IP Licenses: Choice of Law – Don’t Fly Blind

October 11, 2011

The law can change frequently in common law countries – some places less so than others,  other places faster than some.  Many times in U.S. jurisdictions the law fluctuates to at least some extent by the prevailing political climate or party in the majority.   Yet often choice of law or venue is carried forward from contract to contract, license to license, like a “holy relic”.  In a common law system where law and politics are intertwined, this makes no sense.  California remains the most liberal state in permitting extra-contractual statements and duties to hang off of a contract.   New York and Delaware generally do not permit extra-contractual duties and remain strong constants in U.S. law (hence the frequent choice of the law of one of those two states in many commercial agreements).  Texas, however, once as liberal as California, is now more strict and conservative than New York or Delaware.  Times have changed, more after the jump…

California is traditionally a liberal state.  Its laws tend to favor the “little guy” by allowing ways around or through the strict terms of contracts to for a judicial concept of “fairness” to be applied in a given case — which often varies with the court’s politics.  California law allows “parol evidence” to be presented to the court in nearly every contract dispute: Meaning either side can dispute the other’s interpretation of the contract to the jury with evidence from the negotiations pre-dating the contract.  This also means discovery on pre-contract negotiations.  One court stated the test for admission of parol evidence in California as follows: “The test of whether parol evidence is admissible to construe an ambiguity is not whether the language appears to the court to be unambiguous, but whether the evidence presented is relevant to prove a meaning to which the language is `reasonably susceptible.’” Winet v. Price, 4 Cal.App.4th at 1165, 6 Cal.Rptr.2d 554  (internal citation omitted).  California will also enforce contracts to negotiate in good faith: Whether defendants negotiated in good faith is a not a question of law—it is a question of fact for the jury. Copeland v. Baskin Robbins U.S.A. 96  Cal.App.4th 1251, 1261.

California has made the duty of good faith and fair dealing into a an alternative theory of contract enforcement (sort of analogous to doctrine of equivalents):  “The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.” Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818 [169 Cal. Rptr. 691, 620 P.2d 141]. Initially, the concept of a duty of good faith developed in contract law.   As to the scope of the covenant, “`[t]he precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818 [169 Cal. Rptr. 691, 620 P.2d 141].) Initially, the concept of a duty of good faith developed in contract law as “a kind of `safety valve’ to which judges may turn to fill gaps and qualify or limit rights and duties otherwise arising under rules of law and specific contract language.” (Summers, The General Duty of Good Faith — Its Recognition and Conceptualization (1982) 67 Cornell L. Rev. 810, 812, fn. omitted; see also Burton, supra, 94 Harv. L. Rev. 369, 371 ["the courts employ the good faith doctrine to effectuate the intentions of parties, or to protect their reasonable expectations" (fn.omitted)].)

New York on the other hand will not admit parol evidence to vary the terms of a contract unless after reviewing only the contract itself, the court finds an ambiguity: New York law provides that “`extrinsic and parol evidence is not admissible to create an  ambiguity in a written agreement which is complete and clear and unambiguous upon its face.’” S. Rd. Assocs., LLC v. Int’l Bus. Machs. Corp., 4 N.Y.3d 272, 793 N.Y.S.2d 835,826 N.E.2d 806, 809 (2005) (citation omitted).  The duty of good faith and fair dealing is generally consistent and co-extensive with the contract’s obligations and terms, Canstar v Jones Constr. Co., 212 AD2d 452 [1st Dept 1995].); while in California it is a separate inquiry and ground for relief.

Delaware law is similar to that of New York.  Both Delaware and New York have tried to keep their commercial laws tied to strict enforcement of contracts, avoid imposition of extra-contractual duties, and avoid permitting use of parol evidence to vary the terms of their contracts.

Texas law was once very liberal in the vien of California law — but after multiple years of conservative Governors and Supreme Court Justices from the Republican Party, Texas law is now as tough or tougher than that of New York or Delaware.  A Texas court must analyze a contract’s meaning by its language without resort to extrinsic considerations.  In re Texas Commercial Energy, 607 F. 3d 153 (5th Cir. 2010). Under Texas law, it is a basic premise of contract interpretation that unambiguous contracts are construed as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983); First  Union, 168 S.W.3d at 924; Pratt-Shaw v. Pilgrim’s Pride Corp., 122 S.W.3d 825, 829 (Tex.App.-Dallas 2003, pet. denied). The entire instrument, taken by its four corners, must be read and  considered to determine the true intention of the parties. First  Union, 168 S.W.3d at 924; Pratt-Shaw, 122 S.W.3d at 829. Terms are given their plain, ordinary, and generally accepted meaning, unless the instrument shows the parties used them in a technical or different sense. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex.1996); First Union, 168 S.W.3d at 924; Pratt-Shaw, 122 S.W.3d at 829.  When interpreting a contract, courts examine the entire agreement in an effort to harmonize and give effect to all provisions of the contract so that none will be meaningless. MCI Telecomms. Corp. v. Tex. Util. Elec. Co., 995 S.W.2d 647, 651 (Tex.1999); First Union, 168 S.W.3d at 924; Pratt-Shaw, 122 S.W.3d at 829. Courts presume the parties to a contract intend every clause to have some effect. Heritage Res., 939 S.W.2d at 121; First Union, 168 S.W.3d at 924; Pratt-Shaw, 122 S.W.3d at 829. When interpreting a promise or agreement, specific and exact terms are given greater weight than general language. First Union, 168 S.W.3d at 924; Pratt-Shaw, 122 S.W.3d at 829.

Texas typically has no separate recovery for contract duties under its law of duty of good faith and fair dealing: These obligations are generally limited to UCC contracts (and only to the extent provided in the UCC), and Insurer-Insured claim handling, not to all commercial contracts.  Likewise, under Texas law, there can be no fraud or misrepresentation claim that contradicts the terms of a contract.  Finally, The elements of  tortious interference with a contractual relationship are the existence of a contract, the willful or intentional act of interference that was a proximate cause of damages, and actual damage or loss occurred. Aguilar v. Morales, 162 S.W.3d 825, 837 (Tex.App.-El Paso 2005, pet. denied); Hopkins v. Highlands Ins. Co., 838 S.W.2d 819, 824 (Tex. App.-El Paso 1992, no pet.). Even if a plaintiff establishes these elements, a defendant may still prevail by establishing the affirmative defense of justification. Texas Beef Cattle Co. v. Green, 921 S.W.2d 203, 211 (Tex.1996). Justification is an affirmative defense to tortious interference with contract based on either the exercise of one’s own legal rights, or a good faith claim to a colorable legal right, even though that claim ultimately proves to be mistaken. Id.  In this respect, Texas law is more conservative than the Restatement of Torts or of Contracts.

So the bottom line is that you need to consider the choice of law and not just carry forward blindly that term from a prior contract.  Law changes:  Now, the state that gave America George W. Bush (good, bad or indifferent), and has its current governor, Rick Perry, running for the Republican nomination (who can be fairly characterized as at the extreme “right wing” of the Republican party), probably has the strongest law for contract enforcement, avoidance of extra-contractual duties, as well as law against misrepresentation where a contract addresses the issue, and against tortious interference with contract.  Texas is now the second largest state in the United States in population, and is probably the most conservative today in laws governing commercial relationships.

 

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