Licensing Third Party Software for Use in Federal Contracts

July 18, 2017

By Isaias Alba IV

In the IT sector, it is common for contractors with relationships to various federal agencies to have top-tier talent in-house to provide high quality IT services. Some vendors even have programmers and software engineers in-house to directly develop commercial and non-commercial software products for its clients. However, there are many times when, among other things, (1) the government needs a particular type of solution; (2) the contractor believes that some third-party software would suit the government’s needs best; or (3) the contractor believes the solution would give it a competitive advantage in the procurement. In these types of cases, contractors tend to use standard license agreements with the third-party vendors and then either pass those through directly to the government (or at least attempt to do so) or they simply agree to the third-party terms and then give the government some general data rights restriction language from the FAR/DFARS. Given that this type of laissez-faire approach has risks, contractors should take care before moving forward with such a proposal strategy or contract.

The mistake contractors most often make when entering into third-party license agreements is not ensuring that the licensor (the OEM) is required to provide you, the contractor, in privity of contract with the government, at least the same service and support functions that you are promising to provide to the government in the contract. For instance, if the government is requiring you to provide software updates, make sure the licensor is required under the terms of your license agreement to do the same.

Warranties and liability limitations are another issue. Oftentimes, the licensor will limit its liability to one year of service fees/payments or, sometimes, even as little as one month of fees. Of course, if something fails, the government will come after you for much more than that; it could turn into a termination for default, bad CPARS, and even debarment in extreme cases. While it is impossible (or at least no OEM would agree) to get limitless indemnification, you need to walk the line and negotiate with the OEM. And this can be difficult in cases where the license agreement is in place prior to bidding and the key requirements are not yet known or where the license agreement is a long-term arrangement. In these cases, make sure the license agreement contemplates some mechanism for mandatory revisions or, at least, good faith negotiations.

Next, make sure you have all the rights necessary and that you are not giving away rights you do not have to the government. For instance, often times a license agreement will provide that the item cannot be used by any third party for any purpose. It may go further and say that any item or software developed which relies upon or derives from the licensed item becomes the property of the OEM. If, as part of the government contract, the contractor is adding modules on to the third party software, the government generally receives unlimited rights in any module or item which is made 100% at government expense under a contract. So, in this example, the contractor has just given the government unlimited rights to the modules while, at the same time, it is contractually prohibited from doing so by the OEM. This can cause both a breach of contract with the OEM and the various damages from that as well as a breach of contract with the government. Technically, by making a false representation to the government as to the license rights, that could be seen as a false claim. If the false representation is done through mere negligence, there should be no liability. Regardless, it would be best to avoid any allegations of fraud.

Each example above was taken from a real-world situation we have seen with clients so I caution all contractors to be sure they read and understand all terms of both the federal contract to which they are a signatory and the OEM license agreements because inconsistencies can be very costly. Hopefully, the examples have helped to focus in on some of the main areas of mistakes so you can avoid the pain that can come from such issues.

About the author: Cy Alba is a partner with PilieroMazza and is a member of the Government Contracts and Small Business Programs Groups. He may be reached at ialba@pilieromazza.com.

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