Guest bloggers: Jason N. Workmaster, Partner & Marques O. Peterson, Associate, McKenna Long & Aldridge LLP
On June 21, 2013, the FAR Council issued an immediately-effective interim rule that provides that any indemnification clause that is included in an End User License Agreement (EULA), Terms of Service (TOS), or similar legal instrument and that would create a violation of the Anti-Deficiency Act (31 U.S.C. § 1341) (the “ADA”) is unenforceable against the Government—regardless of actions a contracting officer might have taken indicating acceptance of the clause. See 78 Fed. Reg. 37,686 (Jun. 21, 2013). The ADA is a Federal statute that, among other things, prohibits government employees from entering into an “obligation exceeding an amount available in an appropriation or fund for [that] obligation.” 31 U.S.C. § 1341(a)(1(A). The FAR Council issued the interim rule “to address concerns [relating to the ADA] raised in an opinion from the U.S. Department of Justice (DOJ), Office of Legal Counsel (OLC) involving the use of unrestricted, open-ended indemnification clauses in acquisitions for social media applications,” even though the Government contends that, even without the regulatory change, the clauses in questions were unenforceable under existing law. Id.
Recently, government officials have become concerned about the use by government employees of internet based social media applications and licenses, and the specific terms of their respective agreements for these applications. The concern arose from the recognition that many supplies or services purchased by government employees through social media applications are subject to supplier license agreements, particularly in information technology acquisitions. As a result, in a March 2012 opinion, OLC addressed the circumstance in which a government purchase card holder, in the course of registering for a social media or license agreement account, consents to an online TOS agreement that holds the provider of the service harmless in the event that harm is caused to a third party when the application is used by the Government. According to the OLC, such a circumstance amounts to the government employee binding the Government, without statutory authorization or other exception, to an open-ended, unrestricted indemnification term. The OLC contends that this constitutes an ADA violation because the agency’s agreement to an open-ended indemnification clause, such as the TOS described above, could result in the agency’s legal liability for an amount in excess of the agency’s appropriation.
Responding to the OLC opinion, the Office of Management and Budget (OMB) issued a memorandum on April 4, 2013 outlining management actions to ensure agencies act in compliance with the ADA and consistent with the OLC opinion. See OMB Guidance M-13-10, Antideficiency Act implications of Certain Online Terms of Service Agreements, available at http://www.whitehouse.gov/sites/default/files/omb/memoranda/2013/m-13-10.pdf.
Prompted by the OMB memorandum, the FAR Council drafted this interim rule to address the perceived risk of an alleged ADA violation arising from indemnification clauses in the TOS of social media products. Moreover, the interim rule raises the possibility of additional coverage in the FAR to address other clauses in these TOSs that the Government apparently believes may create ADA violations. For example, the FAR Council highlighted a clause – one requiring the automatic renewal of subscription service – that it asserts might violate the ADA if it obligated the Government to pay for supplies or services in advance of the agency’s appropriation. Such additional coverage, however, was left to another day and is not included in the current interim rule.
Instead, for now, the interim rule amends FAR parts 12, 13, 32, 43, and 52 to state that indemnification clauses that violate the ADA are unenforceable, as noted above. While adding little to existing law, it is likely that these changes will make it at least somewhat harder for contractors to demonstrate that the Government is bound by these indemnification provisions—which the Government contends were unenforceable anyway.
In any event, written comments about the rule are due to the Regulatory Secretariat on or before August 20, 2013, and this interim rule is a good reminder that the Government remains vigilant about using the ADA and its regulation-making power to the fullest extent possible.
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