Sovereign Immunity Considerations in Reviewing Commercial Software Provisions for Federal Contracts

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.

· Standard Commercial Disputes Clauses Selecting the Choice of Law & Forum

Standard dispute clauses within the EULA generally identify a state whose law governs any disputes arising from or relating to the agreement. Similarly, such a clause may specify a state court forum to resolve such disputes. Such standard commercial dispute clauses necessarily violate the federal government’s sovereign immunity from state laws and should be edited or removed before they are incorporated into a federal contract for commercial software. Commercial software manufacturers or resellers may edit such dispute clauses to expressly state that the CDA shall govern contract disputes arising out of or relating to the agreement at issue. Additionally, the clause may be modified to state that any claims shall be brought to the relevant Board of Contract Appeals or the Court of Federal Claims having jurisdiction under the CDA. Finally, the modified clause may include a statement indicating that any torts claims shall be brought under the Federal Torts Claims Act (FTCA).

· Standard Payment of Tax Clauses

The clause at FAR 52.212-4(k) requires the contract price of commercial software purchased by the government to include all applicable federal, state, and local taxes and duties. Therefore, any EULA that contains a standard payment of tax clause that requires the government to pay the seller’s state or local taxes associated with their commercial software purchase violates the federal government’s sovereign immunity. Contractors should edit or remove such standard payment of tax clauses before the EULA is incorporated into the federal contract to purchase the commercial software. Contractors may edit such standard payment of tax clauses to expressly release the federal government from liability of any sales, use, or excise taxes imposed by any state or local government or their instrumentalities. Such a clause may also specifically state that the contractor will be responsible for including all applicable federal, state, and local taxes and duties in the contract price of the commercial software pursuant to FAR 52.212-4(k).

A comprehensive pre-award review of EULA terms by the contractor is necessary to ensure the terms of the commercial software are consistent with all applicable federal laws and regulations. Therefore, contractors should review the standard commercial software EULA before submitting it to the government for incorporation into federal government contracts to ensure the terms do not violate the federal government’s sovereign immunity. Commercial software EULA containing standard commercial disputes and payment of tax clauses should be reviewed to ensure they do not subject the federal government to any state laws for dispute resolution or obligate it to state taxation. Contractors should consult legal counsel and consider reviewing these clauses as part of a wider compliance assessment of commercial software terms. This will help establish a thorough due diligence process before incorporating standard commercial terms and conditions into a federal government contract.

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.

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