May 25, 2022

Volume XII, Number 145

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Software Companies Beware: Board Holds Subcontractor Cannot Enforce EULA Directly Against Federal Government

Software companies selling indirectly to the Federal Government finally received an answer to a question that has lingered for years – can a software company going to market through a reseller bring a direct claim under the Contract Disputes Act (“CDA”) against the Federal Government for violating a term of the software company’s End User License Agreement? Sadly, the answer is “no.”

Avue Technologies Corporation (“Avue”) sold licenses to its software platform to the Federal Government through the GSA Federal Supply Schedule contract of its authorized reseller, Carahsoft Technology Corp. (“Carahsoft”). As is standard practice for the Schedules program, upon adding Avue’s software to Carahsoft’s Schedule contract, GSA reviewed and approved Avue’s End User License Agreement (“EULA”), and incorporated the EULA into Carahsoft’s Schedule contract (therefore making the EULA applicable to each order issued thereunder for Avue software).

In September 2015, the Food and Drug Administration (“FDA”) placed an order (one base year plus four option years) under Carahsoft’s Schedule Contract for a subscription to Avue’s software platform. Upon gaining access to the software, Avue alleged the FDA downloaded proprietary ADS data in violation of Avue’s EULA. Now in possession of the Avue proprietary data it desired, Avue alleged the Federal Government refused to exercise the option years in the original order, and instead transferred Avue’s proprietary data into a competitor’s platform for continued use. In March 2018, Avue submitted a certified claim directly to the FDA (rather than through its reseller, Carahsoft) for over $41 million seeking compensation for the FDA’s alleged violation of Avue’s EULA and for the misappropriation of Avue’s proprietary information. The FDA denied Avue’s claim, and Avue appealed to the Civilian Board of Contract Appeals (“CBCA”).

Avue’s appeal presented the CBCA with two interesting questions:

  1. Is a EULA between a software company and the Federal Government an enforceable agreement?

  2. Does a EULA create CDA jurisdiction permitting a software company subcontractor to bring a direct claim against the Federal Government?

On the first question, the CBCA declined to address whether the EULA was an enforceable agreement against the Government. Interestingly, in sidestepping the issue, the CBCA noted the EULA “appears to contain commercially significant promises that might be deemed contractual,” leaving open the possibility of entertaining a claim for breach of a EULA under different factual circumstances.

On the second question, the CBCA held the EULA did not create a right of action for Avue to file a CDA claim directly against the Federal Government. As a general rule, the Federal Government does not deal directly with subcontractors, and the CDA only grants the CBCA jurisdiction over “procurement contracts” (i.e., agreements between a prime contractor and the Federal Government). The CBCA held the EULA between Avue and the Federal Government was not a “procurement contract” because the EULA did not obligate Avue to furnish any services, or obligate the FDA to pay Avue for any services furnished. While the order between the FDA and Carahsoft certainly met the definition of a “procurement contract,” the CBCA held the EULA between Avue and the FDA did not. In dismissing Avue’s $41 million claim, the CBCA stated:

No court or board of which we are aware has held that a party other than the prime contractor can establish CDA jurisdiction by relying on a separate agreement that relates to a CDA procurement contract. We will not be the first.

The CBCA’s decision provides a handful of key lessons for software companies selling to the Federal Government through resellers:

  • Any claim for violation of your EULA (g., over-deployment or improper use) must be filed by your reseller prime as a “sponsored” or “pass-through” claim under the CDA;

  • Ensure your EULA (Terms of Service, Master Services Agreement, or similar document) is incorporated into your reseller’s prime contract;

  • Refrain from negotiating EULAs as side agreements not incorporated into the prime contract; and

  • While you may have a direct claim against the Federal Government for violation of a specific aspect of your EULA (g., copyright infringement), those claims must be brought under the Tucker Act (28 U.S.C. 1491) and must be filed at the Court of Federal Claims; any claim brought at the Boards of Contract Appeals is likely to be dead on arrival.

Over the past decade, software companies increasingly have gone to market Federally through resellers to reduce their compliance obligations. This decision serves as an important reminder, though, that going to market indirectly may limit your ability downstream to bring a dispute directly against the Federal Government.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 28
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About this Author

Ryan Roberts, Government Contracts Legal Specialist, Sheppard Mullin
Associate

Mr. Roberts is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Mr. Roberts has extensive experience handling government contract disputes and defending individuals and corporations in a wide range of civil fraud investigations, including investigations under the Civil False Claims Act and the FAR Mandatory Disclosure Rule. Mr. Roberts has handled corporate internal investigations involving diverse industries such as aerospace and defense, electronics,...

202-469-4945
Daniel J. Alvarado Government Contract & Trade Attorney Sheppard Mullin Law Firm
Associate

Daniel J. Alvarado is an associate in the Government Contracts, Investigations, and International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Daniel's practice encompasses all areas of government contracting, with a focus on matters of compliance, investigations, disclosure obligations, transactional due diligence, and bid protest litigation. He assists clients of all sizes in manning complex government regulatory requirements in the areas of schedule contracting,...

202.747.2325
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