How enforceable are software licenses?

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COMMENTARY | An ongoing federal court case suggests the ubiquitous practice of "pass-through" licensing for software sold by resellers may not have a solid legal foundation.

In their work discussing the history of software licensing, intellectual property scholars Michael L. Rustad and Maria Vittoria Onufrio noted that the creation of the software license was equal to the creation of the corporation in its significance.

That’s a bold statement but it’s justified. Software drives the world’s digital transformation. The smartphones we hold in our hands, our workplace applications, the rush to AI, it’s all software-driven.The global software market is expected to surpass a trillion dollars annually before 2030. And this entire cultural juggernaut balances on the little appreciated legal instrument called the software license. The software license is a remarkable legal innovation. It creates an unusual economic relationship. Software users don’t take ownership of software, even when it’s totally in their control. Instead, they buy a right to use it, sometimes forever, as long the terms of the license are not violated. 

But as a contractual document, just how enforceable are the provisions of a software license?  Recent litigation between the Food and Drug Administration and Avue Technologies Corporation has brought to light an area of uncertainty that occurs when licenses are passed through to the government through resellers. The federal commercial software market is dominated by resellers. Most software companies prefer to use resellers rather than to have a direct contract with the government. This allows them to avoid the onerous regulations that come with prime contracting. When software is sold this way, the reseller holds the contract with the government and passes along the software license. Usually, it’s a standard boilerplate document on the software company’s letterhead – the sort of thing people do not bother to read.  It attaches to the contract as an addendum and is often colloquially referred to as a “pass-through” license. 

This seems to be an unsettled area despite the fact that the government likely spends more than $15 billion a year on commercial software via pass-through licensing.

But has an actual contractual relationship between the software company and the government been established? Who has the right to enforce the license?

In 2018, Avue submitted a claim to the FDA stating it owed Avue $41 million for misuse of its software in violation of Avue’s license.  Despite the Avue license incorporated in the agreement, the FDA claimed it only had a contract with Carahsoft, the reseller, and therefore Avue had no ability to independently pursue a claim. The crux of FDA’s theory was that the license agreement was only enforceable by Carahsoft, its prime contractor.

Avue, on its own, took the dispute to the Civilian Board of Contract Appeals which punted, stating the license by itself was not a procurement contract and therefore it did not have proper jurisdiction to resolve the dispute. It did note that it was the first case of its kind where a 3rd party and not a prime contractor attempted to enforce its license.  

Finally, Avue took the claim to the Court of Appeals for the Federal Circuit which ruled on March 6 that the CBCA does in fact have jurisdiction in this matter. The court did not rule on the heart of the contractual issue but kicked it back to the CBCA to decide. At this moment, the independent enforceability of a software license, absent direct privity of contract with the government, has not been resolved. 

It seems no judicial body wants this hot potato. It is complicated and the ramifications are significant. It seems clear that the reseller is contractually on the hook for the language of the incorporated license, but that only goes so far. In the FDA case, the reseller appears to have not participated in Avue’s claim. If a prime contractor has reasons to avoid litigation, is the licensor out of luck?

Likewise, it is easy to imagine the shoe on the other foot. What happens when the government attempts to enforce a software use right it believes it has and the software company claims it’s unenforceable for a lack of a direct contract?  Obviously, the reseller, with the prime contract would be liable for the language of the license. But a reseller is often a paper tiger, with no control of the products they sell. They operate at the whim of the manufacturer. For some small resellers, it might be more attractive to go bankrupt than to stand in the middle of a lengthy and expensive dispute between trillion-dollar software titans and the government. The government would likely find alternative legal theories to enforce a license agreement under these circumstances, but none would be as clean and simple as relying upon a breach of the license itself. 

For some lawyers, the pass-through license has always been a prickly concept. Hopefully the Avue litigation will create a resolution, one way or another, and both the government and software licensors can craft a way forward to reduce uncertainty. For now, this seems to be an unsettled area despite the fact that the government likely spends more than $15 billion a year on commercial software via “passed-through” licensing.