United States: Final GSA Rule On Commercial License Terms That Conflict With Federal Law

Last Updated: March 14 2018
Article by Locke Bell

Anyone who has endeavored to sell commercial software to the Federal government well knows there are devils hiding in the details of most commercial license agreements. The trick is knowing how to spot them – or, more precisely, agreeing which present legitimate conflict. To assist industry and contracting officials alike, the General Services Administration has penned a field guide for identifying common terms and conditions the Government cannot agree to as a matter of Federal law.

For suppliers selling through GSA, this rule – effective as final on February 22, 2018, but a version of which has been in use since GSA issued a memorandum on point in July 2015 – cuts out the negotiation altogether, providing a GSA-specific addendum to FAR 52.212-4, at GSAR 552.212-4, that rewrites 12 commonly problematic clauses to be consistent with Federal law. These rewritten clauses will supersede any conflicting language in the supplier's commercial license agreement. For companies selling directly to other agencies, GSA's list serves as a handy reference when trading redlines with the contracting agency.

Before diving into some provisions commonly of interest, we note many practitioners will be relieved by GSA's decision to ditch that part of its proposed clause that would have placed the commercial license agreement behind all provisions of the FAR 52.212-4 clause in the order of precedence. Public comments pointed out this would result in terms such as a standard commercial warranty being superseded by the warranty provision in FAR 52.212-4 paragraph (o), although there is no conflicting Federal law demanding that the FAR warranty provision prevail. Persuaded, GSA moved the commercial license agreement up in the order, subject only to select provisions of FAR 52.212-4 implementing mandatory Federal law.

Now, to some specific provisions of interest:

No Automatic Renewals. With the move from desktop solutions to cloud computing, commercial software providers increasingly offer subscription rather than perpetual licenses. Often, a subscription will be set up to renew automatically at the end of a subscription term unless the user takes an affirmative action to terminate the license. But the Government's unique duties to the taxpayer and the public fisc restrict its ability to obligate funds in future years; as it's often put, the Government "can't spend what it ain't got." Congress has implemented this tenet of appropriations law through the Anti-Deficiency Act, see 31 U.S.C. § 1341, which prohibits a government official from entering into a contract or obligation to pay money before an appropriation is made unless otherwise authorized by law. Because Congress at least is supposed to appropriate funds annually, the Act prevents an ordering activity from agreeing to an automatically renewing license. GSA's provisions reflect this as follows: "If any license or service tied to periodic payment is provided under this agreement (e.g., annual software maintenance or annual lease term), such license or service shall not renew automatically upon expiration of its current term without prior express consent by an authorized Government representative."

Unauthorized Indemnification. Another set of provisions that commonly run afoul of the Anti-Deficiency Act are those requiring an end user to indemnify the licensor for certain liabilities that might occur well into the future. Courts (see, e.g., Hercules v. United States, 516 U.S. 417, 427 (1996)) and the Comptroller General (see, e.g., Assumption by Gov't of Contractor Liability To Third Person–Reconsideration, B-201072, May 12, 1983, 83-1 CPD ¶ 501 (62 Comp. Gen. 361)) long have recognized a strict prohibition on Federal agencies entering into open-ended indemnifications absent clear statutory authority to the contrary. GSA takes this concern seriously, addressing it in no uncertain terms in a clause titled Unauthorized Obligations, which states that with the exception of "indemnification or any other payment by the Government that is expressly authorized by statute and specifically authorized under applicable agency regulations and procedures," any "language, provision, or clause requiring the Government to pay any future fees, penalties, interest, legal costs or to indemnify the Contractor or any person or entity for damages, costs, fees, or any other loss or liability that would create an Anti-Deficiency Act violation" will be "unenforceable against the Government" and "stricken from the commercial supplier agreement." GSA adds that no such clause will be deemed to have been agreed to by virtue of appearing in a commercial supplier agreement or by being invoked through an "I agree" click box or other click-wrap or browse-wrap agreements.

Often, the Government will reject any indemnification language it can find in a commercial license agreement, and may be particularly inflexible in its position. It is flatly incorrect that the Anti-Deficiency Act prohibits all indemnifications. The GSA provisions recognize this, and when dealing with other agencies that are not so enlightened, you should consider pointing them to these provisions.

Continued Performance. Commercial licenses often allow a supplier to revoke the license upon a user's failure to pay, a failure to cure a breach of the terms, or in any number of other scenarios. The Government will not countenance a contractor's unilateral termination, and instead requires in nearly all instances that an aggrieved contractor continue performance while raising its claim through the Contracts Disputes Act, 41 U.S.C. §§ 7101 et seq. GSA captures this as follows: "The supplier or licensor shall not unilaterally revoke, terminate or suspend any rights granted to the Government except as allowed by this contract. If the supplier or licensor believes the ordering activity to be in breach of the agreement, it shall pursue its rights under the Contract Disputes Act or other applicable Federal statute while continuing performance as set forth" in the Disputes clause of the contract.

Updating Terms. Many commercial suppliers maintain standard terms and conditions that are available online, often updated, and incorporated into commercial supplier agreements by reference. These referenced terms trouble the Government, as it wants to understand the terms it is agreeing to during contract formation, and it will not allow a contractor to make material modifications unilaterally. GSA initially proposed to require commercial suppliers to provide the full text of the applicable terms, but when industry pushed back, noting these terms may be voluminous and are subject to change at any time, GSA removed the requirement. As final, GSA's provisions require that "For revisions that will materially change the terms of the contract, the revised commercial supplier agreement must be incorporated into the contract using a bilateral modification," and they define a material change as "(1) Terms that change Government rights or obligations; (2) Terms that increase Government Prices; (3) Terms that decrease the overall level of service; or (4) Terms that limit any other Government right addressed elsewhere in this contract."

This is another place where Federal agencies often take a hardline stance that is unwarranted. Drawing the distinction GSA provides for material changes in your government facing license agreements may head off disagreements with other contracting agencies.

Law and Disputes. Most companies carefully select the law governing their commercial licenses and name exact fora and venues in which the company or end user can be sued. Of course, the Federal government will not consent to, for example, being sued in the Superior Court of California, County of Santa Clara, under the laws of the State of California. But the Government may be subject to state law torts claims under the Federal Torts Claims Act, 28 U.S.C. §§ 2671 et seq. To address this, GSA specifies, "This agreement is governed by Federal law," it deletes "Any language requiring dispute resolution in a specific forum or venue that is different from that prescribed by applicable Federal law," and it deletes any language specifying state, territory, district, or foreign law "except where Federal law expressly provides for the application of such laws."

End User. Many commercial agreements are directed to the End User of the software, hence the common title End User License Agreement or EULA. But only very specific persons are authorized to make obligations and enter into agreements on the Government's behalf, and many government end users do not have this authority. Accordingly, the GSA provisions specify, "This agreement shall bind the ordering activity as end user but shall not operate to bind a Government employee or person acting on behalf of the Government in his or her personal capacity." It is important to remember that the entity you are contracting with is the ordering activity within the Agency, not the individual end user.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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