Listen to this post

In January 2022, we warned software companies selling indirectly against attempting to enforce the terms of their End User License Agreement (“EULA”) directly against the Federal Government based on the decision of the Civilian Board of Contract Appeals (“CBCA”) in Avue Technologies Corp. Earlier this month, the Federal Circuit gave software companies some hope by vacating the CBCA’s decision. Read on, though, before filing your claim.

First, the background. Avue Technologies Corporation (“Avue”) sold software licenses 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 EULA and incorporated the EULA into Carahsoft’s Schedule contract (therefore making the EULA applicable to each order issued thereunder for Avue software). Avue alleged the Federal Government violated the terms of its EULA (to the tune of $41 million in damages), and, despite lacking contractual privity with the ordering agency, filed a claim directly to the Federal Government (rather than through its reseller, Carahsoft) for those damages.

In January 2022, the CBCA dismissed Avue’s appeal for lack of jurisdiction under the Contract Disputes Act (“CDA”). The CBCA’s reasoning was simple – 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 Federal Government to pay Avue for any services furnished.

On March 6, 2024, the Federal Circuit vacated the CBCA decision on the threshold jurisdictional issue. The Federal Circuit noted the standard rule that the CBCA has “jurisdiction to decide any appeal from a decision of a contracting officer … relative to a contract made by that agency,” and the contracting officer’s decision giving rise to the appeal must be with respect to a claim by a “contractor” (defined as a party to a government contract other than the Federal Government). However, the Federal Circuit held that in certain circumstances third parties are in privity with the Federal Government and therefore may become a contractor within the meaning of the CDA (and, in turn, have jurisdiction to bring a claim under the CDA). In these limited circumstances, a plaintiff need only non-frivolously allege the existence of an express or implied contract with an executive agency to which plaintiff is a party to establish the CBCA’s jurisdiction under the CDA. The Federal Circuit held Avue met this standard.

Although the Federal Circuit’s decision focuses solely on the jurisdictional issue, the decision sets the stage for the CBCA to determine whether a software company has enforceable rights pursuant to a procurement contract when a subcontractor’s (i.e., the software company’s) EULA is incorporated into the procurement contract.

The obligation to prove the existence of such a contract now comes at the merits stage. The CBCA, however, already dismissed Avue’s claim because it held an MSA, standing alone, is not a “procurement contract” within the meaning of the CDA. The Federal Circuit declined to decide this question and instead chose to “benefit from the Board’s considerable ‘expertise on questions of government contracts’ and its considered views on these issues.” But, the Federal Circuit still provided key issues for the Board to decide, including the “pertinent question” of whether Carahsoft’s FSS contract with the GSA or the Task Order placed by the agency, each of which incorporated the MSA, constitutes a “procurement contract” giving rise to rights enforceable by Avue, the third party software subcontractor.

The key question before the CBCA will be whether the MSA is to be considered part of Carahsoft’s FSS contract or the Task Order placed by the agency. If it is, then we suspect the CBCA will hold that Avue does have enforceable rights pursuant to a procurement contract (i.e., the MSA and Carahsoft’s FSS contract, or the Task Order). This would be a big win for software companies that sell indirectly to the Government. Stay tuned for round three.