Robert S. Metzger, Shareholder, Rogers Joseph O’Donnell, PC
Oliya S. Zamaray, Associate, Rogers Joseph O’Donnell, PC
On July 31, 2015, the GSA Senior Procurement Executive issued a class deviation intended to reconcile federal requirements with the terms of standard Commercial Supplier Agreements (CSAs). An objective of the class deviation is to alleviate costs and delays of negotiating contract terms that federal purchasers can accept from commercial sources of information technology (IT). Although GSA published notice of a proposed class deviation on March 20, 2015 and invited comments, using a class deviation approach meant that GSA avoided rulemaking that would have included full notice-and-comment opportunity.
Now the class deviation is in effect. It adds to the GSAM, at 502.101 a broad new definition of “commercial supplier agreement” that reaches “terms and conditions customarily offered to the public” by vendors of commercial supplies or services, “regardless of the format or style of the document.” This new definition identifies, as examples, Terms of Service (TOS) and End User License Agreements (EULA), and applies regardless of media or delivery mechanism used. The class deviation also creates a new GSAR clause, 552.212-4 (“Contract Terms and Conditions – Commercial Items”), reflecting the substance of the deviation, which GSA Contracting Officers are instructed to incorporate intoall contracts. The deviation also advises that a “mass modification” will be issued to “ensure that all FSS contracts” contain the new clauses.
The new GSAR 552.212-4, among other features, changes the “Order of Precedence” of the underlying FAR clause (as further discussed below), revises subparagraph (u) to clarify that CSA terms that purport to cause the Government to indemnify a contractor are unenforceable where they create an Anti-Deficiency Act violation, and add a new subparagraph (w) (“Commercial supplier agreements – unenforceable clauses”) that specifies that certain provisions often seen in CSAs will not be enforceable against or apply to the Government.
The intent of the deviation was to remove hurdles that have frustrated both Government and industry in contracting for commercial supplies and services where the vendor employs a CSA (in any form) with terms conflicting with federal law. As implemented, unfortunately, the class deviation solves some problems but creates others that may prove just as vexing. In the final deviation, GSA included a seemingly technical change, to the “Order of Precedence” clause, without any prior discussion with industry. Though it has been below the radar, many contractors will find it has a painfully adverse consequence, because it will lead to just the kind of negotiations, over which CSA terms might conflict with the Commercial Items clause, that the deviation sought to avoid. GSA appears to have acted without awareness of the practical impact of the change to the Order of Precedence. GSA should be strongly encouraged to correct this error.
The Federal Government fills many of its needs through purchases from commercial suppliers. A source of tension has been that both federal purchasers and commercial sellers want to use their CSAs rather than federally-dictated contract terms, but the CSAs often contain some provisions that conflict with federal mandates and objectives. The class deviation tries to resolve recurring areas of contention in “one fell swoop,” by declaring that fifteen terms regularly seen in CSAs are deemed unenforceable against the Federal Government even if they are stated in a CSA that is incorporated by reference in a federal purchase agreement.
This issue has broad importance to commercial sellers of supplies and services to the Federal Government. CSAs cover a wide range of transactions, including IT procurements travel, telecommunications, financial services, building maintenance systems, and even purchases below the simplified acquisition threshold. CSAs may take a variety of forms, though EULAs and TOS are particularly important for information technology services and supplies – and have proved regular sources of contention between commercial sources and GSA buyers.
Part of the problem is inherent to federal purchases from commercial sources using multiple award schedule (MAS) contracts. Following the 1994 enactment of the Federal Acquisition Streamlining Act (FASA), there has been a statutory preference for acquisition of commercial items. FAR Part 12 implements the Federal Government’s preference for the acquisition of commercial items. Nonetheless, Contracting Officers (COs) are instructed by the FAR to proceed with caution when a commercial seller wants to use its standard commercial terms. FAR 27.405-3(b), for example, advises COs purchasing commercial computer software to “exercise caution in accepting a vendor’s terms and conditions, since they may be directed to commercial sales and may not be appropriate for Government contracts.” Similarly, FAR 12.212(a) provides that commercial computer software and documentation shall be acquired under licenses customarily provided to the public but only “to the extent such licenses are consistent with federal law and otherwise satisfy the Government’s needs.”
This tension produced chronic complaints by federal schedule buyers that CSAs offered through GSA’s IT Schedule 70 were noncompliant with federal law, and persistent objections by contractors that COs were diverting from commercial norms by insisting on different terms. GSA responded by requiring review and approval of each EULA, TOS and similar agreements for all new Schedule 70 contracts. Because this legal review proved to be costly, lengthy, and frustrating, it worked against another premise of commercial source contracting – namely that purchase from commercial sources would be faster and cheaper.
Over time, both sides came to recognize a “fail list” of provisions that GSA legal consistently found to be objectionable. Through the July 31 class deviation, GSA sought to resolve for all commercial purchases many of these chronic issues. The deviation deals specifically with every one of the fifteen “fail list” provisions. Conceptually, the class deviation is straightforward – but looks prove deceiving, as one appreciates upon examination of the details.
The Order of Precedence clause has been changed to establish that, should there be any inconsistencies, terms of the new commercial item clause at GSAR 552.212-4 control over terms of a CSA (including any license agreement for computer software).
All parties can agree, presumably, that the Federal Government should resort to its own required provisions where a CSA term is in actualconflict. And the added subparagraph (w) to GSAR 552.212-4 identifies and explains more than a dozen specific instances where there is such a conflict.
Unfortunately, the seemingly minor change to the hierarchy of the Order of Precedence clause goes beyond these identified clauses where actual conflict is present to put in doubt the effectivity or enforceability of many other CSA clauses – thus re-opening the door to uncertainty if not dispute that the new GSAR sought to close.
GSAR 552.212‑4 revises the Order of Precedence clause in FAR 52.212-4 to move from 4th to 6th (of nine items) the ranking of CSAs, i.e., “Addenda to this solicitation or contract, including any license agreements for computer software.” Before this change, the Order of Precedence read:
(s) Order of precedence. Any inconsistencies in this solicitation or contract shall be resolved by giving precedence in the following order: (1) the schedule of supplies/services; (2) the Assignments, Disputes, Payments, Invoice, Other Compliances, and Compliance with Laws Unique to Government Contracts paragraphs of this clause; (3) the clause at 52.212-5; (4) addenda to this solicitation or contract, including any license agreements for computer software; (5) solicitation provisions if this is a solicitation; (6) other paragraphs of this clause; (7) the Standard Form 1449; (8) other documents, exhibits, and attachments; and (9) the specification.
After the class deviation, the clause now reads:
(s) Order of precedence. Any inconsistencies in this solicitation or contract shall be resolved by giving precedence in the following order:
(1) The schedule of supplies/services.
(2) The Assignments, Disputes, Payments, Invoice, Other Compliances, Compliance with Laws Unique to Government Contracts, Unauthorized Obligations, and Commercial Supplier Agreements – Unenforceable Clauses paragraphs of this clause.
(3) The clause at 52.212-5.
(4) Solicitation provisions if this is a solicitation.
(5) Other paragraphs of this clause.
(6) Addenda to this solicitation or contract, including any license agreements for computer software.
(7) The Standard Form 1449.
(8) Other documents, exhibits and attachments.
(9) The specification.
As revised, five categories are more important than and control over CSAs (“Addenda,” including “any license agreements”). This is important because many commercial companies, especially those who sell information technology hardware, services and software, include in such “Addenda” and “license agreements” crucial terms intended to protect their commercially competitive position and to align their performance obligations to commercial norms. Far from being low-ranking appendages, standard commercial EULAs and TOS are routinely included as “Addenda” and/or “license agreements” accompanying federal sales orders. They are often highly nuanced, very carefully crafted and represent key business decisions on allocation of responsibility, cost and risk. Relegating these to the proverbial “back of the bus” changes transaction economics for many commercial sources and will cause some to retreat from federal markets, some to raise prices, and some to push back by insisting upon further negotiations (the avoidance of which was a central purpose of the class deviation).
How can it be that “demotion” of such “Addenda” and “license agreements” has such adverse consequences? It is because these now are behind in precedence both “solicitation provisions if this is a solicitation” and “other provisions of this clause” – where “this clause” refers to FAR 52.212-4, the lengthy “Contract Terms and Conditions – Commercial Items” clause which contains no fewer than twenty-four (24) separate categories of subjects – ranging from “Assignment” through “Unauthorized Obligations.” Apart from and in addition to the specified terms that are trumped by the new subparagraph (w) of GSAR 552.212-4, a given Contracting Officer can assert that any and all of the 24 items in FAR 52.212-4 now prevail over counterpart terms if included in a contractor’s EULA, TOS or other CSA form that is one of those lowly “Addenda” or other “license agreements.”
We mentioned previously that the class deviation focused on the fifteen “fail items” that Contracting Officers regularly concluded the Federal Government could not accept because the approach of representative commercial terms would violate federal statute or regulation. Indeed, as implemented through subparagraph (w) of GSAR 552.212-4, the class deviation requires that each of these fifteen “fail items” be treated as unenforceable in any instance of a conflict with federal law, and the deviation helpfully explains the nature of the conflict and the reasons that GSA has found the term to violate to federal law. For illustration, one such term is “automatic renewals of term-limited agreements.” The class deviation treats provisions that make renewal charges due unless the customer takes action to opt out or terminate as an obligation ahead of appropriation which, in the past, were treated as a violation of the Anti-Deficiency Act. Under the class deviation, every subsequent term of term-limited products or services must be purchased separately. Contracting Officers are free to enter into agreements that incorporate CSAs knowing that such “automatic renewal” terms are rejected ab initio (for each contract) and en masse (for every contract). The treatment is similar for the fifteen “fail items,” where such CSA provisions conflict with federal law, namely (1) definition of contracting parties; (2) contract formation; (3) vendor indemnification; (4) automatic renewals of term–limited agreements; (5) future fees or penalties; (6) taxes; (7) payment terms or invoicing; (8) automatic incorporation/deemed acceptance of third-party terms; (9) state/foreign law governed contracts; (10) equitable remedies, injunctions, binding arbitration; (11) supplier’s unilateral termination of agreement; (12) supplier’s unilateral modification of supplier agreement; (13) assignment of supplier agreement or government contract by supplier; (14) confidentiality of supplier agreement terms and conditions; and (15) audits (automatic liability for payment).
These 15 “fail items” are not the problem. Rather, the sweep of issues encompassed within the FAR “Commercial Items” clause is a veritable recipe for unilateral actions by individual Contracting Officers to decide that other clauses conflict with the “Addenda” or “license agreements” and therefore should be ignored. Commercial companies cannot do business with the Government if they are at risk that Contracting Officers, on individual orders, will simply choose to treat key provisions of their EULAs or TOS as mere “surplusage” that any given CO can disregard if she or he decides that a term conflicts with some other provision of the Commercial Items clause. In the best case, the Contracting Officer will inform the seller of this position and negotiations (and delays) will follow. In the worst and all too plausible case, disputes will arise during performance, or after, when the CO chooses to ignore inconvenient or disadvantageous provisions in a EULA or TOS simply because they were contained in such “Addenda” or “License Agreements.” Proven companies may decide not to take this “wildcard” business risk.
The class deviation and the new GSAR were on track in focusing on the fifteen explicit “fail items” and resolving their status clearly. The Order of Precedence change, apparently unwittingly, exposes many other terms in CSAs to uncertainty if not controversy.
The downgrading of CSA terms is difficult to reconcile with cardinal principles governing federal procurement of commercial items. The Federal Government, as expressed at FAR 12.101(c), is to “[r]equire prime contractors and subcontractors at all tiers to incorporate, to the maximum extent practicable, commercial items or nondevelopmental items as components of items supplied to the agency.” (Emphasis added.) As concerns solicitation provisions and contract clauses for the acquisition of commercial items, FAR 12.301 again insists that, “to the maximum extent practicable,” the Federal Government shall include “only those clauses … [r]equired to implement provisions of law or executive orders applicable to the acquisition of commercial items” or those “[d]etermined to be consistent with customary commercial practice.” (Emphasis added.) The cited change to the Order of Precedence clause subverts these principles.
Compounding the problem is the interplay between the changed Order of Precedence clause and the new subparagraph (w), “Commercial supplier agreements – unenforceable clauses,” which now rates 2nd in the Order of Precedence hierarchy, four positions above the deference given to a vendor’s “Addenda” or “license agreements.” Through this subparagraph (w), GSA excludes specific commercial terms that it has found to violate federal law. The class deviation as implemented was accompanied by instructions in the form of “questions and answers.” One question GSA answered in its July 31st memorandum was whether Contracting Officers still need to review CSAs since the class deviation provides protection against inappropriate or illegal terms being incorporated to contracts. The response was: “Absolutely.” It continued: “Contracting Officers should always thoroughly review CSAs (and all documents that are incorporated into any GSA contract).” This is more than just a “license” for COs to review EULAs, TOS and other terms incorporated as “Addenda” or “license agreements.” It is positive encouragement that they do so. The instruction practically invites Contracting Officers to find some, a few or even many aspects of potentially complex commercial EULAs, TOS or other “Addenda” or “license agreements” that they will consider or claim are “inappropriate” or “illegal.” While Contracting Officers may seek guidance from the office of General Counsel of GSA, they are not obligated to do so. In any event the opportunity for uncertainty, disagreement or dispute certainly will restore costs, delays, and frustration that the class deviation sought to eliminate.
No law or regulation mandated this change in the Order of Precedence. GSA need not conduct rulemaking to restore the proper sequence, a proposition virtually proven by GSA’s decision that it could use the class deviation process rather than rulemaking to implement the many changes to commercial item terms effected by the deviation. The class deviation should be revised to restore “addenda in this solicitation or contract, including any license agreements or computer software” to the fourth position in the Order of Precedence.
 Robert S. Metzger is a shareholder and heads the D.C. office of Rogers Joseph O’Donnell, P.C. Oliya S. Zamaray is an associate in that office.
 The class deviation is explained in a memorandum authored by Jeffrey A. Koses, GSA Sr. Procurement Executive, Acquisition Letter MV-15-03, “Memorandum for the Acquisition Workforce: Class Deviation Addressing Commercial Supplier Agreement Terms that Conflict or Are Incompatible with Federal Law” (July 31, 2015) available at https://interact.gsa.gov/sites/default/files/AL%20MV-15-03%20Signed.pdf.
 The new GSAM provisions are at https://interact.gsa.gov/sites/default/files/Commercial%20Supplier%20Agreements%20-%20Draft%20Deviation%20Text%2003262015%20(1)PDF.pdf.
 We acknowledge Roger Waldron’s CGP Blog of Sept. 3, 2015, “FAR and Beyond,” which addresses this subject in less detail athttp://thecgp.org/the-status-of-commercial-supplier-agreement-terms-under-gsa-contracts.html.
 GSA legal created a “Fail Chart” as part of an internal guideline for identifying “unacceptable” provisions and standards in End User License Agreements. Contractors could request a copy from their GSA Contracting Officers. See “Q1 2013 Quarterly Industry Meeting: Center for IT Schedule Program” at slide 15 (Nov. 1, 2012) available at http://www.gsa.gov/portal/mediaId/151519/fileName/Schedule_70_-_Quarterly_Industry_Meeting_-_Nov_1_2012.action.
 Koses, supra note 2, at 3.
 Id. (emphasis added).