Feature

“When Two Worlds Collide”: Comparing Software License Boilerplate with Government Contracts

David S. Bloch

©2016. Published in Landslide, Vol. 8, No. 3, January/February 2016, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Government software contracts are just like ordinary commercial software contracts: they involve an offer, acceptance, consideration, and other concepts that licensing experts know well from the private sector. Indeed, in Department of Defense (DoD) contracts, the government is instructed that “[c]ommercial computer software or commercial computer software documentation shall be acquired under the licenses customarily provided to the public unless such licenses are inconsistent with Federal procurement law or do not otherwise satisfy user needs.”2 And “civilian” government contracts (meaning non-DoD contracts with agencies such as the Departments of State, the Interior, or Homeland Security) follow a similar line: “commercial computer software or commercial computer software documentation shall be acquired under licenses customarily provided to the public to the extent the license is consistent with Federal law and otherwise satisfies the Government’s needs.”3

But at the same time, government contracts are totally unlike commercial contracts. They operate in an environment of preset contract clauses set forth in the Federal Acquisition Regulation (FAR) and its agency-level supplements—the most prominent of which is the Defense Federal Acquisition Regulation Supplement (DFARS). The civilian (FAR) and DoD (DFARS) commercial software clauses define “commercial computer software” differently.4 And each set of acquisition regulations contains a caveat that the agencies will accept commercial licenses only to the extent that those licenses are consistent with federal procurement laws. The contract language imposed by federal procurement laws differs from standard software licensing terms in several important ways. Thus, these relatively innocuous statements (DFARS: “unless such licenses are inconsistent with Federal procurement law”; FAR: “to the extent the license is consistent with Federal law”) create a vast gulf between commercial expectations and government practices.

To bridge that gulf, this article addresses specific boilerplate clauses in commercial software licenses and their counterparts in the government contracting world: choice of law, choice of venue, authority to bind, prompt payment, indemnity, and integration. It then addresses how government procurement law affects the scope of rights and ownership of intellectual property.

Commercial Boilerplate versus Government Contracts

Choice of Law Clauses

Nearly all commercial contracts select a particular state’s governing law. The language typically will say:

This Agreement shall be governed by and construed in accordance with the laws of the State of New York, excluding any conflict of law or choice of law rules.

But in government contracts, federal law always governs. “[A]ny express or implied contract . . . made by an executive agency for . . . the procurement of property . . . [or] the procurement of services” is subject to the federal Contract Disputes Act.5 This is a function of federal sovereignty: because the government must consent to be sued, it controls where and how that lawsuit will proceed.6 Thus, a commercial software contract’s choice of law provision does not bind the government.

Choice of Venue Clauses

Choice of law provisions in commercial contracts usually are accompanied by express venue selection clauses, along the following lines:

The Parties hereby consent to the exclusive jurisdiction and venue in New York, New York, and waive the defense of forum non conveniens.

The purpose of such a provision is to ensure that the licensor can enforce its agreements in a single, familiar jurisdiction.

However, with trivial exceptions, a software licensor can enforce its rights against the government in only two places: (1) an administrative Board of Contract Appeals at the contracting agency, whose decisions are appealed to the United States Court of Appeals for the Federal Circuit;7 or (2) the United States Court of Federal Claims in Washington, D.C.8 The licensor’s preferred venue is irrelevant.

Authority Clauses

These prior two items beg the question of what happens if the government signs a license agreement with choice of law and choice of venue provisions. To address such problems, many software licenses include an authority to sign clause, like this:

The Licensee represents and warrants to the Licensor that the Licensee has full power and authority to enter into this Agreement, and the execution, performance of, or compliance with this Agreement by the Licensee has been duly authorized by all necessary corporate actions. The execution, performance of, or compliance with this Agreement by the Licensee does not and will not conflict with or result in a breach or violation of any law applicable to the Licensee.

Even in the absence of such a clause, the law often allows a person with “apparent” authority to bind a company.9

In government contracts, the opposite is true. The only person who can bind the government to a license is a “contracting officer,” and that officer can only bind the government to the extent of his or her authority.10 That authority is set forth in a written “warrant,” which caps the amounts the contracting officer can obligate the government to pay.11 “Apparent authority” does not exist in government contracting: if a contracting officer does not sign the contract, or if the contract exceeds his or her authority, there is no deal, and any work performed by the private contractor in reliance on the “contract” is gratuitous.

Prompt Payment and Interest Clauses

Compensation is, of course, important in any software license—indeed, consideration is a necessary part of any valid contract in the government or the commercial space. Private parties often include both timing provisions and penalties for late payment in their contracts. For example:

Customer shall pay: (i) all fees as specified in the Invoice and (ii) all other invoices, without deduction or offset, within 30 days of invoice date, to earn any Prompt Payment Discount set forth in the Invoice. Outstanding amounts not paid when due will accrue interest at the lower of 1½% per month or the highest monthly rate allowed by applicable law, whichever is lower. All payments are non-refundable. The obligation to pay and the payment of any such interest will not operate to extend any payment due date or the term of this Agreement.

Such clauses are only partially effective in the government context. Rather, the Prompt Payment Act12 provides that the government normally must pay undisputed invoices within 30 days (though the government can agree to a different schedule)13 and will pay interest “at a rate which the Secretary of the Treasury shall specify as applicable for each successive 6-month period. The rate shall be determined by the Secretary of the Treasury taking into consideration current private commercial rates of interest for new loans maturing in approximately 5 years.”14 This is often less than the “punitive” interest rates imposed by commercial software licenses. The government is, however, permitted to accept prompt payment discounts along the lines of the boilerplate example above.15

Indemnity Clauses

In private software licenses, indemnities run both ways. The licensor indemnifies the licensee in the event that the licensor’s product is accused of infringement, and the licensee indemnifies the licensor to the extent that the infringement allegations arise from the licensee’s conduct or its use of the licensor’s technology with third-party products. A typical “balanced” indemnity provision thus looks something like this:

Licensor shall indemnify, defend, and hold harmless Licensee against any and all claims, losses, liabilities, damages, fees, expenses, and costs (including but not limited to attorneys’ fees, court costs, damage awards, and settlement amounts) arising out of or relating to any claim or allegation against the Licensee that alleges that the Software or any services performed under this Agreement infringe any intellectual property or other proprietary rights.

Licensee shall indemnify, defend, and hold harmless Licensor against any and all claims, losses, liabilities, damages, fees, expenses, and costs (including but not limited to attorneys’ fees, court costs, damage awards, and settlement amounts) arising out of or relating to any claim or allegation against the Licensor concerning alleged infringement of any intellectual property or other proprietary rights arising from Licensee’s use of the Software in connection with any third-party technology, or any Licensee modifications of the Software, or any use of the Software in breach of any term of this Agreement.

In the commercial sector, who indemnifies whom and to what extent are decided based on the bargaining power of the parties.

By contrast, the scope of indemnity in a government contract is determined entirely by statute and regulation. If the government wants to be indemnified by the licensor, it can include a standard patent indemnity clause, which reads in full:

(a) The Contractor shall indemnify the Government and its officers, agents, and employees against liability, including costs, for infringement of any United States patent (except a patent issued upon an application that is now or may hereafter be withheld from issue pursuant to a Secrecy Order under 35 U.S.C. 181) arising out of the manufacture or delivery of supplies, the performance of services, or the construction, alteration, modification, or repair of real property (hereinafter referred to as construction work) under this contract, or out of the use or disposal by or for the account of the Government of such supplies or construction work.

(b) This indemnity shall not apply unless the Contractor shall have been informed as soon as practicable by the Government of the suit or action alleging such infringement and shall have been given such opportunity as is afforded by applicable laws, rules, or regulations to participate in its defense. Further, this indemnity shall not apply to

(1) An infringement resulting from compliance with specific written instructions of the Contracting Officer directing a change in the supplies to be delivered or in the materials or equipment to be used, or directing a manner of performance of the contract not normally used by the Contractor;

(2) An infringement resulting from addition to or change in supplies or components furnished or construction work performed that was made subsequent to delivery or performance; or

(3) A claimed infringement that is unreasonably settled without the consent of the Contractor, unless required by final decree of a court of competent jurisdiction.16

This clause normally is required in contracts for the delivery of commercial items (including software).17 The inclusion of this patent indemnity clause may mean that a private contractor must fund the government’s defense of an infringement claim in the Court of Federal Claims.

The government cannot directly indemnify a private contractor: “The contracting officer shall not include in any solicitation or contract any clause whereby the Government agrees to indemnify a contractor for patent infringement.”18 If the government wants to protect the licensor from intellectual property claims, an authorization and consent clause may be included. The authorization and consent clause comes in three distinct flavors:

  • In the standard authorization and consent clause, the government “authorizes and consents to all use and manufacture . . . of any invention . . . covered by a United States patent” if the technology in question is accepted by the government and “necessarily results from compliance by the Contractor” with the government’s specifications. In such circumstances, “the Government assumes liability for . . . infringement.”19
  • Alternate I to the standard clause is even broader: “[t]he Government authorizes and consents to all use and manufacture of any invention described in and covered by a United States patent in the performance of this contract,” regardless of whether the item is accepted or is required for contract performance.20
  • In Alternate II, the government expressly authorizes and consents to infringement of patents used in communication services and facilities if they are “embodied in the structure or composition of any article” or “used in machinery, tools, or methods whose use necessarily results from compliance by the contractor” with the government’s specifications or written instructions.21

This is the closest the government can come to indemnifying the licensor. Further indemnification is barred under the Antideficiency Act, which prohibits the government from accepting contingent liabilities exceeding pre-allocated funds.22 The authorization and consent clauses are justified by 28 U.S.C. § 1498,23 another expression of government sovereign immunity, and operate as affirmative defenses for private parties in intellectual property lawsuits.24

Integration Clauses

Lastly, private contract boilerplate usually includes an integration clause, stating that the written agreement is the entire agreement between the parties, and that there are no unexpressed or omitted material terms:

This Agreement constitutes the entire agreement and understanding between the Parties with respect to its subject matter and constitutes and supersedes all prior agreements, representations, and understandings of the parties, written or oral. This Agreement may not be modified except by a writing duly signed by both Parties.

The underlying idea here makes perfect sense. The whole point of reducing an agreement to writing is to ensure that both parties know exactly what terms will bind them. But in government contracting, a different rule applies. Important provisions of the FAR or its various supplements are “read in” to each and every government contract even if the parties intentionally omitted them from the agreement. The logic of this approach was expressed in a seminal government contracts decision, G.L. Christian & Associates v. United States:

Like other individuals who deal with the Federal Government, potential contractors can validly be bound to discover the published directives telling them the limits and the scope of the agreements the Government can make. Our concern is not at all whether the policy of embodying mandatory contractual provisions in regulations is the best one. Our special interest is only the legality of such a practice, and we hold that, in the procurement field as in others, an authorized regulation can impose such peremptory requirements on federal officials and those who seek to enter into transactions with the Government.25

Under the “Christian doctrine,” FAR and DFARS clauses are “read in” to government contracts, and language that contravenes applicable FAR or DFARS regulations is “read out.”26 To be sure, the Christian doctrine does not apply to all FAR clauses, but rather only to “mandatory contract clauses which express a significant or deeply ingrained strand of public procurement policy.”27 There is little doubt, however, that the other five clauses discussed above would fall squarely within the Christian doctrine’s ambit.

Other Government Policies That Override Contractual Restrictions

Other key areas where government contracts are unlike commercial contracts relate to rights and ownership. In government contracting, intellectual property rights and ownership are determined in accordance with specific government policies.

Scope of Rights

In private contracts, the scope of an intellectual property license is bounded only by the creativity of the parties. In government contracts, however, certain minimum rights are required to be conveyed so that the government may use its procured technology for “government purposes.” The FAR commercial computer software clause states:

Notwithstanding any contrary provisions contained in the Contractor’s standard commercial license or lease agreement, the Contractor agrees that the Government will have the rights that are set forth in paragraph (b) of this clause to use, duplicate or disclose any commercial computer software delivered under this contract. The terms and provisions of this contract shall comply with Federal laws and the Federal Acquisition Regulation.28

The minimum rights conferred by FAR 52.227-19(b) are as follows:

  • Commercial computer software may be used on any computer for which it was acquired, even if that computer changes location within the government.29
  • The government can create archival and backup copies of software notwithstanding any provisions to the contrary in the license.30
  • A backup copy may be created and used if the primary computer on which the software was loaded becomes inoperative.31 Separately, the government is authorized to make copies “for use with a replacement computer.”32
  • Commercial software may be “[m]odified, adapted, or combined with other computer software, provided that the modified, adapted, or combined portions of the derivative software incorporating any of the delivered, commercial computer software shall be subject to same restrictions set forth in this contract.”33
  • The software may be “[d]isclosed to and reproduced for use by support service Contractors or their subcontractors, subject to the same restrictions set forth in this contract.”34
  • “If the commercial computer software is otherwise available without disclosure restrictions, the Contractor licenses it to the Government without disclosure restrictions.”35 Thus, the contractor cannot treat the government less favorably than a commercial party, notwithstanding the much greater risks associated with government sales.

These minimum rights are required by the FAR and would be read into a software license under the Christian doctrine even if the licensee and licensor expressly agreed to a different and more restrictive grant of rights.

Ownership of Intellectual Property

In a private contract, the parties are free to decide who obtains rights to intellectual property developed in the course of that contract by one or the other party. In government contracts, this is not so. For patents, “subject inventions” created using federal money are owned by the contractor but are subject to a series of nonnegotiable limitations. These limitations are statutory if the private party is a “small business firm[],” “nonprofit organization[],” or “universit[y].”36 For large businesses, the same rules apply by way of a 1987 executive order.37 The limitations are:

  • Before the contractor can elect title, it must notify the government that it has developed a subject invention, in a format provided by the government.38
  • After the contractor has elected title, it must make reasonable and good faith efforts to commercialize the subject invention in the United States. It must manufacture substantially in the United States and preferentially issue licenses to subcontractors and manufacturers in the United States.39
  • To ensure its compliance with these rules, the patentee must list the government as a funder on the face of its patent40 and provide periodic utilization reports on its efforts to comply with the Bayh-Dole Act’s policies.41
  • The government retains a royalty-free, nonexclusive, fully paid-up government-purpose license, and the contractor is obligated to ensure the Government’s rights in patents arising out of subject inventions worldwide.42

If these conditions are not met, in theory the government can exercise its “march-in” rights and impose a compulsory license43—a remedy that is rarely available in private-sector contracts and, in fairness, has never been exercised by the federal government.

Conclusion

As these examples should demonstrate, the government contracting world can collide with the private sector world. And this discussion only scratches the surface: entire books have been written on the subject of intellectual property in government contracts.44 But at the same time, lucrative opportunities abound, so private-sector software companies and their lawyers should not shun the government market even if it may require some unexpected adjustments to standard software license terms.

Endnotes

1. With apologies to Iron Maiden (Virtual XI, 1998).

2. DFARS 227.7202-1(a). The Defense Federal Acquisition Regulation Supplement (DFARS) is codified at 48 C.F.R. ch. 2.

3. FAR 27.405-3(a). The Federal Acquisition Regulation (FAR) is codified at 48 C.F.R. ch. 1.

4. Compare FAR 2.101 (“any computer software that is a commercial item [further defined]”), with DFARS 252.227-7014 (“software developed or regularly used for nongovernmental purposes which—(i) [h]as been sold, leased, or licensed to the public; (ii) [h]as been offered for sale, lease, or license to the public; (iii) [h]as not been offered, sold, leased, or licensed to the public but will be available for commercial sale, lease, or license in time to satisfy the delivery requirements of this contract; or (iv) [s]atisfies a criterion expressed in paragraph (a)(1) (i), (ii), or (iii) of this clause and would require only minor modification to meet the requirements of this contract”).

5. 41 U.S.C. § 7102(a)(1)–(2).

6. E.g., United States v. Sherwood, 312 U.S. 584, 586 (1941).

7. 41 U.S.C. § 7107(a)(1)(A).

8. 28 U.S.C. § 1491(a)(1).

9. E.g., Tutti Mangia Italian Grill, Inc. v. Am. Textile Maint. Co., 128 Cal. Rptr. 3d 551 (Ct. App. 2011); Gulf Ins. Co. v. TIG Ins. Co., 103 Cal. Rptr. 2d 305, 317–18 (Ct. App. 2001).

10. See Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380 (1947).

11. FAR 1.602.

12. 31 U.S.C. §§ 3901 et seq.

13. 5 C.F.R. § 1315.4(g).

14. 41 U.S.C. § 7109(b); see 31 U.S.C. § 3902(a).

15. 31 U.S.C. § 3904.

16. FAR 52.227-3.

17. FAR 27.201-2(c)(1).

18. FAR 27.201-2(g).

19. FAR 52.227-1.

20. FAR 52.227-1 alt. I.

21. FAR 52.227-1 alt. II.

22. 31 U.S.C. § 1341.

23. FAR 27.201-1.

24. Madey v. Duke Univ., 307 F.3d 1351, 1359 (Fed. Cir. 2002).

25. 320 F.2d 345, 351 (Ct. Cl. 1963) (citation omitted).

26. S.J. Amoroso Constr. Co. v. United States, 12 F.3d 1072 (Fed. Cir. 1993).

27. Gen. Eng’g & Mach. Works v. O’Keefe, 991 F.2d 775, 779 (Fed. Cir. 1993).

28. FAR 52.227-19(a) (emphasis added).

29. FAR 52.227-19(b)(2)(i).

30. FAR 52.227-19(b)(2)(iii), (vi).

31. FAR 52.227-19(b)(2)(ii).

32. FAR 52.227-19(b)(2)(vi).

33. FAR 52.227-19(b)(2)(iv).

34. FAR 52.227-19(b)(2)(v).

35. FAR 52.227-19(b)(3).

36. See, e.g., 35 U.S.C. § 200.

37. Exec. Order No. 12,591 (Pres. Reagan, 1987), implemented primarily by FAR part 27, 52.227-11, and 52.227-13, along with (at the DoD) DFARS 252.227-7038, and expressly authorized by 35 U.S.C. § 210(c).

38. FAR 27.302(b)(1), (d)(1)(i).

39. FAR 27.302(g).

40. FAR 52.227-11(e)(4).

41. FAR 27.302(e).

42. 37 C.F.R. § 401.14(a) (“Standard patent rights clauses”; the referenced limitations are at clause secs. (a) and (f)).

43. 35 U.S.C. § 203.

44. My favorite, naturally, is James G. McEwen, David S. Bloch, Richard M. Gray & John T. Lucas, IP and Technology in Government Contracts: Procurement and Partnering at the Federal and State Level (LexisNexis 2d ed., 2015–2016).

David S. Bloch

David S. Bloch is a partner with Winston & Strawn LLP in San Francisco and Menlo Park. He specializes in intellectual property law, including the intersection of IP and government contracts.