerned that the license will be viewed as an asset that can be sold off to the highest bidder, possibly to a competitor.

To prevent such scenarios, licensors often write "ipso facto" clauses into licenses.Some provide that insolvency of the licensee or the occurrence of bankruptcy proceedings automatically constitute default:

    For purposes of this Agreement, a party shall be in default if it materially breaches a term of this Agreement and if such breach continues for a period of thirty (30) days after it has been notified in writing of the breach, or if it shall cease conducting business in the normal course, become insolvent, make a general assignment for the benefit of creditors, suffer or permit the appointment of a receiver for its business or assets, or shall avail itself of or become subject to any proceeding under the Federal Bankruptcy Act or any other federal or state statute relating to insolvency or the protection of rights of creditors.

Others provide that such events justify termination by the licensor:

    Either party may terminate this Agreement and any license granted hereunder if the other party becomes insolvent, or has filed against it a petition under any bankruptcy code (or any similar petition under any insolvency law of any jurisdiction), proposes any dissolution, liquidation, composition, financial reorganization or recapitalization with creditors, makes assignment or trust mortgage for the benefit of creditors, or if a receiver, trustee, custodian or similar agent is appointed or takes possession with respect to any property or business of such other party.

In response, Congress adopted Section 365

    (e)(1) of the Bankruptcy Code. Generally, section 365 empowers Bankruptcy trustees to assume executory contracts—that is,contracts whose obligations have yet to terminate, including most licenses. Section 365( e)(1) allows a trustee to assume an executory contract even if such contract “automatically terminates” or gives the non-defaulting party the right to terminate upon the insolvency or bankruptcy of the debtor:

    (e)(1) Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on -
    1. the insolvency or financial condition of the debtor at any time before the closing of the case;
    2. the commencement of a case under this title; or
    3. the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement….

As a result, ipso facto clauses have limited value.This fact should cause licensors to carefully watch receivables and to opt in favor of terminating licenses as soon as a financially questionable licensee defaults in payment.

This is not to say that "ipso facto" clauses have no value.State Courts often strike such clauses as unconscionable or against public policy. However, they are sometimes upheld, especially if vigorously negotiated. Thus, if the license is terminated prior to the filing of the petition in bankruptcy or the Court dismisses the bankruptcy proceeding, the "ipso facto" clause may still be effective. Also, the Bankruptcy Court may uphold a termination pursuant to such a clause if the nature of the license is such that the identity of the licensee affects the basis of the bargain or the nature of the underlying obligations. For, Section 365(c) includes protections for non-debtors intended to protect their rights in situations such as personal service contracts:

    c) The trustee may not assume or assign any executory contract …of the debtor, whether or not such contract …prohibits or restricts assignment of rights or delegation of duties, if -
      1. (A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and
        (B) such party does not consent to such assumption or assignment; or

The creative licensor may also impose obligations upon the licensee that have the intended effect of an "ipso facto" clause. For example, the license may state that the licensee’s rights to use or sublicense or to serve as exclusive licensee terminate upon the occurrence of some event or condition, (such as failure to make a payment) or upon the failure of the licensee to continue to meet conditions (such as maintaining a certain number of employees, or continuing to meet minimum sublicensing levels). In the case of software, the licensor may insert code that "times out" the software every 30 days unless payment is timely made, with the license stating that the licensed uses are conditioned upon timely payment and stating that the software will cease working in the event that payment is not timely made.

In this regard, UCITA Section 814 specifically provides that on material breach of an access contract or if the agreement so provides, a party may discontinue all contractual rights of access of the party in breach and direct any person that is assisting the performance of the contract to discontinue its performance. On the other hand, one must be aware of the restrictions placed upon "self help" by UCITA Sections 815 and 816. Generally, the licensor should structure the transaction is such a manner that electronic restraints are used to "prevent breach" and to discontinue access to the licensed property when the license terminates by its own terms. (See official comment 1 to Section 816). In such a case, the licensor should also make certain that it contractually limits consequential damages and that it understands that consequential damages cannot be limited in the event of a breach of Section 816. (See UCITA Section 816(e).) On the other hand, licensors should also be aware that UCITA Section 816 may be more strict than case law.

Exclusive licenses present another opportunity for creative drafting.If the managers of the business wish to grant an exclusive license to a shaky start-up, the attorney may be wise to draft a non-exclusive license together with a covenant not to license any third party so long as certain conditions are met; for example, certain minimum sublicensing revenues, certain staffing requirements, etc. In the event of bankruptcy, such conditions are bound to be violated and the licensor may be able to begin licensing third parties.

Bankrupt Licensors

Section 365(n) of the Bankruptcy Code addresses the situation in which a licensor of “intellectual property" files for bankruptcy. Section 101(35A) defines "intellectual property" as including: (1) trade secret; (2) invention, process, design or plant protected under United States Code Title 35; (3) patent application; (4) plant variety; (5) work of authorship protected under United States Code Title 17; or (6) mask work protected under chapter 9 of United States Code Title 17, to the extent protected by applicable nonbankruptcy law. Neither trademarks nor foreign patents are included in the definition.

In order to assume an executory contract, the trustee or debtor in possession must cure any defaults, compensate the licensee for any damages incurred by the licensee as a result of any defaults and provide adequate assurances of future performance. As to an intellectual property license, if the trustee or debtor in possession assumes the license, the licensee's rights remain in effect as if the licensor had never commenced bankruptcy proceedings. Section 365(n) applies to the period after the licensor is placed into bankruptcy and prior to the trustee or debtor in possession's election to accept or reject the license agreement.It also prescribes rights and obligations of the parties in the event that the trustee rejects a license agreement.

Prior to Assumption or Rejection

Trustees have 60 days from the filing of the petition in bankruptcy within which to assume a contract under Chapter 7 of the Bankruptcy Code and (trustees and debtors in possession have) until the approval of the Plan of Reorganization under Chapter 11. Prior to assumption or rejection, Section 365(n)(4) provides that:

    (4) Unless and until the trustee rejects such contract, on the written request of the licensee the trustee shall -
    1. to the extent provided in such contract or any agreement supplementary to such contract -
      1. perform such contract; or
      2. provide to the licensee such intellectual property (including any embodiment of such intellectual property to the extent protected by applicable nonbankruptcy law) held by the trustee; and
    2. not interfere with the rights of the licensee as provided in such contract, or any agreement supplementary to such contract, to such intellectual property (including such embodiment), including any right to obtain such intellectual property (or such embodiment) from another entity.

Inasmuch as such rights may be critical to the continuation of licensee’s business, the licensee should bargain for clauses which acknowledge the applicability of Section 365(n) and clauses whereby the parties agree that the licensed property is "intellectual property" as defined in Section 101(a)35 of the Bankruptcy Code.For example:

    The parties acknowledge that the (Software) is "intellectual property", as defined in Section 101(a)(35) of the U.S. Bankruptcy Code and that Licensee will have the right to exercise all rights provided by Section 365(n) with respect to the licensed intellectual property. > In the event that licensor (or a trustee or debtor in possession) breaches its obligations hereunder, including but not limited to ______________, Licensee shall have the right to require the delivery by Licensor (and any trustee or debtor in possession) to Licensee of all licensed intellectual property (including all embodiments thereof) and to ______________.

Similarly, the licensee should bargain for the following language in escrow agreements:

    The parties agree that this Agreement is supplementary to the License Agreement of even date, as is contemplated by United States Bankruptcy Code § 365 (n).

Trustee rejects the License

Section 365(n)(1) addresses the licensee's rights following the trustee's rejection of the license agreement. Upon such a rejection, the licensee may elect: (1) to treat the rejection as a termination of the license agreement, or (2) to retain its rights under the license agreement.> If the licensee elects to treat the rejection as a termination of the license agreement, the licensee will lose its rights to the licensed intellectual property and will have the right to seek damages on a pre-petition, unsecured basis for a breach of contract claim.

If the licensee elects to retain its rights under the license, those rights are those which existed as of the filing of the petition in bankruptcy.As Section 365(n)(1)(B) makes clear, the licensee will not be entitled to retain any rights that are contingent upon events which have not occurred as of the date of the filing of the bankruptcy petition.This is of critical importance to a licensee whose business depends upon receipt of product upgrades from the licensor.Such a licensee must bargain for language that includes present grants of rights that can be exercised upon conditions subsequent.For example, if a licensee needs to have the right to modify source code in the event that the licensor fails to maintain it or to reverse engineer patented technology for purposes of assuring compatibility with other manufacturer’s products, the license agreement should provide the licensee with a present grant of such rights which may not be exercised so long as the licensor meets carefully negotiated requirements.In the case of the software license, the license may also need to explicitly provide for the right to sublicense derivatives.Negotiation of such matters is particularly challenging.Not only is the licensor being asked to consider its own demise, it is forced to negotiate over the dissection of its corpse!

Section 365(n)(1)(B) protects the licensee’s right to enforce any exclusivity provisions of the license agreement. In such case, the licensee's exclusive rights will remain in effect for the duration of the agreement and for any extension period to which the licensee is entitled under applicable nonbankruptcy law.

Section 365(n)(2)(B) provides that, if the licensee elects to retain its rights, the licensee must make all royalty payments required under the license agreement for as long as it continues to exercise these rights . Therefore, the licensee should make certain that the license does not lump maintenance, update, training and other fees together with license fees.Otherwise, when the licensor’s trustee or debtor in possession assumes the contract, the licensee may be required to continue paying for services even if they are not actually received.The same concern applies to payments for the right to use the licensor’s trademarks or foreign patents, inasmuch as their continued use is not guaranteed by Section 365(n).

Finally, like Section 365(n)(4)(A) and (B), Section 365(n)(3)(A) provides the licensee with the right to obtain the licensed intellectual property from the trustee following the trustee's rejection of the license agreement and Section 365(n)(3)(B) requires that the trustee not interfere with the licensee's rights under the agreement or a supplementary agreement to obtain the licensed intellectual property (or any embodiment of the intellectual property) from a third party.Such guarantees are as important as those applicable to the period prior to assumption or rejection.Accordingly, the recommendations discussed above with respect to Section 365(n)(4) are equally applicable to Section 365(n)(3).

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Tip No. 11. Incorporate Choice of Law and Choice of Forum Clauses

In the context of the traditional license agreement, in which both parties know each other, appropriate "choice of law" and "choice of forum" provisions should be included. UCC Sec. 1-105(1) supports the parties’ choice of law provisions so long as the chosen state bears a reasonable relation to the transaction. Choice of forum provisions will be enforced in the absence of unreasonable unfairness to a party. Bremen v. Zapata Offshore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). A typical short form of such clause provides:

    This Agreement shall be governed by and construed in accordance with the laws of the State of __________, without regard to conflicts of laws provisions. Sole and exclusive jurisdiction for any action or proceeding arising out of or related to this Agreement shall be an appropriate state or federal court located in _______, ________.

With respect to choice of law, UCITA generally supports the parties’ choice.Unlike the UCC (but subject to considerations of unconscionability and public policy) UCITA does not require a "reasonable relationship" between the chosen state and the transaction.The official comments state that: "In a global information economy, limitations of that type are inappropriate, especially in cyberspace where physical locations are often irrelevant or not knowable. Parties may appropriately wish to select a neutral forum because neither is familiar with the law of the other's jurisdiction. In such a case, the chosen State's law may have no relationship at all to the transaction." (See Official Comment 2 to Section 109).

On the other hand, Section 109 limits the parties’ choice of law in the context of certain “consumer contracts”:

    (a) The parties in their agreement may choose the applicable law. However, the choice is not enforceable in a consumer contract to the extent it would vary a rule that may not be varied by agreement under the law of the jurisdiction whose law would apply under subsections (b) and (c) in the absence of the agreement.

    (b) In the absence of an enforceable agreement on choice of law, the following rules determine which jurisdiction's law governs in all respects for purposes of contract law:

    (2)A consumer contract that requires delivery of a copy on a tangible medium is governed by the law of the jurisdiction in which the copy is or should have been delivered to the consumer….
    The comments explain that “if a consumer is to receive delivery of a tangible copy in Chicago, the transaction is subject to the law of Illinois unless the agreement indicates otherwise. This is consistent with current U.S. law and is followed in many European countries. It adopts, for the consumer, the location that is most likely to be consistent with the consumer's expectations. It avoids surprise to the provider because the tangible copy is to be delivered into a known State.” (see Official Comment 3 to Section 109).

With respect to choice of forum, UCITA Section 110 provides:

  1. The parties in their agreement may choose an exclusive judicial forum unless the choice is unreasonable and unjust.
  2. A judicial forum specified in an agreement is not exclusive unless the agreement expressly so provides.

The official comments specifically cite Bremen v. Zapata Offshore Co., Ibid, as authority.

International and Extra-contractual Implications

Contracting parties should be aware that contractual choice of law and choice of forum provisions may not be given effect in foreign countries. Further, choice of law and forum provisions will likely be disregarded in other States within the United States as well as in foreign countries in the case of criminal prosecutions, infringement actions (whether based in copyright, trademark, patent, or trade secret) and common law tort actions.This is particularly relevant with regard to criminal statutes and tort laws of foreign countries which impose substantially more severe standards of conduct than U.S. law. Particular care should be exercised with regard to foreign standards regarding privacy, pornography, libel and slander (with regard to libel, see Gutnick v. Dow Jones & Co Inc. [2001] Victoria Supreme Court 305 (28 August 2001).

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Tip 12: Use a checklist.

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Tip 13: Obtain signed copies of all agreements and make sure that the client follows your advice.

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©2008 Alex Modelski, Business & Technology Law

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