In the process of negotiating intellectual property (IP) agreements, such as licenses, joint development agreements, and nondisclosure agreements, the choice of law and venue provisions are often considered as subordinate terms. The inattention given these provisions belies their true significance. Choice of law and venue provisions can profoundly impact the rights afforded your client and, importantly, the cost and complexity of resolving disputes.
This article explores alternative approaches to such provisions, highlights the pros and cons of the various approaches, and provides practical recommendations for drafters of IP agreements concerning these provisions. In the context of these discussions, we will consider a hypothetical agreement between one party domiciled in Michigan and a second party domiciled in Colorado.
With respect to their choice of a particular venue or governing law, our hypothetical parties may choose one of at least four different approaches. First, the parties may agree that Michigan law will apply and that disputes will be resolved in Michigan state courts. Second, the parties may agree that Michigan law will apply, but that disputes will be resolved in the Colorado courts, or vice versa. Third, the parties may agree that disputes will be resolved in a neutral forum, such as Illinois. Fourth, the parties may agree that the proper venue for dispute resolution will depend on the identity of the party bringing a lawsuit.
In the first scenario, our Michigan and Colorado domiciliaries agree that their contract will be governed by Michigan law and that disputes will be resolved in Michigan state courts. Most courts respect parties’ freedom to structure their relationship in this manner. If one of the parties sought to enforce the agreement in a Michigan state court, the Michigan court would almost certainly find that it had personal jurisdiction over the defendant. Indeed, most courts find that a venue provision confers personal jurisdiction on the chosen courts. Conversely, if one of the parties brought suit in a Colorado court, the Colorado court would enforce the venue provision of the contract by dismissing the lawsuit.
In the second scenario, our Michigan and Colorado domiciliaries agree that their contract will be governed by Michigan law, but that disputes will be resolved in the Colorado state courts. In this situation, sufficient contacts exist with the state of Colorado to enable the Colorado courts to exercise personal jurisdiction over both parties, and venue will be improper in other jurisdictions. A party may favor this approach when it regards one state’s laws as unacceptable or particularly desirable.
Can our hypothetical parties trust that the chosen Colorado courts will apply Michigan law? Probably not. In some cases, courts do honor the parties’ agreement that nonforum law will govern the interpretation and enforcement of their contract. In many cases, however, courts apply the law of the forum state instead of the law designated in the parties’ choice of law provision.
In the third scenario, our Michigan and Colorado domiciliaries agree that disputes will be resolved in some “neutral” jurisdiction that is equally convenient, or equally inconvenient, to both parties. For example, the parties might select Illinois as the venue, even though neither party has a connection with Illinois. In this scenario, the parties must consider whether the Illinois courts will exercise personal jurisdiction on the basis of the venue provision alone.
Parties designating a “neutral” venue in their agreements must ensure that the courts in the chosen jurisdiction will exercise personal jurisdiction over disputes involving the agreements. Nationwide, courts are divided on this issue. In some states, the courts have held that a forum selection clause cannot operate as the sole basis for personal jurisdiction over an objecting nonresident defendant. In other states, the courts do recognize that a forum selection clause may serve as a court’s sole basis for personal jurisdiction. Notably, the Delaware courts have recognized that a party may consent to personal jurisdiction by agreeing to an appropriate venue provision. Delaware has a highly developed body of precedential and statutory law related to corporations because it is a very popular state for incorporation. Therefore, the Delaware courts represent the chosen destination in many venue provisions.
In the fourth scenario, the choice of venue is a function of which party brings an action against the other. These agreements typically require lawsuits to be filed in the defendant’s home jurisdiction. In our hypothetical, the Michigan domiciliary would be required to file suit in Colorado, whereas the Colorado domiciliary would be required to file suit in Michigan. Courts generally enforce these contingent venue provisions.
Although contingent venue provisions have an attractive symmetry on their face, they do present one key disadvantage. Strategically, contingent venue provisions provide disincentive to a party considering bringing an action. Therefore, these provisions punish the party that has suffered a breach by the other party.
Having selected a venue, the parties to an agreement must next decide on the scope of the venue provision. Will the provision apply only to lawsuits concerning the breach or interpretation of the agreement? Or will it apply to all disputes concerning the subject matter of the agreement, including disputes related to underlying intellectual property rights?
Consider a patent license agreement between our hypothetical parties. The Michigan corporation licenses certain patent rights to the Colorado corporation. The parties agree that the venue provision will designate the Michigan courts, but they must also determine the scope of the venue provision. In almost every case, the parties will want the provision to cover disputes over the terms of the agreement itself (e.g., a lawsuit in which the Michigan corporation alleges that the Colorado corporation has not fulfilled its royalty obligations). But the parties might also want the provision to apply to other disputes related to the subject patents (e.g., a lawsuit in which the Colorado corporation challenges the patents’ validity).
The scope of a venue provision depends almost exclusively on the language of the provision itself. Venue provisions pertaining to disputes “arising out of the agreement” generally apply only to breach of contract claims. In contrast, venue provisions pertaining to disputes “regarding the agreement,” “connected with the agreement,” or “related to the agreement” are generally construed more broadly.
Our aim in this article was to point out the importance of choice of law and venue provisions in IP agreements. Your task as an advocate for your client is not complete until you have given careful thought to these terms.
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This article is an abridged and edited version of one that originally appeared on page 42 of Landslide!, May/June 2011 (3:5).
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