David Tscheschke, Esq.
It is not uncommon for a company to offer discounts on its products or services. Generally, this occurs when products are ordered in bulk or services, especially subscriptions, are requested for numerous months or years. In order to obtain the best pricing for a client, contractors will place large orders and pass those savings along to the client. Due to these discounts, sometimes the company will refuse refunds or partial refunds on products or services that are unused. If the client does not use all of the product or decides not to exercise a software option and a refund cannot be issued, who is responsible for any financial losses – the client or the contractor? The answer to that question depends on the actions of both parties.
In the following appeal, the inaction of one of the parties determined who was responsible for such a loss.
Force 3, LLC. CBCA Appeals No. 6654
Decision issued April 27, 2021
The solicitation
In May 2016, the Department of Health and Human Services (HHS) placed a fixed-price delivery order under a multiple-award government-wide acquisition contract with Force 3, LLC (Force 3) for FireEye support services. These services included continuous intelligence (security) updates, content packages, and software updates. The package also included 24x7x365 technical support by FireEye. The contract had a one-year base period and two one-year option periods with identical fixed prices of $1,130,000 per year. Force 3’s terms and conditions with HHS stated, “[a]fter the date of expiration, non-renewal or termination of the contract, the Government shall certify in writing that it has deleted or disabled all files and copies of the software from the devices on which it was installed and is no longer in use by [sic] Government.”
In order to procure competitive pricing, Force 3 purchased a three-year subscription to FireEye, ending March or May 2019. Per FireEye’s standard practice, the company did not provide partial refunds to customers who wanted to discontinue service prior to the end of the subscription termination. Regardless if HHS exercised any options, Force 3 could not cancel the subscription with FireEye. HHS used FireEye for the base year and exercised the first option year, which ended May 3, 2018. HHS decided not to exercise the second option year.
Continued Usage of the Software
Although written in the terms and conditions of the contract with Force 3, HHS did not certify in writing that it had deleted or disabled all files and copies of the software from the FireEye devices after they decided to not exercise the second option year. In July and August 2018, FireEye notified Force 3 that HHS “continued to download software updates and security updates” and to seek technical support after the delivery order expired. Force 3 notified HHS of this information. Force 3 and HHS attempted to negotiate payment for the used services. Although HHS requested a quote for six months of usage, eventually the HHS’s information specialist informed Force 3 that, “[a]fter further discussion with leadership, we would like to pay what we owe from 5/3/2018 to 10/3/2018 and cancel the rest of the contract.”
However, FireEye records indicated HHS continued to download updates until January 22, 2019 and continued to operate the FireEye appliances at least through March 19, 2019. FireEye records also showed HHS users contacted FireEye for technical support on several occasions during the period from May 4, 2018, to January 7, 2019. When Force 3 objected to HHS’s free use FireEye services, the contracting officer (CO), through an intermediary, told Force 3 that, “it is FORCE 3, INC’s responsibility, as the contractor, to discontinue support when the servers are no longer under contract with the Federal government.”
Force 3 submitted a certified claim to the HHS CO in December 2018 and again in May 2019. Force 3 sought recovery of $1,130,000 in costs for HHS’s continued use of software services and technical support after the contract expired. Force 3 justified the claim with breach of contract, constructive execution of an option, and breach of the implied duty of good faith and fair dealing. HHS denied the claim, stating Force 3 failed to show HHS continued to download software updates or that HHS was still using the software and failed to prove HHS breached the contract. Force 3 appealed the CO’s decision to the Civilian Board of Contract Appeals (CBCA).
the appeal
In the appeal, Force 3 claimed HHS breached the contract, and breach the implied duty of good faith and fair dealing. Additionally, Force 3 argued HHS constructively exercised the second option year regardless of the CO’s statements. HHS moved to dismiss Force 3’s appeal because Force 3 “does not present a facially plausible breach-of-contract claim.” HHS did not move to dismiss the other two claims made by Force 3.
HHS argued it was not liable to Force 3 because Force 3’s losses were attributable to its own decision to purchase a three-year, non-refundable subscription to FireEye knowing that HHS was under no obligation to exercise either option year. Force 3 argued HHS constructively exercised the second option year by continuing to use the FireEye support services.
the outcome
The CBCA agreed HHS had no obligation to exercise the second option year, and Force 3 accepted the risk that HHS would not exercise the option. However, the CBCA stated Force 3 had not accepted the risk that HHS would refuse to exercise either option but continue using the FireEye services for free.
While CBCA found that HHS had not breached its contract nor had it exercised its second option year, the government’s use of free services, which Force 3 was powerless to cut off, constituted “ratification” of an otherwise unauthorized act. The CO knew the software and support services were being used by HHS and did nothing to stop that usage until nine months after the contract expired. The CO’s failure to stop the usage of FireEye after the option was not exercised resulted in the ratification of the purchase of those services by implication or inaction. Based on this ratification, the CBCA agreed with Force 3 and stated Force 3 was entitled to receive payment for the support services “under the terms and conditions which existed” under the contract. Therefore, Force 3 was entitled to recoup $1,130,000 from HHS.
The takeaway
This example should not encourage a contractor to prepay for products or services before the government client has committed itself to use those products or services. If the prepaid products or services are not used by the client and the unused products or services cannot be refunded or partially refunded, the contractor will be responsible to shoulder any financial loss. Undoubtedly, the CBCA would have ruled against Force 3 if HHS had stopped using the FireEye services at the end of the contract’s first option year. The fact HHS took advantage of Force 3’s situation by using the uncancelled services for free tipped the balance in favor of Force 3. The CBCA decision clearly demonstrates a client, in this case, the government, cannot have it both ways. They either need to pay for and receive the services or not pay and stop receiving the services.
Conclusion
If the government has found a way to use your services for free, contact us. Whitcomb, Selinsky, PC has a team of experienced attorneys ready to help.
