Desired result

An agreement’s “governing law” (also confusingly called “choice of law”) clause establishes which state or country’s laws apply to the performance and interpretation of the agreement. As substantive contract and tort law varies from state-to-state and across national borders, selecting the body of governing rules and opinions can really affect construction of parties’ rights and obligations.

For instance, imagine you are a New York institution contracting with a U.K.-based publisher. You think U.K. law is more favorable on text and data mining rights, so you want U.K. law, rather than U.S. law, to apply to interpretation of the agreement. In that case, you could reach agreement with the publisher to designate U.K. law in the governing law clause as applicable to the agreement. Private parties largely have the ability to make these designations, subject to some limitations discussed below.

Which jurisdiction’s law should you choose? Broadly speaking, it’s likely you want both or either U.S. federal law or a specific state’s substantive law to apply. In fact, your institution may actually require it. Partly this is because U.S. or a given state’s substantive law is likely more “known” (or can be more predictable) when deciding how to perform the agreement, and familiar to your institutional counsel when assessing performance under the agreement.

There may be instances, though, in which you think another country’s laws are more favorable to you on a given issue. For instance, text and data mining laws in the European Union are potentially broader than fair use rights in the U.S., which could be a consideration. In addition, there may be times when a publisher will insist on the application of laws of their preferred jurisdiction (typically where they are headquartered or “domiciled”).

If you cannot reach agreement with the publisher on governing law, or if your institution precludes you from accepting a foreign state or country’s substantive law, one option is to omit the governing law clause all together. This has ramifications of uncertainty explained further below.

If you are able to reach agreement on governing law, just be certain (as set forth in the Tricks and Traps section below), that when designating the governing law, you also make clear that you want that jurisdiction’s substantive law to apply without regard to its procedural or choice of law rules. You want to avoid a situation in which your chosen jurisdiction then also applies its own set of choice of law rules impacting the preliminary question of who’s substantive law should apply, and reaches a different conclusion to what you’ve selected in the agreement. We’ll explain more, don’t worry.

Finally, it’s important not to confuse or conflate “governing law” with the “venue” or “forum” clause: The governing law clause establishes which jurisdiction’s (i.e. state or country) substantive law applies to the agreement. A venue or forum clause identifies the geographical location (e.g. country, state, county) or particular type of court within that location where disputes must be filed should they arise. For instance, a governing law clause could impose California substantive law, but the venue/forum clause might require lawsuits to be brought in New York based on where the parties are located. We discuss venue/forum selection in a separate chapter.

What it means

Choosing governing law

With certain exceptions in consumer contracts, courts generally let parties privately contract to select which jurisdiction’s law should govern performance under and interpretation of a licensing agreement^[1]. This not only promotes freedom of contract but also fosters cross-jurisdictional and international trade and commerce. Parties may know, for instance, that entering into an employment agreement governed by California law means greater employment protections for the employee, and desire this outcome—and a court will honor the parties’ selection of California law.

Enforceability

However, there are some instances in which a court will step in to override the parties’ choice. That is to say: the parties’ governing law clause may not be enforceable. A court will generally enforce the parties’ chosen substantive law in most matters of contracts or tort, but are more likely to override when the state in which a case is filed has a fundamental public policy objection to the parties’ governing law selection.

For instance, an employee in California and an employer in New York might have agreed that New York substantive law should apply to their employment agreement that prohibits post-employment competition. When the employer files a breach claim arguing that the former employee breached the noncompete clause, a court might refuse to enforce the parties’ choice of New York employment law because California fundamentally rejects such restraints on lawful practices of trade or employment. Some courts only override governing law selections if the parties either (a) had no reasonable basis for their selection, or (b) their selection violates the fundamental public policy of the state in which a case is filed and that state also has a greater interest in dispute resolution.^[2]

Complicating things further is the fact that determining whether a governing law clause is enforceable to begin with also involves its own preliminary or threshold determination of which jurisdiction or state’s law should apply to the very question of enforceability! ^[3]

Don’t panic, though. In the kinds of license agreements you’re dealing with, typically the selection of governing law should be enforceable if it bears some relation to the parties or acts being performed.

Failure to specify a jurisdiction

Sometimes you can’t agree with the publisher about which jurisdiction’s law should apply. In these circumstances, your institution may advise or require that you omit the governing law clause entirely because it may be institutional policy not to consent to the laws of a foreign country or state.

You’ll need to understand, though, that if you omit the governing law clause entirely, then if a dispute between the parties ever escalated to litigation, you would largely be at the mercy of the court where the claim is filed to determine both the substantive and procedural laws that apply to the case. And courts vary widely in how they determine which jurisdiction’s laws to apply.

In the absence of a contractual clause identifying governing law, the Restatement Second of Contracts^[4] recommends a “most significant relationship” standard, through which a court identifies the jurisdiction that has the “closest connection to and interest in” resolution of the dispute. According to the Restatement of Contracts, the assessment of “most significant relationship” might include consideration of factors like:

• the place of contracting,
• the place of negotiation of the contract,
• the place of contract performance,
• the location of the subject matter of the contract,
• the domicil, residence, nationality, place of incorporation and place of business of the parties;
• the needs of the interstate and international systems,
• the relevant policies of the forum,
• the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
• the protection of justified expectations,
• the basic policies underlying the particular field of law,
• certainty, predictability and uniformity of result, and
• ease in the determination and application of the law to be applied.

^[5] Kind-of a lot of factors to consider, eh? As Nimmer and Dodd observe in Modern Licensing Law, “A ‘most significant’ relationship analysis clearly could yield almost any result.” ^[6].

The Restatement of Contracts (2d) approach described above offers one framework for courts to choose governing law. Another is for courts to look to the Uniform Commercial Code. To the extent that the Uniform Commercial Code might be said to apply to electronic resource license agreements (see Appendix A), unfortunately it offers no additional clarity on a court’s selection. Generally speaking, the Uniform Commercial Code takes a similar approach to the Restatement of Contracts, though in practice this may simply result in the application of the law of the state where the lawsuit was filed—provided that the transaction has at least a “reasonable relation” to the forum. ^[7]

And we’re sorry to share that: When the parties to the agreement are located in different countries, determining governing law where there is no agreed selection by the parties becomes even more complicated. A court might apply a foreign country’s law, or even “international law” like a treaty.

It’s fair to say that omitting a governing law clause entirely opens the door to just about anything.

Desired Language

From the CDL Model Agreement:

This Agreement shall be interpreted and construed according to, and governed by, the laws of [STATE / JURISDICTION], excluding any such laws that might direct the application of the laws of another jurisdiction.

Tricks & Traps

Many vendor-provided clauses will pair choice of law and choice of venue in the same clause, and it’s surprising how often contractual language, or the people negotiating that language, will muddle the two. Keep in mind that they are distinct issues, and avoid accidentally agreeing to an unfavorable choice for one when negotiating the other. You may, for example, be willing to agree to New York as governing law, but not want to have to travel to New York in order to litigate.

Aim for friendly and predictable outcomes

Assuming that your institution allows discretion in selecting governing law, look to choose governing law that is favorable to your interests as a potential litigant in a contract dispute. For example, if the e-resource agreement restricts the publisher’s exposure to liability more greatly than yours, you may wish to choose the governing law of a state that takes a narrow or restrictive reading of such limitations of liability.

For issues of particular interest to you—say, accessibility, fair use, etc.—you’d also want to consider whether there is a well-enough developed body of case law from the jurisdiction of your choosing, so that you could have some predictability in how your case might ultimately be decided.

Avoid the “choice of law” trap

Most importantly, when selecting the substantive law of a jurisdiction, you should consider whether you also want that jurisdiction’s “choice of law” or procedural rules to apply. (Hint: You probably don’t.)

What do we mean? It’s helpful first to understand the following about the different kinds of laws within a given state or jurisdiction:

• “Substantive law” refers to rights, obligations, and liabilities governing one’s conduct under the laws of a state or jurisdiction. For instance, we would say that the way that New York defines and regulates defamation is governed by New York’s substantive law of torts.

• “Procedural law” instead applies to the process, methods, and rules governing how violations, claims, or other matters are redressed or enforced in a given jurisdiction. Using the defamation example, New York procedural law would govern matters like who could properly file that defamation claim in New York, how many days after a claim is filed a defendant has to file a response, and what kind of evidence the parties could introduce.

• “Choice of law” is a subset of state laws involving the threshold question of which state’s substantive or procedural law should apply in the first place. With our New York defamation example, if the parties’ contract specifies only that “New York law” applies with no further qualification, then this means that New York’s “choice of law” rules will also apply—in order to answer the preliminary question of which state’s substantive law should apply. In turn, if New York’s choice of law rules focus on factors like where the harm occurred, then perhaps the application of New York’s choice of law rules yields an outcome in which the court ultimately applies California substantive law on defamation even though the parties thought they had chosen New York.

We mention all of this because: if you sign an agreement that merely states a given jurisdiction’s law applies with nothing further, then a court applying that jurisdiction’s law (including its choice of law rules) might look at the locations and transactions between the parties and ultimately conclude that a different jurisdiction’s substantive law should apply. And this result may not be what the parties intended.

In the defamation example above, the parties probably intended to have New York substantive law on defamation apply regardless of whether New York’s choice of law rules would have led to a different outcome. And the parties could have achieved this with a simple addition to their governing law clause: The exclusion of New York’s choice of law rules. In other words: To give effect to your selection of substantive laws of a particular jurisdiction, you’ll also likely need to include language that applies that jurisdiction’s laws “without regard to” any procedural or conflicts of laws rules that could otherwise result in another jurisdiction’s law being applied. Whew, right?

Extending the choice to other claims

Finally, one last thing to consider is whether you want the governing law clause to clearly extend to all kinds of claims that might arise between the parties related to the agreement.

For instance, let’s say you’ve agreed to New York substantive law for “the Agreement,” and you’ve read this chapter so you’ve also added “without regard to or effect of New York’s choice of law or procedural law rules.” Great: you’re squarely going to be governed by New York law of contracts. But what if you discover that the publisher made a fraudulent representation inducing you to enter into the contract in the first place? That kind of fraudulent representation is a tort, and if your governing law clause pertains only to claims related to or arising under the “agreement,” there is some possibility that a court could choose another state’s substantive law to govern the tort claims.

To avoid uncertainty, you may wish to expressly add to the governing law clause that it also extends to any tort, fraud, statutory, and equitable claims between the parties related to the agreement.

Importance and risk

It’s evident that the parties’ choice of which jurisdiction’s or state’s substantive law applies is paramount to contract interpretation and enforcement. It also can shape the fundamental rights and obligations your institution and users have under an agreement.

If you cannot reach agreement on governing law with the publisher, your institution may advise or require you to leave the clause out entirely rather than to consent to a jurisdiction whose laws are unfavorable to your interests. However, this also leaves open the door for uncertainty: A court may ultimately decide to apply that other state’s or jurisdiction’s laws anyway. For this reason, where you can reach agreement on governing law, it’s worth the time spent negotiating—because it’s almost certainly in your best interests to specify the parties’ choice in the agreement.