Microsoft’s Form License Contract: Compliance with PRC Law?

Microsoft’s software license contracts with its Chinese end users provide that all disputes arising therefrom are subject to U.S. law and should be resolved in U.S. federal courts. Based on this clause, Mr. Dong, a lawyer in Beijing, requested the State Administration for Industry and Commerce (“SAIC”) to start antitrust investigation on Microsoft China.

According to Microsoft China’s in-house counsel, the software license contract used in China is based on the global form of Microsoft, which applies to all countries where Microsoft has business, and does not seem to violate PRC law.

International private law experts in China commented that China did allow application of foreign law in contracts involving foreign factors; however, it is arguable whether Microsoft’s software license contracts with Chinese end users have foreign factors. The key issue is who is the other party to such contracts. In fact, Microsoft is selling its software in China through its Chinese subsidiary (i.e., Microsoft China), which is obviously a company incorporated in China. With Chinese parties on both sides (Microsoft China and Chinese end users), plus the fact that the software sales and license transactions occurred within the territory of China, no foreign factors are seen in such contracts, according to the interviewed Chinese law expert. Application of U.S. law in such contracts is thereby baseless under PRC law.

In addition, from the consumer protection perspective, PRC law provides that product providers, when using form contracts, should not increase obligations on consumers. Given the choice of U.S. law as applicable law and U.S. federal courts as forum for dispute resolution will foreseeably increase the litigation cost and burden on consumers, this clause is also deemed as impairing consumers’ rights in China.

It is reported that the SAIC will pay more attention to such practice of Microsoft and engage investigation when necessary.