Federal Contract Law: Know what your software rights are—and are not

With government IT spending on the rise, it’s a good time to remind federal customers and vendors that, before signing development contracts, they should review the Federal Acquisition Regulation clauses that dictate the government’s rights in software—and follow them.

Essentially, one of three licensing regimes applies to software deals. The one used depends on whether the acquiring agency is in the Defense Department or civilian, and whether the software meets the definition for a commercial item in FAR Part 12.

Commercial software can be licensed generally under the same terms and conditions as in the private sector, with a few exceptions outlined in the FAR clause. Contractors need to note the different tests under the civilian and military regulations for determining what qualifies as commercial software.

The FAR prescribes two categories of rights the government has for noncommercial software. These are unlimited and restricted. The military adds a third category called “government purpose rights” for software developed with mixed DOD and private funding. A DOD contract clause also authorizes the parties to negotiate special license rights to accommodate specific needs.

Unlimited rights means pretty much just that. The government can use the software, distribute it, make copies and prepare derivative works. Unlimited rights software generally cannot be resold with more restrictive rights to a federal agency. Issues arise when a contractor enhances a software program developed under contract and offers it in a new procurement.

Restricted rights are much less restrictive than typical commercial license terms. With restricted rights, the agency may still modify or combine the software with other programs and give away the software to support contractors.

If the acquisition is for commercial software, the government requires a license agreement in the contract. For vendors selling through the General Services Administration’s Multiple Award Schedule program, the MAS price list must incorporate the software license. Otherwise, the ordering agency will not be bound.

Sometimes, schedule holders will offer IT products incorporating the software of other vendors but fail to include their license terms in the schedule holder’s price list. This presents a significant problem because it is usually impossible to get an authorized signature of the contracting officer on the software license after an order is placed.

A recent Armed Forces Board of Contract Appeals decision emphasizes the need to adhere strictly to the terms of the software clause. In March, General Atronics Corp. lost a claim against the Navy for software license fees because it failed to properly mark embedded software prior to delivery and failed to negotiate a license agreement. The board observed that the contractor had included some proprietary markings in the software and declined to waive the informality.

The case also points out the importance of getting agreement on license terms before delivery. Because the contractor had waited 15 months to submit a proposed license, the board held the Navy had unlimited rights in the programs. The contract did not originally call for software delivery and the contractor had objected to providing it. Regardless, the board said, the contractor must obtain a signed license before shipment.

Karen D. Powell is a partner in the Washington law firm of Petrillo & Powell PLLC. E-mail her at [email protected].

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