Business

Let's face it - most contract terms are boring.  SaaS licensors and their customers want to close deals.  They want to hammer out the business terms and key legal terms and get the contract done.  I don't blame them.  Nobody in their right mind wakes up in the morning and says "I want to negotiate a contract today."

After weeks (or even months) of negotiations over key business and legal terms, the parties often are left with a few miscellaneous "legal" terms that seem more of a burden than important to the ultimate goals of the transaction.  One common term that reaches these final stages is the forum selection clause (i.e., if a lawsuit arises based on the contract, where will it be brought?). 

An Indiana technology company obviously wants all actions to take place in Indiana courts.  The out of state (or out of country) customer wants their home forum. 

So the key question is: Is this clause really important enough to delay closing the transaction? 

My favorite attorney answer: It depends.

As a business law attorney, answers are not always so clear.  For instance, a SaaS client of mine once asked me regarding a large scale SaaS licensing agreement valued at hundreds of thousands of dollars in which we were negotiating a choice of law clause, "What is the difference between choosing Indiana law or Illinois law to govern this contract?"  There are two potential answers.  The first answer engages the standard large business law firm approach - have an associate draft a massive memorandum comparing statutory and case  laws of each state on each and every clause of the contract and then outlining each and every difference to the client.  Spend: 40 legal hours @ $250/hr = $10,000.  

The second answer is approached from a business risk standpoint.  This is usually more what the client is looking for.  The attorney answers that there will be some differences but anticipates the differences will be fairly minor as both are seventh circuit states and have approached business law in very similar manners.  That said, this does not mean there are not differences in law, and we can look into specific issues further if there are key issues you want addressed.  Spend: 0.3 Hour @ $250/hr = $75.

The second answer provides a platform of risk assessment for the client to make an informed decision.  Do they want more information or are they willing to take on the risk of not knowing all of the answers in order to get the transaction done.

That example is for choice of law.  With forum selection clauses you are taking on the risk of a lawsuit arising from this contract and the need to bring an action on this contract.  The attorney can either do a detailed analysis of the differences in procedure and history of case law in SaaS transactions in the other state or provide the client with the opportunity to weigh the risk.

An out of state (or country) forum selection clause will greatly increase the costs of an action on the SaaS licensor.  So, there are several factors to consider when weighing the risk.  

• Is the SaaS licensor collecting a subscription fee over time or payment upfront?  A foreign forum selection will make small collection actions more difficult to obtain.
• Does the contract provide for attorney's fees and collection costs to be recovered by the SaaS business?
• Does the foreign selection clause put the SaaS business' customer on their home turf (there is a such thing as home court advantage in law) or is it a neutral site?
• What is the estimated cost for securing counsel in the forum (e.g., If you have London or New York forum, the SaaS business will pay double or triple on legal rates than Midwest rates).

Moral of the story - consult with an attorney who truly wants to get business deals done and weighs risks with you based on particular transactions.  Be aware of attorneys that want to provide over analysis on all provisions or ignore the particulars of a transaction.  Finally, don't overlook what sometimes are considered miscellaneous, general or "boilerplate" terms.  There are often "hidden" costs down the road in these clauses.


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Alerding Castor is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, probate and business litigation.