U.S. Navy Breached Implied-In-Fact Software License, Federal Circuit Decides In Bitmanagement

The case arose out of the Navy’s purchases, between 2006 and 2012, of just more than 100 “seat” (i.e., single computer) licenses in Bitmanagement’s “BS Contact Geo” software.  The software, provided in both a desktop executable form and as a web browser plugin, enables a user to visualize geographic information by rendering realistic terrain and city models and allowing the user to position virtual objects using geographic coordinates.  After the Navy had trouble managing its individual seat licenses, the parties agreed to a floating license structure that allowed the Navy deploy the software to all computers across the Navy Marine Corps Intranet (“NMCI”), but required the Navy to use a license management software to monitor and limit the number of simultaneous users.  The Navy did not do so, at least for the web browser plugin, and from July 2013 through at least September 2016, the program remained available for use on 429,604 government computers without limitation.

Bitmanagement filed suit in the U.S. Court of Federal Claims seeking compensation for copyright infringement under 28 U.S.C. § 1498(b). The Claims Court denied the claim, finding an implied-in-fact license for the Navy’s copying based on several direct email exchanges between the parties.  On appeal, the Federal Circuit agreed an implied-in-fact license existed, and further that implied-in-fact license was not precluded by the express contracts between the government and Bitmanagement’s reseller, which (according to the court) “do not capture or reflect the discussions that occurred between the Navy and Bitmanagement directly.”  In a concurring opinion, Judge Newman weighed in even more favorably for Bitmanagement, adding that she would have overturned the Claims Court’s finding of an implied-in-fact license, as “there plainly was no mutual intent that Bitmanagement would abandon its commercial purpose and grant the Navy unlimited free licenses to copy and use” the software.

But it was not enough, according to both the majority and concurrence, for the Navy to show an implied-in-fact license existed; the court also must determine whether the Navy’s conduct breached that license.  Furthermore, for purposes of copyright infringement claims, the court had to determine whether the breach was simply a covenant (e.g., an obligation to pay), in which case Bitmanagement’s relief sounded only in contract, or if the breach violated a condition precedent to the limiting the scope of the license itself.  The Federal Circuit found the facts developed below to be sufficient to hold, as a matter of law, the implied license was conditioned on the Navy’s use of Flexera to limit, from the time of copying, the number of simultaneous users of the program.  The court found this limitation “critical to the basic functioning of the deal,” and noted “[w]ithout tracking, the Navy would have no basis to purchase more licenses and, consequently, Bitmanagement would have had no reason to enter into the implied-in-fact license.”  Because the Navy had failed to abide by that condition of the license, its copying constituted copyright infringement, according to the court, which vacated and remanded the case to the Claims Court to determine appropriate damages.

On that point, the Federal Circuit went on to offer some guidance.  In a footnote to its conclusion and remand order, the court suggested Bitmanagement’s damages should be based on the Navy’s actual excess usage of BS Contact GEO, as determined by a “hypothetical negotiation” in which the Navy, as the party in breach, “bears the burden of proving its actual usage . . . and the extent to which any of it fell within the bounds of any existing license.”  Even though the court suggested Bitmanagement could not claim damages for every copy made, only those used beyond the scope of the license, the damages framework the court outlined should be reassuring in some regards to commercial software providers selling to the federal government.  Unique security restrictions often make it very difficult, if not impossible, to monitor and audit the government’s use of software in the same way one would a commercial customer, hindering an aggrieved contractor’s ability to prove its breach damages with the same specificity a court or board would normally expect in other cases.  This framing more equitably places that burden of proof on the government, who is better positioned to gather evidence and whose breach itself might have, in some cases, compounded these evidentiary shortcomings.

As we have previously written on this blog, commercial software companies have many reasons to be cautious when selling to the federal government, whether due to an inability to rely on one’s established and trusted licensing terms, or the various practical barriers to enforcing even legally permissible terms.  These concerns often lead companies to engage the government through resellers, which in turn creates even more issues of enforceability between the software manufacturer and its government end user.  The Federal Circuit’s decision in Bitmanagement does not resolve these concerns, but its endorsement of the implied-in-fact license that might arise between a software provider and the government, and the obligations it places on the government to observe and abide by such licenses, are, without a doubt, promising developments for software companies supporting the federal government.

[View source.]