Who enforces software licenses when sold through reseller?

An issue of costly importance to every agency recently came up in Federal Circuit Court. Namely, when you buy software through a reseller, who can enforce the end user licensing agreement, the software manufacturer or the company you actually bought it from? The answer isn’t always so clear, as the Federal Drive with Tom Temin recently heard from Haynes Boone procurement attorney Zach Prince.

Interview Transcript: 

Tom Temin  And I guess this is an important principle, even though it’s a fairly routine case. Tell us who was involved here.

Zach Prince This case involved a company called AVUE Technologies. They’re a software company. They sell the public and private entities through resellers, as a lot of software companies do. A lot of companies have taken the view that they’d rather not have direct contracts with the government. So, there are companies out there that will hold a NASA contract or a GSA contract, and they’ll list your software for you, and they’ll sell it to the government. And one of the conditions that you as a software company would have been that your standard end user license agreement has got to be applied to the government. And that’s especially important when you’re talking about cloud-based solutions because they’re actually using your infrastructure. But it has implications for, you know, your intellectual property just in general. This is a critical thing for companies.

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Tom Temin And AVUE then was selling software through Carahsoft, which is one of the big, big software resellers. And the user was the FDA. And the FDA canceled the contract. And AVUE discovered that it felt it was owed licensing costs that the FDA had incurred, but not paid yet.

Zach Prince Yeah. So AVUE did an audit or review of the agency’s use after they declined to extend the contract through option exercise, and their real issue appears to have been that, in their view, the government breached their intellectual property rights by taking some data that had been generated using their software in violation of the end user agreement. So, they sent the agency a letter and they said, hey, you know, here are the problems. We want a final decision, and this is a certified claim. And the agency responded, well, first, we don’t agree with you, but second, we’re not even going to talk to you because we have a contract with Carahsoft, not with you. And Carahsoft appeared uninterested in getting involved here. So AVUE brought a claim directly on appeal to the civilian Board of Contract Appeals?

Tom Temin Right. And the civilian Board of Contract Appeals upheld the FDA saying that that was the contract, not with AVUE directly.

Zach Prince Yeah. So, they had a sort of an interesting position that they took. They said that they had no jurisdiction in this case, because even if AVUE had a contract with the government, because the government had accepted the end user license agreement, and those license agreements always talk about the relationship between the end user, that is, the agency and the software provider suggesting there is a contract. It still wasn’t enough for jurisdiction at the boards because it’s not a procurement contract. And procurement contract has specific definitions under the Contract Disputes Act. AVUE appealed that decision to the Federal Circuit.

Tom Temin So that decision said, yeah, you might have a legitimate claim per the end user agreement, but it’s not a contract claim that we, the board would normally deal with.

Zach Prince That’s right. They said we don’t even have jurisdiction to hear this case. We have to kick this now because even if we accept that there was a contract, it’s not the type of contract that we have jurisdiction that hear appeals from.

Tom Temin All right. So, then AVUE went to federal circuit court.

Zach Prince That’s right. So, the Federal Circuit reversed, and they sent it back to the boards with instruction to consider this, because they said all you have to do to establish jurisdiction is allege the existence of a contract, which they did here. You have to say we have a contract with the United States government to win the case. You have to prove that it’s a procurement contract. But to get jurisdiction, all you have to do is make the allegation at the outset the question of whether there is a contract that’s enforceable, that’s the merits. That’s the ultimate resolution of the case at the trial level. The jurisdictional question, the baseline, can you even be hearing this case? All that turns on is making the appropriate allegations. Here they said it seems pretty clear they declined to say whether it was a procurement contract, but it seemed pretty obvious that they thought that it was. So, they said, you know, you’ve got this task order issued under a GSA contract. The Eula, the end user license agreement was part of that order. Right. That’s the whole reason we’re here is because there was an order placed by an agency that incorporated an end user agreement. That’s a procurement contract. The government said in oral argument that that has to be viewed as part of the larger contract. Well, there you go. It’s a procurement contract. So now it’s up to the board to hear the merits and decide whether there actually was an enforceable contract here and what the rights were that you had and whether it breached.

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Tom Temin We’re speaking with procurement attorney Zach Prince. He’s a partner at Haynes Boone. It sounds like I’m not a lawyer, but I remember from college days there are elements that make a contract. One is consideration. And AVUE was getting ultimately revenue from it, even though it was going through Carahsoft as the reseller, which might have had some value-added services going along with the software. And then there was also an agreement that was connected to the software, which if someone had bought it directly from AVUE, they would have the same end user license agreement. So, it sounds like the elements of a contract are there, even though it wasn’t the procurement vehicle contract. Does that make sense?

Zach Prince Yeah it does, and that sounds right to me too. I mean, this is really standard for software companies. And I’ve been on the other side with the software companies negotiating these end user agreements with the government, and they do it frequently through the resellers, but not always. DoD took the position a few years ago that they wanted to negotiate these standards standing and user agreements with a bunch of the big software companies so that when they’re buying that software through the resellers, they’ve got terms they’ve already agreed to, published online. Everyone knows them. And that always to me seemed a little odd because it raised the question, well, if DoD breaches this, who has the right to sue? And when I was negotiating with DoD at the time, they ducked the question. But it struck me as pretty likely that, like if you did here, they would be able to bring a suit directly if there was a breach. Now, hopefully you’ve just got a good agreement with your reseller, because if you’ve got a good agreement, your reseller, it should say in the event of a dispute reseller agrees that it’s going to sponsor a claim. That’s easy, right? But it seems like for whatever reason here, Carahsoft decided they didn’t want to get involved. And so, if you had to go directly. And so, I think usually you would have that right. Like if you likely will be found to have had here.

Tom Temin A lot of the software company audits are aimed at seeing if there were widespread use, then the number of particular user licenses the agency had. A lot of agencies have gotten it sounds harsh, but correctly dinged for that, and sometimes have had to pay out lots of money because they had 100 people using it and they were only licensed for 50. If that had been the case, maybe it would have been more clear cut for what Carahsoft wanted to do, or what AVUE wanted to do, or what the contract Board of Appeals wanted to do. In this case, though, you said it wasn’t an end user license number problem, but some other use of the software, which is a little maybe subtler than just the number of you’re using more than you have licenses for.

Zach Prince Yeah. Here it seemed to be an issue with the data that came from the agency’s use of the software. Whether it would have been something the agency settled if they had more clear-cut breach, I don’t know. I mean, you know, we see cases like this where the agencies clearly were using more than they paid for. the SCIAsoft cast case that came out of the Armed Services Board a few years ago. And they still don’t settle and pay, right. They’re going to fight it to the extent they can here. They thought they had a pretty clear-cut jurisdictional argument that even if justice says that we should pay this, we don’t have to because you didn’t follow the proper avenues. Right? I don’t like that kind of argument. It rubs me the wrong way. But agencies make it all the time.

Tom Temin Sure. Otherwise, you know, you get into an INS law type case, which you know, is in the record pantheon of the great cases of all time. I think that dragged on for what, 30, 40 years? I’m not sure the Justice Department ever settled with INS law, but you don’t want to have your company pursue it to that degree. Probably.

Zach Prince Yeah. I mean, you get that with the, the spent nuclear fuel cases too, right? They come up every few years. They have to because the government will never actually have a Yucca Mountain where they’re storing the nuclear fuel. But the government’s going to keep fighting it because it’s hundreds of millions of dollars every couple of years for all these companies. And they are guardians of the public fist sometimes.

Tom Temin All right. Well, so we’ll have to see what this case comes out as. It might be precedential actually, when it does get settled.

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Zach Prince Yeah, it’s an important case to watch because it’s possible the board’s going to take this back and say, yeah, notwithstanding the directions of the circuit, we still don’t see that there’s an enforceable agreement here on the merits and that it could go back up and it could take years. But there’s so many companies that sell their software through these resellers, and sometimes the resellers just aren’t interested in playing ball. And so, you’ve got to figure out if you have a way to enforce your rights directly against the government. Alternatively, you make sure you’ve got really good reseller agreements, and you have a recourse against the reseller.

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