The U.S. Court of Federal Appeals (CAFC) just released its decision in another breach of software license case. Bitmanagement Software GMBH v. United States, Fed. Cir. 2020-1139 (Feb. 25, 2021). This is the second case where the court recently found for the contractor and held the Government to have overextended its use of a software license. (For a similar case at the Contract Board of Appeals, please see here).

As factual background, the Navy was using Bitmanagement’s software through a third party reseller agreement. The Navy was having trouble tracking the seat licenses and transferring them when needed (i.e. when Navy personnel transitioned). So the Navy and Bitmanagement directly discussed solutions.

Together, they decided (1) Bitmanagement would allow the Navy to use a web-based version of the software, hosted on a Navy server, and replicated for users; and (2) the Navy would run the software through an intermediate mechanism: an independently contracted and licensed software called Flex Wrap, that tracked floating licenses in order to limit the number of programs being used at any one time. Contrary to its agreement to do so, the Navy never actually implemented the Flex Wrap. Beginning in 2013, the Navy increased its number of floating licenses from 119 to 429,000 copies of the Bitmanagement software program. Bitmanagement sued, stating these additional copies were outside the scope of the license and were unauthorized.

At the U.S. Court of Federal Claims (COFC), that lower court found that there was an implied-in-fact license that allowed the Navy to make these copies. It found for the Navy.

On appeal, Bitmanagement raised three arguments. First, Bitmanagement argued that the test of implied-in-fact licenses is different than the test for implied-in-fact contracts, citing a Ninth Circuit case (Effects Associates v. Cohen), which dealt with movie licenses, not software licenses. CAFC rejected this argument, finding it too attenuated; the COFC had reasonably found there was an implied-in-fact license. Next, Bitmanagement argued there was a purchase order – an express contract – so there could be no controlling implied-in-fact contract. Here, Bitmanagement’s problem was that the purchase order was between the Navy and the third party reseller. Because it was not directly between Bitmanagement and the Navy, there was no direct contract — to replace the implied in fact license. Without a direct relationship, i.e. privity of contract, CAFC rejected this argument, too.

Finally, Bitmanagement argued that, if there was an implied-in-fact license, then in return for getting the right to use Bitmanagement’s software, the Navy was obligated to use Flex Wrap to track the number of Navy users. Without it, the Navy couldn’t receive the licenses. This time, the CAFC agreed. Keeping track of the number of users was a condition of that implied-in-fact license.

The CAFC accepted that, during negotiations around the implied-in-fact license, Bitmanagement agreed to the web-based deployment because the Navy could keep track of the number of users with Flex Wrap. The Navy used the web-based deployment of the software but failed to keep track of the number of users. Ultimately, the CAFC found that the Navy’s failure to employ the intermediate step — Flex Wrap — allowed Navy un-throttled use and replication of the Bitmanagement’s software. This was not what the parties had agreed to. The Navy was, indeed, making unauthorized copies of Bitmanagement’s software. The CAFC remanded the case to the COFC to determine damages, which are expected to be significant.