How enforceable are software licenses?

In their paper discussing the history of software licensing, intellectual property scholars Michael L. Rustad and Maria Vittoria Onufrio noted that the creation of a software license is equivalent in significance to the creation of a corporation.

It’s a bold statement, but it’s justified. Software drives the digital transformation of the world. The smartphones we hold in our hands, our workplace apps, the rush for artificial intelligence, it’s all driven by software. The global software market is expected to exceed a trillion dollars a year before 2030. And this entire cultural leap is balancing on a little-appreciated legal instrument called a software license. A software license is a remarkable legal innovation. This creates an unusual economic relationship. Users of the software do not take ownership of the software, even when it is fully under their control. Instead, they buy the right to use it, sometimes in perpetuity, as long as the terms of the license are not violated.

But how enforceable are the terms of a software license as a contractual document? Recent litigation between the Food and Drug Administration and Avue Technologies Corporation has highlighted an area of ​​uncertainty that occurs when licenses are passed to the government through resellers. The federal market for commercial software is dominated by resellers. Most software companies prefer to use resellers rather than contract directly with the government. This allows them to avoid the onerous regulations that come with first-class contracting. When software is sold this way, the reseller has a contract with the government and passes on the software license. It’s usually a standard boilerplate document on a software company’s letterhead – something people don’t bother to read. It is attached to the contract as an addendum and is often colloquially referred to as a “transient” license.

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

In 2018, Avue filed a lawsuit with the FDA alleging it owed $41 million for misusing its software in violation of Avue’s license. Despite Avue’s license included in the contract, the FDA argued that it only had a contract with Carahsoft, a reseller, and therefore Avue had no ability to independently bring a claim. The crux of the FDA’s theory was that the license agreement could only be enforced by Carahsoft, its prime contractor.

Avue itself took the dispute to the Citizens’ Contract Appeals Board, which rejected it, stating that the license itself was not a procurement contract and thus lacked proper jurisdiction to resolve the dispute. He noted that this was the first case of its kind where a third party, rather than a main contractor, had attempted to enforce his licence.

Ultimately, Avue filed suit in the Court of Appeals for the Federal Circuit, which ruled on March 6 that the CBCA did in fact have jurisdiction over the matter. The court did not rule on the core of the contractual issue, but sent it back to the CBCA to decide. At this time, the independent enforceability of a software license is not resolved, without a direct privacy contract with the government.

No judicial body seems to want this hot potato. It’s complicated, and the consequences are significant. It seems clear that the reseller is contractually bound by the language of the included license, but that only goes so far. In the case of the FDA, the reseller does not appear to have participated in Avue’s claim. If the prime contractor has reason to avoid litigation, is the licensor out of luck?

Likewise, it is easy to imagine the shoe on the other foot. What happens when a government tries to enforce a right to use software it believes it has, and the software company claims it’s unenforceable due to lack of a direct contract? Obviously, the reseller with the master contract would be responsible for the license language. But the reseller is often a paper tiger, with no control over the products he sells. They work according to the manufacturer’s wishes. For some small resellers, it may be more attractive to go bankrupt than to stand in the middle of a protracted and expensive dispute between the software titans and the trillion-dollar government. The government would probably find alternative legal theories to enforce the license agreement under these circumstances, but none would be as pure and simple as relying on the breach of the license itself.

For some attorneys, transient licensing has always been a tricky concept. Hopefully, the Avue litigation will lead to a resolution, one way or another, and that both the government and software licensors can find a way forward to reduce uncertainty. For now, this appears to be an unsettled area despite the fact that the government probably spends more than $15 billion a year on commercial software through “portable” licensing.