This two-part series of articles will highlight some of the legal issues to analyze when preparing a software license agreement for use in Europe.

Before heading across the pond to increase market share, U.S.-based software suppliers must have the right strategy in place to protect valuable intellectual property rights beyond our borders.

There can be key differences between the legal frameworks of software licensing in different countries. For example, the European Union provides legal regulations that apply in addition to each country's own legal framework. One obvious but important precaution is to review the software license agreement for its enforceability in the country in which the software will be used.

Choice of law 

When preparing or reviewing a license agreement between a U.S. software supplier and an international customer, an important issue to consider is the choice of law to govern the agreement. This will ultimately be considered by a court in the event of a dispute.

In the U.S., a provision addressing applicable law is sometimes referred to as a “forum selection clause.” Under general conflicts of law principles in the U.S., courts will generally uphold the forum selection clause between two commercial entities. For example, in The Bremen v. Zapata Off-Shore Co., a leading U.S. case involving a German corporation contracting with a U.S. company, the United Supreme Court stated: “in the light of present-day commercial realities and expanding international trade we conclude that [a] forum clause should control absent a strong showing that it should be set aside.”

If, however, a German court had been asked to interpret this case, the result might have been different. The German rules governing conflicts of law are explained in the Introductory Law to the Bürgerliches Gesetzbuch (German Civil Code or BGB). These rules specify the applicable law where a dispute or transaction has a connection to a law of a non-German jurisdiction. Furthermore, for all countries in the EU, applicable regulations for choice of law are set forth in the Rome I Regulation.

The impact of the choice of law decision is a complicated one. Continuing to use Germany as an example, the following scenarios illustrate the implications of expanding into European markets.

A U.S. licensor works with a non-U.S. distributor

In the case where aU.S.software supplier hires a German distributor to license software directly to customers inGermany, German law will generally apply to and govern the license agreement because both parties reside inGermany. According to Article 3(3) of the Rome I Regulation, this will generally be the case in all EU courts irrespective of the parties' choice of law in the license agreement.

A U.S. licensor distributes directly from the U.S.

If the U.S.-based software supplier distributes its software directly from the U.S. to customers in Germany, it must first determine whether the license agreement includes an express choice of law provision or not.

Express selection. If there is an express choice of law by the contracting parties and both parties agree to adopt either German or U.S. law as the governing law, the chosen law will, in most cases, be applied by a German court.

If the license agreement is between two commercial entities (B2B), and the parties choose U.S.law to govern the agreement, a German court will generally apply U.S.law. However, Articles 9 and 21 of the Rome I Regulation provide that overriding mandatory provisions of the forum state (that are considered crucial for safeguarding public interests) may apply regardless of the choice of law. In addition, certain provisions of the choice of law may be disregarded if they are incompatible with the public policy of the forum state. This means that certain mandatory provisions of German copyright law would also apply to the agreement regardless of the agreement's terms (e.g., permitting compilation and reverse engineering of the software).

It is different when the U.S. software supplier is licensing the software to a German consumer (B2C). A German court will likely apply U.S. law to the license agreement, but, again due to the Rome I Regulation, it will be superseded by those provisions of German consumer protection regulations. The purpose of these provisions is to ensure that a consumer will not be subject to a foreign law without being protected by at least the mandatory standards of their own national law. In addition, the “standard terms and conditions” of the German Civil Code and mandatory German copyright law will also apply to a B2C agreement.

If the parties choose German governing law, the terms in the agreement could be supplemented or even superseded by German Civil Law.

No express selection. It is unusual, but there are situations where the parties have not expressly chosen the governing law to be applied to the agreement. Article 4 of the Rome I Regulation addresses issues of choice of law in the absence of a choice. It establishes that the law that has residence is that of the country of the party required to effect the characteristic performance of the contract. In other words, the nature of the contract must be determined to understand which national law will apply. Generally, the nature of license contracts suggests that the licensor is effecting the characteristic performance, in which caseU.S. law would apply. However, in the event of an exclusive license or an obligation to exploit the license, it could be argued that it is the licensee that is effecting the characteristic performance, in which case the law of the licensee's residence would apply. There is a great deal of complication created when a contract does not address governing law, and this scenario should be avoided at all costs.

Licensing software outside the U.S. has its benefits, and licensors should structure agreements to leverage them. U.S. software suppliers doing business inEuropeshould consider engaging competent local counsel in case questions arise and negotiations are necessary. The next article in this series will outline additional legal issues to carefully analyze before expanding business internationally in Europe.