CLE Software Licensing

with honors and then received my JD and MBA from the University of California, Berkeley, more years ago than I care to admit. This CLE is going to focus on negotiating software license agreements and the key issues and was prepared by myself and my partners Jennifer Dosseri and Michael Vargas. If you want more information about any of our bios, please go to the Ramon Law website. Uh, our group represents technology and investors in both their general corporate and securities law work, but also mergers and acquisitions and technology licensing transactions. During the last 35 years, I have learned a great deal about structuring and negotiating software license agreements And today I hope to share some of those ideas and thoughts with the people on the, on the CLE. Many people ask me, well, Frank, with software as a service, isn't there less need for software licensing negotiation? And yes, that's true. Many of our clients now offer their software only as software as a service. But even those clients still have software licensing issues. From time to time. And the software licensing issues also is used in many other industries, not just the technology world. Finally, I want to let you know that many of the issues I will discuss today apply to other types of license agreements as well as software licensing agreements, you know, such as medical device, all kinds of other technology licensing. So with that, let's Let's start. Sorry, I was having technical— there. Okay. My fault. So, you know, I just want to go over an overview of what I'm going to talk about today. So in today's CLE, I will go over a number of issues that legal counsel should consider in drafting and negotiating a software license agreement. So those include the licensor versus licensee representation considerations, the important definitions that are in the license agreement, the scope of the license, what type of payment or royalties will be paid, the term of the license, any ownership of any modifications, the audit rights, what audit rights should be granted, limitations on use, warranties, identification, governing law, and more recent important issue, export issues. So the first issue that I want to discuss a little bit is the licensor versus licensee counsel. Issues. And this is because depending on who you represent depends on what type of comments you make and what arguments you try to use to get various ideas across. Often the licensor will prepare the first draft, but that also depends on which party has the most power. In a situation where the licensor is the startup, and the licensee is a large established company, the licensee might try to prepare the first draft or take a more involved role in the drafting. So for example, I recently worked on a license agreement with our client, which was a venture-backed company, and the other— the licensee was a very, very large multi-billion dollar company. And although we were able to do the first draft, the licensee counsel took a very heavy hand in revising our draft, and the negotiations took a long, long time because although we were the licensor, we had a worse negotiating position than the licensee. So should the first draft be middle of the road or more one-sided? In my opinion, it is better to start more in the middle. The reason for this is because I don't believe that there is a win-lose situation that ends up being successful long term. Short term, there is, but long term, I don't think it works out very well. So I believe in being middle of the road fair for your first draft, especially if this is a one-time agreement. The licensor doesn't do— that is, the licensor doesn't do a lot of licenses. Then I would try to prepare a fair draft with a few Easter eggs that can be negotiated. So what I mean by that, I'm sure all of you know Easter eggs are things that you sort of assume that the other side is going to catch and want to negotiate, leave those in. Because just like when you go to your garage and the garage tent says it's going to be $1,000 and it turns out only being $900, you feel like you've won something. It's the same thing here. People want to feel like they win. And so giving them something that you can give away at the beginning is, is a good strategy. So lawyers should also keep in mind the business goals as they draft and negotiate. If the license is critical for one or the other, then lawyers need to consider how hard to push on issues that are not make or break. So many times in my 35 years of doing this type of negotiation, I've seen lawyers argue about issues that are really not issues. And they argue about things that could destroy the deal. And, you know, it requires their client to push them back and say, no, I don't care about that. And so oftentimes my strategy is, in situations like that, is to tell my client, hey, look, lawyers are not gonna solve this issue. You need to go to your opposite and tell them to tell their lawyer to back off. And oftentimes that works well. And the way that I do that is I teach my client what the issue is. So I explain to them, you know, in plain English what the legal issue is. And usually the business people, even if they're inexperienced, once they understand it, they can go and negotiate and get something that's reasonable, especially if it's critical to them and not to the other side. Many times— the other thing, many times legal issues are not real issues. For example, in a license which is for software for non-commercial pilot testing purposes, granting blanket indemnification may only matter as setting precedent for the final agreement. Because there's very little risk there. Again, where are the damages for the third party gonna be? This is internal use pilot testing. Now you might say, well, what about the final agreement? Exactly. That's why you— why if you're gonna argue, you're arguing not for this agreement, but for the final agreement. The other side may not understand that, but you need to keep that in mind. So what definitions are important? And these are my definitions. There's many, many more, but for now, these are the ones that I always look at first. So defining the debt— what is the software? What is actually going to be licensed? It's very important. Many times in negotiations, we fought very hard when I was either representing the license or licensee on the definition of what is software is actually being licensed. And so you need to understand the company's business. You need to understand software so that you can understand, oh, does it matter whether something is— trying to think— whether, you know, the software includes— a picture includes metadata or it doesn't, whether the software includes— trying to think of good examples of things. I can't think of anything off the top of my head, but you need to really focus on what the definition of software is, which means you have to understand the client's business. So lawyers who say they're in the technology business and they say, I don't understand my client's business, they need to learn their client's business. Even if it's only, you know, you've got knowledge 2 miles wide but 2 inches deep, that's probably good enough. You know, I understand a lot of technology, but just enough so that I can do a good job for my client. I don't understand it the way the client does, but just enough. So that's a really important definition. The other one, field. So is the use limited to certain areas, industry, market, or product? For example, the software can only be used for development of software. Well, that seems like it's really an oxymoron, right? Of course it can only be used— well, no, because maybe they're incorporating this software into a device. You know, so that's the idea. Or maybe it can only be used in the healthcare area by hospitals and clinics because the licensor wants to use it in other areas for their own use, develop their own products. Territory. Is the use limited to certain areas? Patients may be— patents may be filed in only certain areas, so consider if a license is needed. For example, the IP may only be used in Japan if the licensor wants to sell its own product elsewhere. You know, we had a— I had a client that wanted to sell its robot in the United States and Europe but knew it didn't have the resources to sell in the Far East. So it was looking for, um, you know, someone in the Far East who could basically take the product, develop its, you know, software, and in this case hardware too. They could take it and, you know, build a product that would be more applicable for the needs of the Far East market. So that territory is very important. Finally, and this is important for the purpose of getting paid, which is usually what people want in business, is revenue and understanding how will revenue be calculated if payment is based on revenue. Is it a gross revenue or a net revenue? Is it GAAP, US GAAP, or is it something else? Is it based on United States dollars or something else? So next slide, the scope of the license. So is the license going to be exclusive or non-exclusive? If the license is exclusive, the licensor must consider what happens if the licensee fails to put forth effort to use the IP in a way that generates royalties. And many times, you know, the client says, well, let's just put a good faith effort, and that's fine. But you also have to consider other things. And we'll talk about minimum royalties later on. But it's important that you explain to your client that they need to understand granting exclusivity to someone limits their ability or potentially limits their ability to basically generate revenue from this intellectual property. Then the licensee needs to consider if the license is not exclusive, then competitors can get the same intellectual property and compete with them on a fairly even level. So what about exclusive easement even as to licensor? You know, most of the time I don't really worry about this very much if I'm representing the licensee or the licensor, actually, in, in fact. But in fact, legally in the United States A license can be exclusive to everyone, including the licensor, or the licensor may use the IP in its own products. And that's something that you consider. I usually will explain to the client, the client will always say to me, well, does it matter if I'm representing the licensor? I said, well, do you want to use it to create your own products? No. Then I say, well, you know, if we raise the issue, it could cause a lot of issues. And so oftentimes the client will say no. With a licensee, many times they say, well, that's fine, that IP, or we'll put something in, or we might not put something in. But I usually will raise the issue with an exclusive license. You know, in all honesty, I haven't done a lot of exclusive licenses recently just because with the world market, people don't like to do exclusivity anymore. But when there is an exclusive license, it's something that you should consider. Modification incorporation allowed. Now, this is really critical, and I'll talk more about it. I've got an entire slide about this. Ownership of modification is important, so stating whether it's allowed early is important, and I'll talk about why later on. So is it sublicensable? Why is this important? In addition to the general reasons to be able to sublicense, for example, you want to sub-license to another company. So the licensee wants to sub-license to another company so that that sub-licensee can create its own product. And the licensor may or may not want that to be true because this licensor may say, no, I want to do that license, I don't want you to do the sub-license. But the other reason for wanting to understand sub-license is because today many companies don't have the internal capability to modify software or create software. And so they often farm it out to an independent contractor or another company. And in order to do that, you have to grant to the licensee a sublicense so they can sublicense to that third party. So if you grant that sublicense, then who's responsible for actions of the sublicensee? So you need to make sure that if you do allow a sublicense, that you clearly state what happens if that sublicensee violates any of the terms of the license agreement. You know, next issue is assignability. So can the licensee assign the license? What about the licenser? The licenser typically can assign because they control the licenses, their intellectual property. They want to be able to assign. But what about the licensee? Well, let's think about a change of control position. If the licensor will have an inordinate power to approve an acquisition if the licensee is not able to assign. In general, so not in all cases though, because Maybe, maybe not. If the assignment has a change of control provision in it that is specific to certain transactions, for example, a reverse triangular merger ordinarily would not trigger a non-assignment clause since the acquirer is stepping into the shoes of the licensee. But still, you shouldn't put it at risk. You should, if it's important, if the IP is important to the licensee, then you want to negotiate up front, is this license assignable and under what conditions? The licensor, keep in mind, will not want to do it. In fact, I've had situations where the licensor said, yeah, you can license it to anybody except for these competitors. And forgetting any antitrust concerns for a minute, that can cause problems for the licensee because it limits the people who can acquire the company. So moving on to royalty or payment. So obviously the licensor wants to get something for this, and depending on who the licensor is will depend on what they want. So many times it's cash, or it might be something else. So for example, In the, um, in a situation where you've got a university or hospital license, they often will ask for stock in exchange in addition to any, a cash royalty. I've also seen situations where there's a cross-license, in which case the consideration is the other side is licensing back something to the licensor or they're giving back something to the licensor. I've had situations where the licensor is licensing software to a licensee, and then the licensee is giving back to the licensor their finished product so that the licensor can resell it. So the consideration depends, the royalty depends on the situation. Most are some form of cash. So the other question is, what is the royalty percentage if there is a royalty percentage? So as a lawyer, often the clients want advice on what percentage to use or how the percentage or whether percentage being offered is fair. I always tell clients that it depends on many factors, including the industry and the value to licensee. So it's not a great answer, but then if it's something that I've done before or I have knowledge, Then I'll provide, you know, well, in my experience, here's the percentages in this industry, in this area, whatever. But you also keep in mind that there are actually services that track this like everything else. There are investment banks that sell intellectual property that have a pretty good feel for what percentages are, things like that. Some of our partners who do just intellectual property, they might have ideas. You know, I will reach out, I'll look on the internet to see if there's any studies that have been done, things like that, to try and help a client. So once, once let's say that the royalty is based on revenue, you know, how is that calculated? Does it deduct anything? Returns, credits? Often if it's a net revenue, then what they do is they, they say, yeah, but we're going to deduct any credits we give or any returns. And sometimes they— what they'll say is, oh, and by the way, we can give away software for free if we want. And so as a licensor, you're going to try and limit that as much as you can. So what happens if the product is combined? So let's say that you're a licensor and you've created some really good software, and somebody's going to take that software and combine it with their own software and they're going to sell the combined product. So in that case, how will you calculate what revenue is? Because revenue is going to be based on a combined product. The licensee will try to argue, well, gosh, you're just a little tiny piece of the combined product, so revenue should be that piece of the combined product. But your argument, if you're the licensor, is, no, no, no, we want at least a minimum royalty of x in that situation. So, and oftentimes what you say is the greater of x percent but a minimum of y. But keep in mind that that's very negotiable And as a lawyer, the best thing that you can do is educate your client about the issues, make them understand what happens, because they will understand once you explain to them. And they say, oh, okay, so it's really, you know, the accountants on the other side, you know, they— it's, it's what they will say revenue is. Exactly. And then they say, oh, well, gosh, then I don't want to do that, or I want to make this. So once you educate the client, then the client can participate and can usually do a better job than you can because the other side, the other counsel, they're not business people. They're not the ones who are going to make the final decision. It's their clients. So that's one where you try to educate the client and then let the client do the first, and then what we do as lawyers is we are the scrutiners. We'll put in language in English what exactly the business people have agreed and counsel our clients. Continue to counsel them through the negotiations. Um, what about minimum payments? Now, this is a situation where exclusivity happens. If you grant— if you're a licensor and you grant exclusivity to someone, you want to make sure that they actually try and sell something. And so often the way that you do that is you say, okay, well, there's minimum royalties or minimum payments that are due, and if those payments aren't met, either one or two things happens. But the license becomes non-exclusive, or it— the licensor can terminate the license. So last point on that slide: how often is the royalty paid? Is it monthly? Is it quarterly? So, and also, will the— how will the licensor make sure that the calculations are correct? Oftentimes the licensor will require that the CFO or CEO of the licensee verify or ratify that the numbers are correct together with a calculation of how the royalties were calculated. Next item is the term of the license. So the term of the license is a very important strategic issue. Many lawyers, when we first start out practicing, I know that was my case back in the '80s, when I first did my first license, I thought, okay, well, the term, it doesn't really matter that much. Let's do a 1-year term or a 2-year term, who cares? 'Cause after that time, we'll just negotiate again. And it was only after a few bad situations where clients were burned by that situation where I realized, no, Term is very important. You know, the licensee has incentive to have a long-term license with renewals since if they don't want to use the IP, they can stop using it. What does that mean? Well, it's, it's actually an obvious concept. Let's say I'm a licensee and I license software from you exclusively. There's no minimum royalties, and I decide, and I, I license the software for the purpose of using it to incorporate in one of my products or some other reason. And I decide, you know, a year from now, 2 years from now, that it's not strategic anymore and we're just going to stop selling the product. But I've developed a competitive product and so I'm not using any of the IP that I licensed. So I say, well, you know, the best thing for me strategically is not to cancel this, terminate this agreement, just leave it out there because then no competitors can have this IP and neither can the licensor. And so in that case, the licensor is stuck. And so the licensor, their incentive is really to have shorter time periods. Licensors will often tell me when they first say, they say, oh God, I want a long term because I want to make sure I get lots of royalties. And then I explain to them, oh, not so fast, because here's what could happen. And then I explain to them these situations and they say, oh wow, that's true. And I said, so either you gotta have minimum royalties or you gotta make sure on short-term pipe— short periods. So if the license— on the other hand, if the licensee spends money and resources on developing products based on the IP, then having a short time frame puts the licensor in greater control. The licensor knows that if the licensee has built its product off of the IP there may be an opportunity to increase payments in the future. So that you've got the situation where the licensor would like shorter terms, the licensee would like longer terms. And so as the lawyer, again, you're educating your client because by yourself, it's tough to negotiate those. Because again, the other side, the other lawyer, you can't assume that the other lawyer understands this or that is willing to move. They may just look at it as a legal issue— oh, term, well, it should be this— and not understand the underlying business issues. And so that's why if you educate your client, then the client can then understand. And if you're the licensor, say, the client can say, okay, I want a shorter time period. Or if they're— if they want to do a longer time period, they understand why they're doing it and the risk that they're taking. And the licensee, they want a longer period with lots of extensions. Now, the good news is technology today changes very fast. So, you know, having a 5-year term or a 10-year term for much IP is not usually necessary because IP supersedes that. Now, that doesn't apply for certain patents, which is fundamental patents, but other IP, it may not be necessary. So keep that in mind. So the other thing to, uh, keep in mind with the term is whether you want to have bankruptcy or any other kind of insolvency trigger a termination automatically. And that, that's a very highly negotiated subject. I often will ask in situations where I'm not sure, I'll go to bankruptcy counsel and talk to them about the risks if I'm representing the license or licensee. But that is a subject that has been discussed in many, many articles. And so if you want to, you can go and Google it and review many, many excellent articles on the subject of software licenses in bankruptcy. I talked before about modifications in incorporation. And so I want to spend a lot of time talking about this. So why is this an important issue? Well, it's an important issue to consider because, you know, the question is, if a modification is done, who owns it? If the licensee is building the software into a product, it may create new IP based on the licensed intellectual property. So that, you know, if the licensee owns that IP, what does that mean to the licensor? Because potentially that IP will become blocking IP, meaning that the licensor can't create additions to its intellectual property because the licensee has gone out and patented intellectual property that acts as a blocker. So if the licensee surrounds licensor IP with its own patents, the licensor becomes trapped to expand its own intellectual property. You know, in fact, back in the '80s when we were doing transactions with companies, first started doing technology transactions with companies outside the United States, that was often the case is we would be licensing intellectual property and the licensee would then patent around our intellectual property, basically blocking us from expanding our intellectual property. And so you have to be careful that you understand that if they create IP on top of licenser IP, who owns that? The licensee, on the other hand, wants to control its own destiny because they recognize that in order to create value for their product and their company, they need to have intellectual property. The other reason why the licensee may be concerned about the subject is because, again, we just talked about what happens in a bankruptcy. Will the license be enforceable in bankruptcy? Again, as I said before, this issue has been you know, discussed ad nauseam now, and you can go read it, but it is something that you need to be aware of and make sure your client is aware of. Finally, what if— what effect does a possible exit have on this? Well, keep in mind that an acquirer will generally not want to be held hostage by a licensor. So if the acquirer wants to combine licensee products with its own Will the license allow that? And this can affect the value and desirability of a licensee. So if you've got a venture-backed company or a company that's trying to raise venture capital, that's going to be important because acquisitions, of course, are one of the methods that investors get their money back. Okay, how am I doing on time? Okay, I'm going to try to speed up a little bit here. Um, so the next issue is audit rights. This is an important item for both licensor and licensee because in order to make sure audit information is protected, first they, they need to make sure confidential information is clearly defined. So the audit is important because you need to be able to find out, um, if you're the licensor, you need the data to make sure that the calculations are correct. If you're the licensee, you want to make sure that the licensor doesn't have access to your confidential information. So the first issue in the audit rights is how do you protect that confidential information? So first of all, you, you make sure that it's clearly defined what's confidential. Then you have language in there protecting confidential if you don't have a supplemental confidentiality agreement. The next issue in audit rights is who can do the audit? A licensed or a qualified accountant. If a qualified accountant, again, you have those confidentiality issues. Are there any restrictions that need to be added, such as the accountant needs to sign a confidentiality agreement, or should they just have experience reviewing this type of books? Because if you just get a normal accountant, they may not have experience, in which case they may not understand. So These are things to think about. So what can the licenser audit? You know, if you're a licensee, I often counsel the licensee, keep a separate book which shows the data that the licenser needs to look at. Because that way, when they come in to audit, it's very easy for them to do, and it's very clear. This isn't a separate set of books for, you know, tax or accounting proof. This is just a separate set of books specifically for audit rights of a licensor. So how often can the licensor audit? If you have too many audits, that can disrupt the business of the licensee. On the other hand, the licensor wants to make sure that they can— if they see something that they don't like, or they're not getting the royalties that they think they should be getting, then they want to be able to go in and audit. When they need to go in and audit. So the, the frequency is negotiated. In general, I usually will just argue, hey, look, you get it once a year, except if you audit and you find a discrepancy of more than a certain percent, then you can audit twice a year or more frequently. Finally, who pays for the audit cost? So usually what happens is the licensor pays the audit cost, again, unless there's a discrepancy of more than a certain percentage, and then it is often either shared or the licensee will be required to pick up. Limitations on use is something that many license agreements don't have because many lawyers feel like Well, you know, it's— of course it's recognized that the licensor owns the intellectual property. Or of course it's recognized that the licensee can't reverse engineer or can't share confidential information or can't share something, any other things that are covered by the license agreement. But the better practice is to specifically say in the agreement that the licensor does own the intellectual property and nothing contained in the license changes that. It also pays to say the licensee will not reverse engineer it. They won't share confidential information. And that's really important in my opinion, because I've often seen battles over stupid issues like this, which in most cases, you know, the licensor won because the judge ruled, no, no, this is— that's what the license agreement's about. But I always tell clients, why take the chance? It's easy. Let's put it in. So my suggestion is always have this boilerplate language. It's very boilerplate today. Not much negotiation goes on with this. Always have this language that specifically says, you know, this is our prop— if you're licensed or counsel, this is our property. If you're a licensee, you just want to make sure that it's standard language and is very narrow and covers only what they actually own. And if you've, if you've agreed with, with modifications and who owns them, making sure that that's covered clearly, that modifications are referenced clearly as well. Okay. We're doing pretty good on time. So let's talk about representations and warranties. So the amount and type of representations and warranties is very hotly negotiated. The licensor wants to limit the representations and warranties to the minimum. They don't, you know, if licensor would prefer to just say the this, the software is given or the software IP is given as is, no warranties, no representations. And that often will happen in situations where the software is given for free. You know, it's open source or something else. There are no representations and warranties. But where there are representations and warranties, the licensee ideally wants licensor to represent that First, the licensor is in good standing because they want to make sure that they, they are actually, you know, uh, have the rights to do this license. Um, the life— they have authority to enter the license. So the board has approved the license. The board of the company has approved the license. The software will meet specifications. This is often negotiating what are the specifications. You know, and again, this is where you need to educate your client and explain to them what the risk is. The specification— if you're licensed or counsel, you're trying to, to narrow the specifications as much as you can. Just like in the definition of software, you want to pay attention. Just in this case, in the specifications, you want to make sure that you specify what exactly are this— what are the expectations of of the licensor and licensee, because that's what its specifications are going to be. If the specifications say A, you don't want to promise A and B. You want to promise A because that's what the licensee expects. Um, the next thing is you want to make sure, and this is probably the most hotly negotiated, that soft— the software does not infringe any third-party intellectual property. The licensor will push hard to limit this representation, especially if it is an area where there are a lot of filed patents. So today there are lots and lots of machine learning patents. If you are licensing software or software IP related to machine learning, you need to be very, very careful in what type of representation you're giving. And what is— what we talk about in the next slide— what is the indemnification you're going to provide for failure and how you do that. Okay, moving on to indemnification. So I want to just take a second here to talk about indemnification for a minute, um, because it's very, very important. You need to spend a lot of time explaining to your client indemnification. Because the client needs to make the business decision. You know, oftentimes the client will say, well, doesn't my insurance cover this? And sometimes it does, and sometimes it doesn't. And so you need to explain to the client, okay, yes, what type of insurance do you have? Can I review your insurance policy? And then, you know, I don't review insurance policies. I'd ask one of my partners who reviews insurance policy, Review the insurance policy. Would this be covered? Oftentimes we don't even do that. Oftentimes we just say, probably not. Let's assume it doesn't and let's talk about it. And if I'm representing the licensure, I start by explaining to them the risks that they take in providing identification. What could happen? What's the liability? And I always give my horror story of you know, the, a license where the licensor got, you know, $20 million of royalties but got hit with a billion-dollar intellectual property infringement lawsuit. And legal fees just to defend were $5 million. They eventually prevailed, but it was not as lucrative as it could have been otherwise. Now, I'm not sure they could have protected themselves, but that's always the situation I give to my licensors. Is talk to them about that's the potential liability. Imagine if you had lost that billion-dollar suit. That's, that's huge. And do— would you have the money to defend it if you're a startup? You know, $2 to $5 million to defend a patent lawsuit is, is very difficult to swallow. So with that in mind, and with the licensee, I talk about the reverse. Okay, if you get sued, do you want the license holder to have to pay for whatever damages you have? And so the licensee understands that. So, you know, what you want to talk about is the licensee would like to complete indemnification from losses related to any breach of the license, any third-party infringement, gross or gross negligence, or willful act of licenser or its employees. So breach of the license, what damages? Well, let's say that the licensor fails to provide the licensee with some part of the intellectual property, and that causes the licensee damage. It can't finish its product on time. So that's where you need to understand that's a consequential damage potential. Have you disclaimed consequential damages? In your representations and warranty section. Third-party infringement, we talked about that, is the licensee wants to be protected. If someone comes and says you're infringing on my patent, the licensee wants to go back to the licensor and says I'm getting sued, you're going to reimburse me for any cost. And finally, gross negligence and willful act of licensor. This doesn't happen very often, but again, if it's something related to when they, when the, they developed the intellectual property, they had Trojan horses or they had, you know, things like that, and they didn't disclose or they didn't tell people or they didn't get rid of it, you know, or there are other issues like that, you know, you would say, well, that's gross negligence or that's willful misconduct on behalf of one of the employees of the company. Because they included backdoors or whatever in software. So the licensor would like indemnification from losses related to any breach of license. Again, let's say that the licensee sublicenses despite the fact that they're not supposed to. You know, what damages does that cause to the licensor? And also grossly negligent or willful act of licensee or its employees. Finally, the other issue is, again, you're advising your client. If there is a lawsuit or something like that, who controls that lawsuit? The licensee, if they're being sued, they want to control that lawsuit. The licenser is looking at that situation and saying, well, wait a minute. I'm not sure I wanna let you do that because you could settle for some ridiculous amount of money and I have to reimburse you. So oftentimes what the agreement is, is that the indemnified party, in this case, let's say the licensee, can control the lawsuit, but they can't settle a lawsuit without the consent of the licensor. And often, you know, you know, they won't withhold consent unreasonably. Okay, so indemnification is one that you want to spend a lot of time with your client explaining and educating them because then they'll make good business decisions. So let's move to governing law and arbitration. This is a boilerplate clause that most of us ignore and really don't pay attention to. And, um, in my startup law class, I spent a lot of time talking about these quote-unquote miscellaneous clauses and why. My first boss was a very, very good technical lawyer, and I'm not really a great detail person, and he used to just tell me, why is this clause in there? Why is that clause in there? And I would say, well, because that's in the form. And he'd say, that's not good enough. You have to have a reason for every clause in a contract. And so I started to get used to looking at clauses and making sure that every clause had a use and a reason. So governing law in a software license agreement, I think of it as important in the, in the situation, basically going back to the indemnification and other issues. Where will litigation be held if it needs to be held? So if my client's in California and the other party's in Florida, where is litigation going to be held, and will it be California law, will it be Florida law, or federal law? Who will govern this? What's going to happen? So I always look at it as, where do the parties want to litigate? And second, which state provides the best protection for the party? So if I'm representing the licensor and their headquarters is in California and California has the best law, I'm gonna fight for California. And my argument is gonna be, well, look, we're in California, you know, we wanna be out— if we have to litigate, we wanna litigate in California. The other side will say the exact opposite, of course. The licensee will say, well, wait a minute, I wanna be in my state because "If I have to litigate this, that means that you did something bad." Well, licensor says, "Well, that's my side too." So you get into these discussions. And so oftentimes what you end up doing is you agree on a neutral state. So for example, California, Florida, people say, "Well, New York or Delaware. We're gonna agree on that." And everybody says, "Fine, Delaware. We'll go to Delaware." And oftentimes they'll say, "Well, you know, let's agree on federal court." we'll have Delaware law govern and we'll fight in federal court. And you can also pick the jurisdiction. You can say, okay, we're gonna do Delaware law, but it's gonna be in San Francisco, California, or it's gonna be in New York City. So you can do that. You can break this up, but think about it. Don't just say, oh, this is part of the form, I'm gonna leave it here, because the other side often will, don't assume that the other side is not thinking about this strategically. And you need to too, okay? So the last thing is today because we are a world economy, I mean, the pandemic shows that, how fast it has spread across the world is just shocking to me. But what if one of the parties is a foreign entity? That party may want the governing law and jurisdiction to be theirs. So for example, they're in Germany. They want the governing law to be Germany, and they want jurisdiction to be Germany. Now most of us who practice in the United States don't know anything about German law or German, and so we'll say, no, we don't like that, just because we don't wanna go there. But what's more is, now let's say that you have a situation like that, and you win, you say California, California's gonna be the state even though the other company's in Germany. But do you know that Germany respects choice of law choices? You need to go and look that up or get counsel in Germany to confirm that. Because it may be that if the company says, sure, California law's fine, but then they sue in Germany, the German court may say, fine, you know, we're not gonna, we don't respect choice of law in contracts like this, it's German. We'll take it. Then you get into all kinds of arguments about, well, will California, will the United States courts enforce the judgment, that kind of stuff. But why take the chance? Just go ahead and check that because it doesn't take much effort. Okay, I'm gonna finish up here and then hopefully we'll have some questions. Arbitration is something to consider. When I've middle of my practice in the '90s, arbitration was— everybody was saying, go to arbitration, arbitration, arbitration. And then people realized that sometimes arbitration was just as slow as litigation, and sometimes the arbitrator wasn't giving good decisions because the arbitrator didn't understand, or they wanted to just split the difference. And so now people actually consider, do I want to use arbitration? Do I want to dictate what experience the arbitrator has, where it's going to be, under what rules it's going to be? So arbitration is definitely something to look at, but also recognize that you need to make a thoughtful decision and make sure that you've considered whether it, um, and how it should be done. Okay, export issues. Historically, when I first started practicing, we didn't worry that much about export issues because we didn't export a lot of software outside the United States. We did starting in like 1986 and '87. We started doing exports to Europe and Japan. And so, but still even then, you know, there weren't many regulations. You could just do it. You didn't really have to think about it too much. But today, it's an important issue in software licensing. Oh, export regulations have always been a little bit of an issue in cross-border licensing. Today there is much more regulation, and especially under the current administration, there have been more concerns about preventing certain software, often related to IP which has military and security importance, from finding its way to certain countries. And so it's important for the lawyer drafting the license to be aware of the regulations And then if they don't have expertise, bring in an export law expert if necessary. So if your software has really no export issues, then don't worry about it. But if it might, and many— because people don't understand that software may have pieces of it, it may be 1% of the total software, but that piece has export control issues. You know, for example, a piece of software that does something, but it also has encryption technology. That could be an export issue. Might not, but it could be. Even though the software is to control televisions, remotes, remote controls. But there might be embedded in that some very, very small piece of software which does encryption. That might trigger export controls. So it's worth checking to see if there's export issues and then making sure that the language correctly states this is the export issues. And also there's some enforcement responsibility. This is one of those things where if the licensee, for example, if you're exporting outside the United States and the licensee further exports it to one of the countries that are not supposed to get this type of software, then that's damage which the licensor wants to protect in that indemnification section. So you need to think about that. Okay. That's it for today. So let me see if there are any questions. Let's see here. There's one question. So somebody asked, which states do I recommend as jurisdiction for U.S. technology companies? You know, it's an interesting question. I actually like California. I think California has a lot of litigation regarding technology, so there's a lot of case law out there. I also like Delaware, believe it or not. I don't really have strong feelings about other states. I know I've had litigation in Minnesota, in Massachusetts, in Florida, in Texas. Again, my favorite is just California, partly because I'm here now and partly because there's lots of litigation that's gone on. So there's lots of case law. It's like corporate law where Delaware is nice because there's lots of litigation to look at. In California, there's lots of litigation related to intellectual property. Are there any other questions from anybody? Oh, Nicholas, can you answer this one? People want to know how to claim CLE credit.

Sure will. Everyone, thanks, uh, thanks for attending. Frank, I think you're done as well. Uh, just real quick, tomorrow you will receive an email from us. Uh, you can respond to the, the email on that, which is my email, uh, with your bar number, and I will send you the certificate. It just— we just have to go through a little verification on our end. And then, uh, we'll also have a link to a video presentation of the slide as well as basically what you listened to today, as well as the PowerPoint materials. It looks like that might be it. Frank, I'll hand it over to you.

Okay. Thanks everyone for attending. And if you have any questions after this, please send email to either myself, Jennifer, or Michael. And again, appreciate your taking your time and hope you're all staying safe and, uh, hopefully that we get over this fairly soon.