No Free License: Lessons from Bitmanagement and ImmixTechnology for Companies that License Software to the U.S. Government
Many companies that license computer software to the United States government have long relied on commercial software license agreements as the principal source of protection for their intellectual property (IP). But two recent government contracts decisions—Bitmanagement Software GmBH vs. United States and ImmixTechnology, Inc. v. United States—illustrate the limitations and risks of adopting a one-dimensional approach to IP protection, particularly for companies that license their software through third-party resellers. In this alert, we discuss the Bitmanagement and ImmixTechnology decisions and highlight several key lessons for commercial companies that license software to the United States government.
Bitmanagement Software GmBH v. United States
Bitmanagement Software GmBH (Bitmanagement) develops virtual reality software called BS Contact Geo. In a series of transactions, Bitmanagement licensed the software to the U.S. Navy through a third-party reseller. Each license permitted the Navy to utilize the software on a specific computer and the Navy eventually purchased a total of 119 licenses. The last installment of these licenses required the Navy to monitor the number of simultaneous users with a software tracking application called Flexera. During this time, the parties also discussed the Navy's desire to expand the number of computers on which BS Contact Geo was deployed, while also tracking and limiting the number of simultaneous users with the Flexera application. The Navy interpreted these discussions as granting permission to copy and broadly deploy the software, but Bitmanagement understood that any expanded use would be closely tracked and that the Navy would eventually compensate the company by purchasing additional licenses. By 2013, the Navy had copied BS Contact Geo onto every computer in the Navy Marine Corps Intranet (NCMI) network—without using the Flexera tracking application and without purchasing additional licenses from Bitmanagement. This use continued until at least 2016.
Bitmanagement filed a claim for copyright infringement at the U.S. Court of Federal Claims (COFC) and, following a trial, the court granted judgment to the government. Even though COFC found no written agreement permitting the Navy to install BS Contact Geo throughout the NCMI network, it held that Bitmanagement had granted the Navy an implied license to broadly deploy the software via the parties' communications and course of conduct. Bitmanagement appealed to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit), which vacated COFC's decision and remanded the case. Though the Federal Circuit agreed with COFC's finding of an implied license, it held that the Navy had violated a condition precedent of the license by failing to track the number of simultaneous users. The Federal Circuit's opinion contains several noteworthy rulings:
- First, the Federal Circuit held that, where a copyrighted work is commercially available software, a trial court may consider the totality of the parties' course of conduct to determine if an implied license exists. The majority concluded that COFC had plausibly found an implied license between Bitmanagement and the Navy given their relatively detailed discussions about the Navy's plan to copy and further deploy the software.
- Second, the Federal Circuit rejected Bitmanagement's contention that the existence of an express license necessarily precluded a finding of an implied license. Drawing on contract law principles, the Court explained that an express license should only have such preclusive effect if supported by the totality of the specific facts and circumstances. Three factors weighed against precluding an implied license, according to the Court: (1) Bitmanagement licensed the software to the Navy via a reseller (and thus had no express agreement with the government), (2) the relevant agreement did not bar the Navy from copying the software onto additional computers, and (3) the agreement did not clearly articulate how the Flexera tracking application would be used.
- Third, notwithstanding its earlier holdings favoring the government, the Federal Circuit found that the Navy violated the terms of the implied license because it failed to use the Flexera software tracking application. According to the majority, the use of Flexera was a "condition precedent" to the Navy's right to copy and broadly deploy the software because, in their discussions, the parties implicitly agreed that tracking users was critical to determining how many additional licenses the Navy would eventually purchase. Notably, the Court distinguished this type of condition from a mere contractual covenant (e.g., a payment term), which ordinarily would give rise to an action for breach of contract—a potentially less viable option for a software company that lacks privity of contract with the government.
- Finally, in remanding the case to COFC, the Federal Circuit provided detailed instructions to assess and award damages to Bitmanagement, either in the form of statutory damages or through a hypothetical negotiation of market value as of the time of infringement.
ImmixTechnology, Inc. v. Dept. of the Interior
Beginning in 2003, Software AG licensed its webMethods software for use by the Small Business Administration (SBA). These perpetual licenses were priced based either on the number of "server central processing units (CPUs)" or the number of "server processor cores." Software AG also provided associated software maintenance and support via a series of direct contracts with the government. The Department of Interior (DOI) later purchased webMethods software support, for use by the SBA, via a GSA Federal Supply Schedule (FSS) contract held by immixTechnology, Inc. (Immix), an authorized reseller of Software AG software and services. Around the same time, the SBA initiated an upgrade of its information technology infrastructure, which included replacing the existing single-core servers running webMethods with servers that use multi-core processors. The new multi-core servers would contain two processors with eight cores each for a total of 16 cores—a significant change from the single core processors the SBA had used historically.
Recognizing that these technical changes would require new software licenses, the SBA engaged in discussions with Software AG about entering into a new direct contract. These discussions and Software AG's subsequent proposal assumed that any new licenses would be priced on a "per processor core" basis. But before the SBA could award a contract to Software AG, it learned that the procurement would have to be routed through DOI. DOI decided to purchase the new webMethods software licenses by modifying its existing FSS order with Immix (Modification 1).
Relying on its interpretation of language in Immix's FSS contract, the SBA eventually installed webMethods software onto 128 different processor cores (eight servers with 16 cores per server), spread across four different environments. This was contrary to the governing licensing agreement, which only permitted the use of webMethods on 48 processor cores—i.e., four environments times 12 cores per environment. This mistake went undetected for years, in part, because the SBA did not provide software use reports to Immix and Immix did not inquire about the SBA's usage, as contemplated by the contract. Upon discovering the SBA's unauthorized use, Immix filed a claim on behalf of Software AG with DOI. The government denied the claim and Immix appealed to the Civilian Board of Contract Appeals (CBCA).
The CBCA ruled for the contractor, holding that Modification 1 and the parties' pre-award negotiations demonstrated that the new licenses were priced on a per processor core basis—not on a per CPU basis, as SBA argued. The CBCA found that the SBA was only licensed to run webMethods on 48 processor cores, but actually used the software on 128 processor cores—a difference of 80 cores. With respect to quantum, however, the CBCA rejected Immix's contention that damages should be calculated using the FSS Contract rate of $93,094.64. According to the CBCA, this approach was not a reasonable measure of damages because it greatly surpassed the license rates in Modification 1 and would place the company "in a better position through the award of expectancy damages than if there had been no breach." The CBCA instead calculated damages using the Modification 1 rates, resulting in an award of $674,184 for the excess deployment of software on 80 additional cores. The CBCA also awarded $350,000 for associated support and hardware costs.
Key Lessons from Bitmanagement and ImmixTechnology
The Bitmanagement and ImmixTechnology decisions contain several important lessons for companies that license software to the U.S. government:
- Ensure that the Scope of the Government's License is Clear. The CBCA in ImmixTechnology looked to the parties' pre-award discussions to confirm that the relevant software was licensed on a "per processor core" basis because it found that the reseller's FSS contract lacked clarity. This was a good result for the software company, but the company may have avoided a dispute altogether if it had ensured, upfront, that all the relevant contract documents clearly stated the scope of the government's license—especially since it was licensing its software through a third-party reseller that held the FSS contract. Further, in crafting license terms, companies must be mindful that courts distinguish between "conditions precedent" to a license agreement and "contractual covenants" in the agreement itself. The software company in Bitmanagement (perhaps presciently) negotiated software tracking as a condition precedent to the conveyance of any license rights, which ultimately was the key to its victory at the Federal Circuit. If it had framed the requirement as a contractual covenant, however, it may have had difficulty enforcing the covenant because it lacked privity of contract with the government.
- Your Company's Words and Actions Matter Too. While the terms of a written license agreement are of paramount importance to defining the government's use rights, Bitmanagement shows that a software company's communications and course of conduct can also give rise to an implied license that grants greater rights to the government. This again is an especially significant takeaway for contractors that license software through resellers. The Federal Circuit in Bitmanagement found that the existence of a written license agreement did not preclude a finding of an implied license, in part, because the Navy's written agreement was with the reseller—not the software company. In other words, to protect their IP, software companies cannot rely exclusively on the terms of commercial license agreements they incorporate into reseller agreements. They must proactively monitor and enforce the government's use of their software, while also avoiding conduct and communications that may inadvertently create an implied license.
- Software Tracking and Enforcement Tools Also are a Must. Both Bitmanagement and ImmixTechnology illustrate that a software company's commercial license agreement is only as strong as the mechanisms it uses to enforce the terms of the agreement. The software company in Bitmanagement negotiated the use of a license tracking application, but apparently did not insist on receiving confirmation that the Navy had actually used the tracking application with each additional copy and deployment of the software. In ImmixTechnology, the contract required the SBA to monitor its software usage and provide quarterly reports, but SBA did not send any reports. The contract also permitted the reseller to request usage information, but it never did. In each case, the software company and its reseller wisely insisted on mechanisms to prevent unauthorized use of the subject software, yet they failed to follow through. If they had done so, they may have avoided costly and protracted litigation with the government.
- You May Be Entitled to Damages, But Perhaps Not What You Expect. Finally, with respect to damages, Bitmanagement and ImmixTechnology highlight some important parameters for pursuing a copyright infringement or breach of license case against the United States. In Bitmanagement, the Federal Circuit explained that, in an action for copyright infringement against the government, the non-infringing party may be entitled to statutory damages under 17 U.S.C. § 504(c) or expectancy damages (measuring fair market value at the time of infringement using a hypothetical-license test). The Court made clear, however, that non-compensatory or punitive damages may not be awarded. In ImmixTechnology, the CBCA acknowledged the availability of expectancy damages, but found that the FSS contract prices did not represent a fair market valuation. The CBCA instead opted to calculate damages using the Modification 1 rates because they reflected the parties' most recent valuation of what additional licenses would have cost the government. It remains to be seen if COFC will adopt a similar contract-based approach to damages on remand in the Bitmanagement case.
We will continue to monitor and report on any further developments in these cases. In the meantime, if you have questions about licensing software to the United States, including through third-party resellers, please contact the Miller & Chevalier attorneys listed below.
Connor Farrell, a Miller & Chevalier law clerk, contributed to this client alert.
This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.