IP and Government Contracting: Taking a New Look at Technical Data Rights
Overview
For any entity involved in government contracting, protecting intellectual property (IP) rights in technical data delivered to the government is an often overlooked but mission critical factor to business operations. The allocation of data rights between contractors and the government1 is federally regulated under the Defense Federal Acquisition Regulation Supplement (DFARS) parts 227 and 252,2 which set forth standard protections and license terms. In addition to the standard protections under the DFARS, contractors may now strategically take advantage of additional protections that were approved in the Federal Circuit’s recent decision in Boeing Company v. Secretary of Air Force, 983 F.3d 1321 (Fed. Cir. 2020). However, it may become difficult for contractors to obtain those additional protections if certain proposed changes to the DFARS take effect. This article analyzes the facts and key takeaways of the Boeing decision, and how the appellate court’s analysis is likely to impact government contractors as they negotiate IP rights protection with the DoD going forward.
Background
In general, the government’s policy is to acquire only the technical data3 —and the rights in that data—that it needs to “satisfy agency needs.”4 While the government’s specific needs and technical data requirements may vary from contract-to-contract,5 some types of technical data are routinely procured to satisfy certain basic needs. For instance, to be able to use an item, the government typically procures the technical data that is necessary for operation, maintenance, installation, or training purposes.6 Similarly, to facilitate competitive spare or repair parts procurements, “form, fit, and function data” is often required.7
Even such basic technical data can comprise a wealth of the contractor’s intellectual property and proprietary information. Accordingly, by operation of the DFARS, the contractor grants a license in such technical data to the government and the contractor retains all rights not granted under the license.8 For non-commercial items, there are four basic types of licenses: (1) an “unlimited rights” license; (2) a “government purpose rights” license; (3) a “limited rights” license; and (4) a “specifically negotiated license rights” license.9 The scope of the licenses varies greatly and can critically impact a contractor’s business.10 While the source of funding for development of the item is a primary consideration in determining which license applies, certain types of data, such as form, fit, and function as well as operations, maintenance, installation, and training data, are conferred with “unlimited rights” despite their proprietary nature.11
From the contractor’s perspective, “unlimited rights” is the least protective license. Specifically, with “unlimited rights,” the government acquires a “royalty-free, world-wide, nonexclusive, irrevocable” license to “use, modify, reproduce, perform, display, release, or disclose technical data in whole or in part, in any manner, and for any purpose whatsoever, and to have or authorize others to do so.”12 For example, with an unlimited rights license, it may be permissible for the government to provide one contractor’s technical data and intellectual property to another contractor for the latter to use to manufacture the item, even if the two contractors are direct competitors. Or, as another example, the government could use a contractor’s technical data and intellectual property to make or have made additional quantities of an item without the contractor’s involvement.
Furthermore, while other types of technical data may be eligible for a more restrictive license, it does not automatically attach. Rather, if anything less than unlimited rights is to be provided, the burden is on the contractor to assert such restrictions on the government’s rights by marking the deliverable data as subject to restriction using the authorized legends provided in the DFARS.13 The government also has the right to reject “nonconforming markings.”14 Therefore, the regulations regarding technical data rights and marking demand careful attention and consideration from the outset of the procurement process, especially with respect to unlimited rights data.
Additional Protections Beyond the DFARS Standard Terms
Recently, in Boeing Company v. Secretary of Air Force, the Federal Circuit interpreted the technical data rights and marking regulations such that additional protections may be available for technical data pertaining to noncommercial items delivered with unlimited rights.15 Specifically, the Federal Circuit interpreted the marking requirements regulation as only applying to marking legends that restrict the government’s rights.16 These regulations, as the Federal Circuit ruled, do not apply to any marking legends that a contractor may apply to restrict only the rights of “non-government third-parties.”17 Accordingly, after Boeing, contractors can advantageously deliver technical data to the government with additional markings that restrict only non-government third-parties.
The decision in Boeing is likely to stimulate contractors to include additional non-government third-party restrictive legends on technical data delivered to the government as an additional protection. Such non-government third-party restrictive legends, however, should be carefully considered because disputes may arise as to whether the legend in fact only restricts non-government third parties.18 That factual issue was present in Boeing, and the Federal Circuit remanded the case for that issue to be decided.19 How the Board decides that issue makes Boeing a “must watch” government contracting case of 2021 and may provide meaningful guidance on the boundary between proper and improper non-government third-party legends.
One additional notable portion of the Federal Circuit’s decision in Boeing was the Court’s rationale in rejecting the government’s policy argument that Boeing should have foreseen this dispute and negotiated special license rights upfront.20 The Federal Circuit explained the undesirable consequences of the government’s reasoning:
“[W]e can easily envision that every contractor will be incentivized to negotiate a special license rather than submitting to the standard provisions set forth in the DFARS contract clauses. At that point, the special license would cease to be “special” and the standardized contract clauses would not longer be useful.The technical data rights regulations, and specifically the contract clauses provided in the DFARS, are intended to avoid such a result.”21
Although the Federal Circuit seemingly rejected the government’s argument because it would promote the “special” license option over the standard licenses, contrary to the intention of the DFARS, one of the new IP rules proposed by the DoD in 2019,22 which is currently under consideration,23 seems to do exactly what the Federal Circuit sought to avoid. Specifically, the new rules seek to establish a “preference for specially negotiated license rights.”24 Further, “to ensure that [Specially Negotiated License Rights] are not merely authorized and encouraged, but are required to be considered, the approach also includes an affirmative requirement that … the parties must enter into good faith negotiations when either party desires a special license.”25 The tension between the Boeing court’s rationale and the express preference in the proposed rule changes suggests a shift in policy regarding the allocation of data rights may be coming.
While it may appear that a preference for specially negotiated licenses may provide more flexibility and opportunity for contractors to obtain more protections, in practice that may not be the case. For instance, if a contractor seeks protections other than the standard license terms, such as those additional protections at issue in Boeing, the new rules, if enacted, may force the contractor into negotiating such third-party restrictive rights with the government before the contract is awarded. At that time, the government has leverage over the contractor and the contractor may be forced to balance how much protection it is willing to give away to secure the contract. Should the proposed rules take effect, it will be important to watch how the Boeing decision is impacted and how the government reacts to contractors asserting additional third-party restrictions.
1 The term “government” used herein primarily refers to the Department of Defense (DoD).
2 Codified in Chapter 48 of the Code of Federal Regulations (C.F.R.)
3 “Technical Data” is defined as “recorded information, regardless of the form or method of the recording, of a scientific or technical nature (including computer software documentation). The term does not include computer software or data incidental to contract information, such as financial and/or management information.” DFARS 252.227-7013(a)(15).
4 DFARS 227.7103-1(a).
5 DFARS 227.7103-1(b)(1) (“Solicitations and contracts shall … [s]pecify the technical data to be delivered under a contract and delivery schedules for the data”).
6 DFARS 252.227-7013(b)(1)(v).
7 DFARS 252.227-7015(a)(11) (“’Form, fit, and function data’ means technical data that describes the required overall physical, functional, and performance characteristics (along with the qualification requirements, if applicable) of an item, component, or process to the extent necessary to permit identification of physically and functionally interchangeable items.”).
8 See e.g. Defense Federal Acquisition Regulation Supplement (DFARS), codified in 48 C.F.R 227.7103-5(a)-(d); 48 C.F.R 252.227-7013(b).
9 See DFARS 227.7103-5(a)-(d).
10 See DFARS 252.227-7013(c).
11 DFARS 227.7103-5(a)(4), (5).
12 DFARS 252.227-7013(a)(16), (b) (emphasis added).
13 DFARS 252.227-7013(f).
14 DFARS 227.7103-12.
15 Boeing Company v. Secretary of Air Force, 983 F.3d 1321 (Fed. Cir. 2020).
16 Id. at 1327 (“The plain language of the first sentence in Subsection 7013(f) makes clear that the two sentences together are describing the way in which a contractor ‘may assertion restrictions on the Government’s rights.’ Thus, we agree with Boeing that Subsection 7013(f) is only applicable in that context, and is silent on any legends that a contractor may mark on its data when it seeks to restrict only the rights of non-government third-parties.”).
17 Id. (emphasis added); see also id. at 1330 (“Because we conclude that Subsection 7013(f) is not applicable to legends that restrict only third-party rights, its silence regarding any such legends is not meaningful.”)
18 Indeed, the Federal Circuit in Boeing remanded the case for the Board to decide, as a factual matter, whether Boeing’s third-party restrictive legend restricted only third-parties or also improperly restricted the government’s unlimited rights. See id. at 1333 (“[I]f the legend does restrict the government’s rights, then it is improper because it fails to conform to the authorized legends of Subsection 7013(f). In contrast, if it does not restrict the government’s rights, then it is proper because it is not subject to the requirements of Subsection 7013(f).”); see also id. at 1334 (remanding the case to the Board to resolve the remaining factual dispute between the parties as to “whether Boeing’s proprietary legend, in fact, restricts the government’s rights.”).
19 Id. at 1333 (“[T]he Board expressed doubt that Boeing’s proprietary legend places any meaningful restrictions on the government’s rights.”).
20 Id. at 1331-32.
21 Id. at 1332 (emphasis added)
23 See https://www.acq.osd.mil/dpap/dars/opencases/dfarscasenum/dfars.pdf (report due 2/24/2021).
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