• Paul Peter Nicolai

Private Software Licenses vs. Government Software Licenses

Government contracts are totally unlike commercial contracts. They operate with preset contract clauses laid out in the Federal Acquisition Regulation (FAR). The civilian FAR and DoD (DFARS) commercial software clauses define “commercial computer software” differently. Each set of regulations has a warning that agencies will accept commercial licenses only to the extent they are consistent with federal procurement laws. The contract language imposed by federal procurement laws differs from standard software licensing terms in important ways. Thus, DFARS and FAR create a vast gulf between commercial expectations and government practices.

We address here 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.

Choice of Law Clauses

Nearly all commercial contracts use a state’s governing law.

In government contracts, the federal Contract Disputes Act always governs. Because the government must consent to be sued, it controls where and how that lawsuit will proceed. 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 which say that all cases must be brought in a particular court. The purpose is to ensure the licensor can enforce its agreements in a single, familiar jurisdiction.

With minor 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; or (2) the United States Court of Federal Claims in Washington, D.C.

Authority Clauses

Most software licenses have an authority to sign clause which makes sure the person signing the agreement and the company itself are authorized to sign and that their signing does not violate law or other contracts. Even without such a clause, the law often allows a person with “apparent” authority to bind a company.

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 their authority. That authority is in a written “warrant,” which caps the amounts the contracting officer can obligate the government to pay. “Apparent authority” does not exist in government contracting: if a contracting officer does not sign the contract, or if the contract exceeds their authority, there is no deal, and any work performed by the private contractor in reliance on the “contract” is free.

Prompt Payment and Interest Clauses

Payment is a necessary part of any valid contract. Private parties often include both timing provisions and penalties for late payment in their contracts.

These clauses are only partially effective in the government context. The Prompt Payment Act says the government normally must pay undisputed invoices within 30 days (though the government can agree to a different schedule) and will pay interest at a rate which the Secretary of the Treasury specifies as applicable for each successive 6-month period. The rate is determined by taking into consideration current private commercial rates of interest for new loans maturing in about 5 years. This is often less than the interest rates imposed by commercial software licenses. The government is permitted to accept prompt payment discounts (but not alternative interest charges)

Indemnity Clauses

In private software licenses, indemnities run both ways. The licensor indemnifies the licensee if the licensor’s product is accused of infringement, and the licensee indemnifies the licensor to the extent the infringement arises from the licensee’s conduct or its use of the licensor’s technology with third-party products.

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

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. It normally is required in contracts for the delivery of commercial items including software. The inclusion of the 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 for patent infringement. If the government wants to protect the licensor from intellectual property claims, an authorization and consent clause may be included.

There are three types of authorization and consent clauses.

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. Here, the Government assumes liability for infringement.

Alternates to the standard clause are broader. In the first, the 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 the contract regardless of whether the item is accepted or is required for contract performance. In the second, 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.

This is the closest the government can come to indemnifying the licensor. Anything beyond this is barred.

Integration Clauses

Private contract boilerplate usually includes an integration clause saying the written agreement is the entire agreement between the parties, and that there are no unexpressed or omitted material terms. The underlying idea is to ensure that both parties know exactly what terms will bind them.

In government contracting, a different rule applies. Important provisions of FAR or its supplements are read in to each government contract even if the parties intentionally omitted them from the agreement. Under applicable court doctrine, mandatory FAR and DFARS clauses that express a significant or deeply ingrained strand of public procurement policy are “read in” to government contracts, and language that contravenes them is “read out.”

Other Policies

Other areas where government contracts are not like commercial contracts are on rights and ownership. In government contracting, intellectual property rights and ownership are decided by specific government policies.

Scope of Rights

In private contracts, the scope of a license is only limited by the creativity of the parties. In government contracts conveying certain minimum rights is required so the government may use its procured technology for government purposes. The FAR commercial computer software clause requires that

  • Commercial computer software may be used on any computer for which it was acquired, even if that computer changes location within the government.

  • The government can create archival and backup copies of software,

  • A backup copy may be created and used if the primary computer on which the software was loaded becomes inoperative. In addition, the government is authorized to make copies for use with a replacement computer.

  • Commercial software may be modified, adapted, or combined with other computer software, provided the modified, adapted, or combined portions of the derivative software incorporating any of the delivered, commercial computer software is subject to same restrictions in the contract.

  • The software may be disclosed to and reproduced for use by support service contractors or their subcontractors, subject to the same restrictions in the contract.

  • If the commercial computer software is otherwise available without disclosure restrictions, the contractor licenses it to the Government without disclosure restrictions. In other words, the contractor cannot treat the government less favorably than a commercial party

IP Ownership

In a private contract, the parties can decide who gets rights to intellectual property developed in the course of the contract by either party. It is different in government contracts. For patents, inventions created using federal money are owned by the contractor subject to a series of nonnegotiable limitations. These limitations are statutory if the private party is a small business firm, nonprofit organization or “university. The same rules apply to large businesses through an executive order. The limitations are:

  • Before the contractor can elect title, it must notify the government it has developed an invention in a format provided by the government.

  • After the contractor has elected title, it must make reasonable and good faith efforts to commercialize the 0invention in the United States.

  • It must manufacture substantially in the United States and preferentially issue licenses to subcontractors and manufacturers in the United States.

  • To ensure compliance, the patentee must list the government as a funder on its patent and provide periodic utilization reports on its efforts.

  • The government retains a royalty-free, nonexclusive, fully paid-up government-purpose license, and the contractor must ensure the Government’s rights in patents arising out of the inventions worldwide.

If these conditions are not met, the government can exercise its rights and impose a compulsory license; a remedy rarely available in private-sector contracts. This has never been exercised by the federal government.

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