Can a Commercial Software License Be Valid and Enforceable When It’s Not Included in Your Government Contract?

Software manufacturer CiyaSoft recently appealed to the Armed Services Board of Contract Appeals (ABSCA) when the Army violated the terms of their commercial software license. The Army countered that the licensing agreement, which had been shipped with the CD-ROMs containing the software, was not included in the contract. Ultimately, the Board drew upon provisions in the FAR to inform their ruling in favor of the contractor. Software manufacturers who use shrink-wrap or click-on licensing agreements and hold contracts with the Federal Government will want to read on to learn about the implications of this ruling. 

A Contracting Officer Unaware of Shrink-Wrap Licensing Terms

CiyaSoft provided the Army with language translation software to translate English into Dari or Pashto, and visa-versa. Included in this commercial item contract was a purchase description for a “single user license,” but the contract documents did not include the license terms themselves.

Perhaps a rarity in these days of online distribution and cloud computing, the software came in the form of several CD-ROMs. When the software arrived, it was accompanied by a license inside the box and inside each CD-ROM’s shrink-wrap packaging. The license stated that the software was good for installation on one computer only. The Contracting Officer was not present when the boxes were opened. If the personnel who installed the software read the license, they did not take heed. Later, CiyaSoft learned that the software had been installed on not one, but on at least 17 computers.

The contractor responded by filing a claim for breach of the license with the Contractor Officer. When that claim was denied, CiyaSoft appealed it to the ABSCA, where the claim gained traction. The Army defended the case on the ground that the licensing agreement was not physically part of the contract, and this became the main issue in the case. The Board had to decide whether the license was valid and enforceable, even if the Contracting Officer had never seen it and despite its omission from the contract document.


The ABSCA’s Analysis Lands in Favor of the Contractor

The ABSCA conducted an extensive analysis that resulted in a ruling for the contractor. In explaining their decision, the Board offered a very interesting analysis. First, the ABSCA pointed out that the contract was written for a software license, and that CiyaSoft’s shrink-wrap license was the only one connected to the contract. They held that the Federal Acquisition Regulation supports the use of this license. Whenever the Government acquires commercial computer software, it should be acquired “under the licenses customarily provided to the public,” as long as they’re consistent with Federal law and otherwise satisfy the Government’s needs. In this case, the shrink-wrap license was the one customarily provided to the public, and the ABSCA felt it was consistent with Federal law and needs.

Next, the ABSCA stated that the Contracting Officer had issued a contract for a software license without putting any license terms into the contract. Under those circumstances, the Board felt that the duty shifts to the Contracting Officer to inquire about the terms of the contractor’s existing software license. The fact that the Contracting Officer didn’t do so here was ultimately held against the Government. The Board cited a principle that we’re all aware of, even if we don’t see it frequently: that you can be bound by a contract’s terms and conditions even if you don’t actually read them. It turns out that this simple tenet applies to the Government, as well.


The ASBCA Ruling In the Context of Later Developments

The Board went on to discuss a newer regulation that was too recent to apply to this case.   The FAR now has a prohibition against license agreements that violate the Anti-Deficiency Act (FAR 12.216 & 52.212-4(u)). (A similar GSA contracting clause overwrites standard license terms.) Here the ABSCA stated that, even though those provisions say that certain terms and conditions are contrary to Federal statutory law and therefore unenforceable, they don’t prohibit such licenses outright. And because they aren’t prohibited, the Board concludes that the new regulation supports the enforceability of industry standard shrink-wrap and click-on licenses, to the extent that they’re consistent with Federal law.


What’s Next in this Case

Like many Board decisions, the decision in CiyaSoft’s case determines only the contractor’s entitlement to recover damages, not the amount of those damages. That matter has been remanded to the parties to negotiate. It appears that the software was installed on 17 machines instead of one, so it’s likely that CiyaSoft will recover the value for 16 more licenses, many times the original contract value.

CiyaSoft Corp., ASBCA Nos. 59519, 59913, June 27, 2018


For more on commercial software licenses, listen to my interview on Federal News Radio’s “Federal Drive with Tom Temin.”

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