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Asserting Commercial Software Manufacturer Claims Based on End User Licensing Agreements in Federal Supply Schedule Contracts

The U.S. Federal Government often utilizes federal supply schedule (FSS) contracts to purchase commercially available off-the-shelf software (COTS) software from reputable pre-vetted software vendors. These FSS contracts are administered by the General Services Administration (GSA), and they eliminate the need for lengthy open-market solicitations for common COTS software products. FSS contracts permit agencies to purchase COTS software products quickly and efficiently from pre-vetted software vendors using pricing that reflects volume discounts due to GSA’s government-wide purchasing leverage. Generally, the COTS software product manufacturer’s end-user licensing agreement (EULA) is incorporated into the procurement contract and dictates the Government’s use of the COTS software. The term “contractor” has been expressly defined in 41 U.S.C. § 7107(7) as a “party to a Federal Government contract other than the Federal Government.” Therefore, in COTS software product purchases, since the pre-vetted software vendor has the FSS contract with the Government, the COTS software product manufacturer is generally not considered a contractor in the traditional sense because it is not a party to the Government contract. Accordingly, since the CDA does not permit appeals by anyone who is not a party to a Government contract, COTS software product manufacturers are generally unable to bring contract claims against the Government under the CDA. However, subcontractors and certain third parties may achieve privity of contract with the Government under particular circumstances, which allows them to bring claims against the Federal Government under the CDA.

A recent Court of Appeals for the Federal Circuit decision issued in March 2024 provides a deeper discussion of the interplay between these federal contract law concepts, potentially allowing an avenue for COTS software manufacturers to bring claims against the Federal Government. Avue Technologies Corporation v. Secretary of Health and Human Services, Administrator of the General Services Administration (22-1784), involves the purchase of COTS software by a federal agency through a GSA FSS contract with a pre-vetted software vendor that was not the manufacturer of the COTS software. In 2012, the GSA and the pre-vetted software vendor expressly included, by reference, the software manufacturer’s EULA as part of the FSS contract. In 2015, the Food and Drug Administration (FDA) placed a task order under the FSS contract for a subscription to the COTS software product. A year later, the FDA chose not to exercise its contract option for the subscription of the COTS product. A few days before the expiration of the base subscription period, the COTS software product manufacturer accused the FDA of taking acts in violation of the EULA, its intellectual property rights, and the Trade Secrets Act. In the following months, the COTS software product manufacturer sent the FDA a “cease and desist letter” along with a claim letter. In denying the COTS software product manufacturer’s allegations, the FDA contracting officer (CO) stated that if the COTS software product manufacturer wished to pursue a claim against the FDA, the COTS software product manufacturer must request the pre-vetted software vendor to assert a pass-through claim on its behalf. As reasoning, the CO supported his position by pointing out that the FDA’s contract was with the pre-vetted software vendor and not the COTS software product manufacturer.

In early 2019, the COTS software product manufacturer filed an appeal at the Civilian Board of Contract Appeals (CBCA) alleging a deemed denial of its claim. The Department of Health and Human Services (HHS), the parent agency of the FDA, moved to dismiss the COTS software product manufacturer’s appeal on the basis that the CBCA lacked subject matter jurisdiction. In its motion to dismiss, the HHS argued that the COTS software product manufacturer was not a “contractor” within the meaning of the CDA because the FDA’s FSS contract was with the pre-vetted software vendor and not the COTS software product manufacturer. However, the Board denied the motion to dismiss while consolidating a separate protective claim filed by the COTS software product manufacturer against the GSA with the HHS appeal. The COTS software product manufacturer and the GSA cross-moved for summary judgment. Following the submission of Board-ordered briefs by both parties on whether the EULA is a procurement contract subject to the CDA, the Board dismissed the COTS software product manufacturer’s claim for a lack of jurisdiction. Notably, however, the Board refused to decide whether the EULA established privity of contract between the COTS software product manufacturer and the Government – which would presumably allow the COTS software product manufacturer to bring a claim under the CDA. Instead, the Board agreed with the Government’s position that even if an independent contract existed between the Government and the COTS software product manufacturer, the Board lacked jurisdiction because the EULA could not be considered a procurement contract under the CDA. The COTS software product manufacturer appealed the Board’s dismissal decision to the Court of Appeals for the Federal Circuit.

The Court of Appeals for the Federal Circuit vacated and remanded the CBCA decision that dismissed the COTS software product manufacturer’s appeal. As reasoning for its decision, the Court reiterated that the determination of the existence of a contract is not a jurisdictional query but rather one that tends to resolve the substantive merits of the case. Therefore, to properly establish the Board’s jurisdiction over a CDA claim, the COTS software product manufacturer only had to allege non-frivolously that it had a contract with the Government. It was inconsequential whether that contract was express or implied. Since the COTS software product manufacturer did not have to prove the existence of the contract until the case proceeded to a discussion of substantive merits – a mere non-frivolous allegation that such a contract existed was sufficient to provide the Board jurisdiction over the appeal and avoid dismissal. The Court opined that this requirement was adequately met by the COTS software product manufacturer’s assertions that the FSS contract and the task order incorporating the EULA provide the necessary basis for the claim as they are procurement contracts under the CDA. The Court explained that whether the EULA by itself would be considered a procurement contract was not important. Instead, the pertinent question was whether the software vendor’s FSS contract and the COTS software product manufacturer’s EULA together constituted a procurement contract, giving rise to rights enforceable by the COTS software product manufacturer against the Government. Similarly, the task order issued under the FSS contract also incorporated the COTS software product manufacturer’s EULA and was, therefore, subject to the same inquiry.

Notably, since the Government already conceded that the FSS contract, together with the EULA, constituted a procurement contract, the pertinent question before the Board on remand would be whether this contract gives the COTS software product manufacturer enforceable rights against the Government. COTS software product manufacturers that sell their software to the U.S. federal government through pre-vetted third-party software vendors on GSA FSS contracts should follow this case closely to fully understand their rights. Since such COTS software product manufacturers are generally reliant on pass-through claims by the pre-vetted software vendors, they will be particularly interested in whether the Board determines that such procurement contracts, together with the EULA, allow them to achieve privity with the Government. Such a determination by the Board in its analysis may bestow additional rights to COTS software product manufacturers, along with an additional avenue for pursuing claims against the Government under the CDA. Either way, this Federal Circuit decision may resolve a jurisdictional obstacle for COTS software product manufacturers, providing an opportunity for Board review on a case-by-case basis of the merits of their claims relating to federal procurement contracts that incorporate their EULA.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.

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The federal government generally procures software as commercial items. The terms and conditions governing the use of commercial software are contained in the end-user licensing agreement (EULA), which is generally incorporated into the government contract. Since the Federal Acquisition Regulation (FAR) does not provide standard licensing agreements for commercial software, manufacturers or resellers must negotiate the terms of use of such software when the EULA is incorporated into the contract. Depending on the contract, the EULA can be incorporated into an individual order or the master agreement of a government-wide acquisition vehicle, such as a Federal Supply Schedule (FSS) contract.

As relevant to government contracts, the U.S. federal government waives its sovereign immunity for liability arising from contract claims under the Contract Disputes Act (CDA). However, the government may use the Sovereign Acts Doctrine as an affirmative defense against contractor claims. Standard contract provisions within the software manufacturer’s EULA may occasionally conflict with federal laws, including the government’s rights as a sovereign. Contractors must, therefore, review their standard EULA terms and negotiate specific clauses with the software manufacturer, if necessary, before submitting them to the government for incorporation into a government contract. While contractors should review all provisions with sovereign immunity implications, they should pay especially close attention to the following standard clauses before the EULA is submitted to the government for incorporation into a federal contract.

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The Competition in Contracting Act (CICA) mandates the use of procurement procedures enabling full and open competition in federal acquisition. Agencies may not place task or delivery orders that fall outside the scope of the underlying blanket purchase agreement (BPA) or indefinite delivery indefinite quantity (IDIQ) contract as such requirements are subject to full and open competition under CICA. In such protests, the protestors generally challenge the award against the master contract by alleging that the task or delivery order improperly exceeded the scope of the underlying master contract. The adjudicative forum must then decide whether material differences in scope exist between the order at issue and the relevant underlying master contract.

In B-412821, the Government Accountability Office (GAO) sustained such a bid protest challenging the issuance of an out-of-scope sole-source delivery order under a Government Services Administration (GSA) Federal Supply Schedule (FSS) Blanket Purchase Agreement (BPA). The protest involved the acquisition of Microsoft e-mail products for the Internal Revenue Service (IRS). The BPA was issued in 2013 for maintenance and software assurance services for the IRS’s existing inventory of Microsoft products and services for a period of three years. The BPA included a complete schedule of the Microsoft product licenses owned by the IRS and their quantities. Under the BPA, the IRS was expressly permitted to upgrade and use the latest version of each Microsoft product during the term of the BPA if it so chose. Additionally, if Microsoft products owned by the IRS became unsupported by the manufacturer, the IRS retained the right to convert its licenses to comparable, supported products at no cost. In other words, by utilizing this BPA, the IRS intended to keep its portfolio of Microsoft licenses up to date with the latest versions.

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While there are ways in which subcontractors may achieve privity of contract, they may not generally bring direct claims against the Government due to a lack of privity. Therefore, subcontractor claims against the Government are typically asserted by prime contractors as pass-through claims. However, prime contractors may only bring such pass-through claims if they meet the requirements of the Severin Doctrine. First articulated by the Court of Claims in 1943, the Severin Doctrine bars pass-through subcontractor claims unless the prime contractor itself remains liable to claims by the subcontractor. While the Severin Doctrine has evolved through its application to various pass-through claims scenarios, at its outset, it barred the assertion of pass-through claims unless the prime contractor either reimbursed the subcontractor due to the Government’s fault or was at least liable to make such a reimbursement in the future.

Based on the principles of sovereign acts immunity and privity of contract as applied to government contracts, the Severin Doctrine requires the prime contractor to have at least some demonstrable exposure to subcontractor liability. To prevent pass-through claims through this affirmative defense, the Government typically points to any provisions in the subcontract that tend to exculpate the prime contractor from liability to the subcontractor. When entering teaming arrangements, contractors should be aware that if the subcontract agreement contains a clause completely or specifically exonerating a prime contractor from liability to the subcontractor for pertinent damages, then the prime contractor may not assert a related pass-through claim against the Government. Prime contractors are similarly barred from asserting pass-through claims if the subcontract specifically extinguishes prime contractor liability upon the meeting of certain requirements, such as the subcontractor being granted additional time or the acceptance of final payment.

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Software manufacturers that provide commercial software to the government via pre-approved intermediary software vendors on the General Services Administration (GSA) Federal Supply Schedule (FSS) do not contract directly with the federal government. Due to this lack of privity of contract with the government, such software manufacturers are unable to bring direct contract claims against the government under the Contract Disputes Act (CDA). Since the software manufacturers’ end-user licensing agreement (EULA) is typically incorporated into the government contract and dictates the government’s use of the commercial software – the government’s violation of the EULA is considered a non-frivolous cause of action for a breach of contract claim. However, the Civilian Board of Contract Appeals (CBCA) refused to recognize the right of software manufacturers in such situations to bring a direct CDA claim when the intermediary GSA FSS software vendor does not sponsor their claim against the government.

In the underlying claim at issue, the software manufacturer had alleged that end users at the Food and Drug Administration (FDA) violated its EULA in 2015. The claim was not sponsored by the GSA FSS software vendor. The software manufacturer alleged that as part of FAR Part 12 acquisition of software licenses, FDA end users owed it a freestanding obligation, as they had “clicked” a box representing their agreement to the terms of the EULA. According to the software manufacturer, this freestanding obligation owed by FDA end users, created a privity of contract between the software manufacturer and the FDA. Meanwhile, the GSA and the FDA did not deny the software manufacturer’s allegations concerning the specific acts of the FDA end users leading to the alleged violations of the EULA. However, the agencies generally denied violating any legal obligations to the software manufacturer citing a lack of privity between the government and the software manufacturer, and the GSA FSS software vendor’s lack of sponsorship of the software manufacturer’s claim. The software manufacturer’s January 2019 appeal at the CBCA was dismissed by the Board for a lack of jurisdiction. The software manufacturer appealed the CBCA’s dismissal at the Federal Circuit. In March 2024, the Federal Circuit in Avue Technologies Corp. v. Secretary of Health & Human Services, 96 F.4th 1340 (Fed. Cir. 2024) (covered here) vacated and remanded for the CBCA to consider as a merits issue, whether the software manufacturer was a party to – or otherwise had enforceable rights pursuant to the “procurement contract” – defined by the Federal Circuit as the software manufacturer’s EULA in addition to the underlying GSA FSS or task order contract.

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Asserting Commercial Software Manufacturer Claims Based on End User Licensing Agreements in Federal Supply Schedule Contracts

TILLIT LAW Federal Contract Claims Insights