The Power of Procurement Contracts: Software Manufacturer May Bring IP Claims Against Federal Agency

A glimmer of hope from the Federal Circuit for software manufacturers looking to enforce license agreements against the U.S. Federal Government.

In an order issued March 6, 2024, the court said entities licensing software to federal agencies through resellers may enforce end user license agreements (EULAs) directly against the government if the agreements qualify as ‘procurement contracts.’ The order vacates the earlier decision of the Civilian Board of Contract Appeals (CBCA), which held that it lacked jurisdiction under the Contract Disputes Act (CDA) to entertain disputes brought by software licensors who contract through resellers. On remand, the CBCA will consider whether Appellant Avue Technologies Corporation (Avue) has a ‘procurement contract’ with the Food and Drug Administration (FDA) capable of direct redress under the CDA.

The case stems from Avue’s 2015 contract with the FDA, which purchased licenses for Avue’s commercial AI-enabled human resources software via reseller Carahsoft Technology Corporation (Carahsoft) under Carahsoft’s Federal Supply Schedule (FSS) contract. These licenses were subject to Avue’s EULA, which Avue refers to as a master subscription agreement (MSA). Avue contends that FDA employees downloaded its software in violation of the MSA. In 2018, Avue invoked the CDA in noticing a dispute with the FDA. After the FDA rejected the claim, Avue appealed to the CBCA. The CBCA dismissed for lack of CDA jurisdiction because Avue lacked a ‘procurement contract’ with the FDA. It held that “a claim by Avue in its own capacity for breach of the MSA/EULA is not, regardless of its viability, a claim by a contractor under a CDA procurement contract that our Board [the CBCA] may resolve.”

At the Federal Circuit, Avue argued that its MSA is a ‘procurement contract’ under the CDA, or, alternatively, was combined with the FSS contract as part of Carahsoft’s larger procurement contract with the FDA. Courts have held that a procurement contract under the CDA generally includes a buyer-seller relationship, the direct expenditure of government funds, and a direct benefit to the government in exchange for government funds. See G.E. Boggs & Assocs., Inc. v. Roskens, 969 F.2d 1023, 1027–28 (Fed. Cir. 1992); Pasteur v. United States, 814 F.2d 624, 627–28 (Fed. Cir. 1987). While the Federal Circuit declined to consider the “MSA-standing-alone” argument, it found Avue’s “combination” pleading “nonfrivolous” and sufficient to establish jurisdiction under the CDA. Citing its holding in Engage Learning, Inc. v. Salazar, 660 F.3d 1346 (Fed. Cir. 2011), the court said a plaintiff “need only allege the existence of a contract to establish the Board’s jurisdiction under the CDA ‘relative to’ an express or implied contract with an executive agency.”

It remains to be seen whether Avue’s EULA/MSA constitutes a ‘procurement contract’ under the CDA, and what role the channel partner must play in bringing any claims before the CBCA. In any case, the CBCA’s decision bears watching.

In the meantime, software licensors with indirect federal end users can take steps to protect their enforcement rights.

Consider:

• Drafting fit-for-purpose channel partner agreements that, among other things, require the partner to submit pass-through claims;
• Ensuring that channel partners are obligated to ‘flow up’ EULAs (or equivalent) and incorporate their terms and conditions into the partners’ procurement contracts;
• Creating a ‘federal-friendly’ version of the EULA terms and conditions to facilitate deal velocity while mitigating unenforceability of clauses contrary to federal law; and
• In the event a dispute with the U.S. federal agency end customer materializes, adhering to procedures and timelines for perfecting a claim.

Beyond disputes and jurisdictional questions, general compliance and other considerations for companies licensing commercial software to U.S. federal government agencies include:

• Developing policies, playbooks and training for public sector sales and ethics compliance;
• Actively managing software supply chain, including, for example, complying with and documenting secure software development practices; and
• Considering special compliance requirements for software developed with AI tools and software that delivers AI-based capabilities to U.S. federal government end users.

*Daniel Klaeren contributed to this alert.