When interpreting terms of a federal contract, dispute adjudicative forums may turn to extrinsic evidence of trade practice and custom to resolve ambiguities. Trade usage refers to the use of terms or language with such regularity in a particular vocation, location, or industry that a contracting party is justified in its expectation that their technical meaning will be observed with respect to the contract. The use of trade practice and custom evidence as an interpretive device is not typically available when contractual language is plain and unambiguous on its face. However, under certain conditions, such as when a term has an accepted industry meaning different from its ordinary meaning, it may be appropriate for the dispute adjudicative forum to turn to evidence of trade practice and custom even when the contractual language is seemingly unambiguous. In such situations, the party introducing the evidence must demonstrate that it reasonably relied upon the accepted industry meaning as opposed to the ordinary meaning at the time of contract formation. In other words, the party presenting the evidence must show that the trade practice or custom genuinely reflected its intent when entering the contract, rather than serving as a post hoc rationalization for its actions.
Parties to a federal contract often rely on evidence of industry trade practice and custom to define technical terms. For instance, when the license agreement of commercial software is incorporated in a federal contract, parties may rely on evidence of trade practice and custom in the commercial software industry to define technical terms in that agreement. In Armed Services Board of Contract Appeals (ASBCA) 59913, the Army used such extrinsic evidence to defeat the contractor’s motion for summary judgment in a dispute arising under a contract for commercially available bi-directional translation software. The ASBCA issued its opinion on the contractor’s motion for partial summary judgment on June 1, 2022. Pursuant to the underlying contract, the Army purchased 20 single-user licenses of the commercial software for $96,800 in 2010. The contractor delivered the software to the government on 20 compact disks (CDs), packaged in a box with a written, paper version of the long-form license agreement. Additionally, each CD included a separate piece of paper with a short-form agreement inside the shrinkwrap surrounding the case. Finally, the software installation application included a clickwrap agreement, requiring the end user to click and accept the license agreement before installing the software on a computer.
The long-form license agreement required the Army to provide the contractor with a list of registered users and stated that each license permitted the government to install the software on only one computer. The long-form agreement also prohibited the government from making copies of the software or allowing others to make such copies. Similarly, the short-form shrinkwrap agreement provided that “this CD can be used for installation on one computer system only.” The shrinkwrap agreement instructed the Army to activate each installation with the respective product ID printed on the face of the CD case. The shrinkwrap agreement also warned the government that the software should not be copied onto another CD, hard disk, or any other storage device. Finally, the clickwrap agreement in the installation application required the end user to agree to the software licensing agreement by clicking the accept button and entering the product ID unique to that copy. The clickwrap agreement did not relist the terms of the long-form agreement or inform the user that the software was provided under a single-user license. Software manufacturers often mitigate the risk of unauthorized copying, modification, or distribution by adopting a Software as a Service (SaaS) or other cloud service models. However, this option was not available for the contractor because the software needed to be used on the government’s secure computers in Afghanistan. These computers often did not connect to the internet, and when they did, the internet connection was inconsistent and problematic.
Significantly, while the contract included the clause at Federal Acquisition Regulation (FAR) 52.212-4, “Contract Terms and Conditions – Commercial Software,” it did not contain the clause at FAR 52.227-19, “Commercial Computer Software License.” In addition to requiring that the terms and provisions of the contract comply with federal laws and the FAR, the clause at FAR 52.227-19 lists specific conditions under which the government may use, copy, reproduce, modify, or disclose the software being acquired. Barring those expressly enumerated conditions, FAR 52.227-19 prohibits the government’s use, reproduction, or disclosure of the software. Thus, the incorporation of that clause in the contract resolves any inconsistencies with the software manufacturer’s commercial licensing agreement regarding the government’s rights to use, reproduce, or disclose the commercial software. The parties also failed to negotiate and set forth the extent of the government’s rights to use the software as required under FAR 27.405-3 when FAR 52.227-19 is not included in the contract. Consequently, the Army was bound by the terms of the included license agreement, which was affirmed by the ASBCA in a related appeal from 2018. In that appeal, the ASBCA determined that the terms of the license agreement were sufficiently consistent with those provided by the contractor to commercial purchasers and did not otherwise violate federal law. The ASBCA also found that the Army had breached the contract by violating the terms of the license agreement, as it had permitted the installation of a single copy of the software onto more than one computer and failed to provide the contractor with a list of registered users.
Meanwhile, one of the legal issues presented to the ASBCA in the contractor’s motion for partial summary judgment in ASBCA 59913 was whether the contract, which was for 20 single-user licenses, limited the Army’s use to 20 unique individual users. Importantly, the contract did not define the term “single-user,” and the contracting officer (CO) indicated that he did not clearly understand what a single-user license might entail. In its motion for partial summary judgment, the contractor took the position that a single-user license meant the software could only be installed on a single computer for one specific individual, and any other use was prohibited. Meanwhile, the government argued that the term “single-user” permitted more than one individual user to access the software on a single computer. According to the Army, the license also allowed it to remove the software from one computer and to subsequently install it on another machine, as long as a single copy of the software was installed on only one computer at any given time. To support its position, the Army attached a declaration from an expert witness stating that the term “single-user,” as used in the commercial software industry, did not restrict the use of a copy of the software to only a single specified user. Instead, in his declaration, the expert witness analogized the single-user license to a library book, which permitted many people, but only one person at a time, to use the software. Based on this expert testimony and drawing inferences in favor of the Army as the non-movant, the ASBCA denied the contractor’s motion for partial summary judgment, finding that a dispute over a material fact existed over how the contract’s “single-user” term should be interpreted.
Whenever practicable, contractors should negotiate and incorporate the desired limitations and restrictions on the government’s use of commercial software in their federal contracts. When drafting such limitations and restrictions, contractors need to not only ensure that the license grant is sufficiently narrow and consistent with federal laws and the FAR but also account for trade practice and customs. Since the clause at FAR 52.227-19 was not included in the contract described above, the contractor could have protected its interests by expressly defining what a single-user license entailed in the licensing agreement. For instance, the contractor could have limited the license grant to permit only one authorized individual end user to install and use one copy of the translation software on one computer for exclusive use by that single user on the computer on which the software was first installed. Describing the limitations on the license grant in this manner would have prevented the government from introducing evidence of trade practice and custom with respect to the term “single-user.” However, even though the government successfully defeated the contractor’s motion for partial summary judgment, in later stages of the litigation, the government will have to demonstrate that it reasonably relied on the expert witness’ definition of the term “single-user” at the time of contract formation. Doing so may prove challenging, considering the CO’s testimony that he did not understand what a single-user software license entailed. Finally, the government may have to prove that the definition of “single-user,” as advanced by its expert witness, was prevalent in the commercial software industry at the time of contract formation in 2010. This may present additional challenges if the definition advanced by the expert witness became customary in the industry at a later stage.
This Federal Procurement 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.
