As the government embraced the digital age in the years after COVID-19, its need for new software and technologies skyrocketed. This rapidly expanding procurement need presents great opportunities for businesses—both small and large—to satisfy the government’s needs. But every opportunity carries risks. In this blog, PilieroMazza explores a case that sheds light on (1) the risks posed by the ever-changing nature of software, (2) the government’s acquisition of new software using multi-option-year contracts, and (3) the legal enforceability of negotiated terms for government contractors.
The Back Story
The story is simple. A government agency needs a new computer program, but they do not know how long they need that program or whether the program will be outdated in the next few years. The government’s solution is to procure software using contracts with a single-base year and multiple-option years. Then, when it comes time to exercise an option, the government can re-evaluate whether the software is worth it and choose whether to exercise the option. However, software is much cheaper to acquire with longer terms compared to simple one-year terms. This leaves the contractors providing the software in a tough spot because they do not know whether they have a contract for the next five years or just the year in front of them.
One contractor, DLT Solutions, LLC (DLT), recently fought a summary judgment battle against the Marine Corps over what DLT believed was the solution to the problem described above. DLT was awarded a Federal Supply Schedule contract for numerous software licenses and maintenance for that software. The software that became an issue in this case was called Quest software, and it contained three pieces: (1) the Recovery Manager for Active Directory, (2) the Change Auditor for Windows Files Servers, and (3) GPO Admin. Key Government Finance, Inc. (Key) supplied the Quest software to DLT in support of its supply contract. DLT negotiated a blanket purchase agreement (the Agreement) with the government for a base year and four option years. This saved DLT considerable costs. However, the Agreement allowed the government “to evaluate license usage at the end of option periods and terminate, without penalty, unused licenses upon mutual agreement that the identified licenses are unused.”[1]
Due to the nature and pricing scheme of the software, Key insisted that DLT include provisions in the Agreement with the Marine Corps to show that it was the Marine Corps’ intent to exercise all the option years. After some negotiations, the parties agreed on a Bona Fide Needs Provision containing the following language:
It is the intent of the Government by placing this Order to exercise each renewal option so long as the bona fide needs of the Government for the product or functionally similar products continue to exist and the requirements of [Federal Acquisition Regulation] 17.207 are satisfied.[2]
The referenced FAR citation covered the government’s rights to evaluate and exercise options, but the intent of the provision was to ensure that the Marine Corps would exercise the options unless no bona fide need existed. The Agreement was incorporated into the purchase order, and all seemed well.
Unbeknownst to DLT and the Marine Corps, the Marine Force Cyberspace Operations Group (Cyberspace Operations Group) was already contemplating whether the Quest software was necessary. In fact, a decision that the software was unnecessary was reached prior to DLT obtaining financing to cover the costs of its Agreement with Key. This came to fruition only one month after DLT began supplying the software when the Cyberspace Operations Group told the Marine Corps it did not need the Quest software and that the options should not be exercised. The Marine Corps responded with disdain, stating how “frustrating” this was, that it was “disingenuous in the worst way,” and that “we must do better.” Despite this, when the time came to exercise the options, the Marine Corps elected not to, and DLT filed a certified claim on behalf of Key.[3]
The Argument
DLT argued that the Marine Corps breached the Bona Fide Needs Provision and that DLT relied on the representations of the Government in a breach of the duty of good faith and fair dealing. Both parties filed for summary judgment, and the Armed Services Board of Contract Appeals (the Board) ruled in favor of the government on the breach claim. However, the Board found DLT’s reliance argument to have disputed material facts and denied both parties summary judgment motions on that topic.[4]
The most important argument made by DLT that contractors need to be aware of relates to the Bona Fide Needs Provision. DLT, of course, felt this would be a slam dunk breach argument. The Board, however, strongly disagreed. In evaluating DLT’s claim under that provision, the Board stated:
Even assuming without deciding that there was a bona fide need for the maintenance in order to comply with internal Marine Corps policies, the Marine Corps is entitled to summary judgment on DLT’s breach of the Bona Fide Needs Provision claim because a reasonable fact-finder could not decide that the Bona Fide Needs Provision was anything but a contractually-unenforceable expression of intent…[5]
The Board reasoned that the government’s intention “to perform a certain act may presuppose a moral commitment by the [defendant], but is contractually unenforceable, at least without more.”[6] The Board then cited its own decision in Supplycore, to state:
we held that a contractor may not reasonably rely upon a government communication indicating that the government intended to exercise an option to conclude that [the] government actually exercised the option because FAR 52.217-9(a)—which the Purchase Order incorporated here—stated that “preliminary notice [of intent] does not commit the Government to an extension.[7]
By applying this stated law, the Board found the Bona Fide Needs Provision to be nothing more than an expression of intent, whether there was a bona fide need or not, and thus, the provision was unenforceable.[8]
The Takeaway
The takeaway here is that while contractors can negotiate certain terms in software agreements and other contractual forms, those terms still need to be legally enforceable.
There is hope for DLT, though, as the Board did not dismiss their reliance arguments related to the duty of good faith and fair dealing. While evaluating DLT’s second theory, the Board found a genuine issue of fact “as to whether the Marine Corps breached the duty of good faith and fair dealing by allowing DLT to rely upon the Marine Corps’ representation that it intended to exercise the options if there was a bona fide need in order to obtain financing.”[9] DLT has a strong case to make because the Marine Corps, or at least a portion of the Marine Corps, knew there was no actual intention to exercise the options. It was a breach of the duty of good faith and fair dealing to allow DLT to rely on its belief that the options would be exercised.
DLT’s case will move forward on this latter theory, and PilieroMazza attorneys are eager to see the results. In the meantime, we encourage government contractors negotiating specific terms with any government agency to ensure those terms are legally enforceable.
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[1] DLT Sols., LLC, ASBCA No. 63069, 2024 WL 2285316 (Apr. 29, 2024)
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id. (citing Pacificorp Capital, Inc. v. United States, 25 Cl. Ct. 707, 716 (1992)).
[7] Id. (quoting Supplycore, Inc., ASBCA No. 58676, 16-1 BCA ¶ 36,262).
[8] Id.
[9] Id.
