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Intellectual Property in Government Contracts

Question

In your discussion of intellectual property in government contracts, you talked about government purpose rights and how you negotiated with the government for your client to keep the background technology but allow the government to own the form factor.  Where both the contractor and the government contribute funding, the parties are left to negotiate the apportionment of data rights, but the default rule is that the government retains at least the right to use the data for any government purpose. This “government purpose rights” presumption was already DoD policy, but the 2012 NDAA incorporated the presumption into the law.

If you could change anything about the FAR or DFARS, what would it be? Where could the govenrment be more helpful in protecting the rights of the contractor in your opinion?

Answer

“If I were king for a day,” I would work to educate contracting officers on commercial items, FAR 12, cost or pricing data, and intellectual property in government contracts. That may seem like an overly broad response to your question, but I assure you that those are all pieces of the same puzzle and must be evaluated together, not separately. Note my assumption that there is some commercial component in the acquisition (not a development contract) causing the need for IP negotiation.

Many government contractors are commercial companies that have developed products and services at private expense (a key term when evaluating intellectual property rights). The expectation of the contractor is retention of title (ownership) and significant licensing rights. Any sale of goods or services requires at some form of licensing (at a license to use the product), though sellers do not want to give up rights “to make, have made, sell, make derivative works,” etc. Those latter rights are often boilerplate terms in many contracts (particularly from prime contractors).

So, what’s the connection to commercial items, FAR 12, and cost or pricing data? If a product or service qualifies as a commercial item (as defined in FAR 2.1o1), then it is subject to the simplified acquisition procedures defined in FAR 12 and exempt from certain requirements such as TINA and the submission of certified cost or pricing data. Again, contractors have developed these items at private expense and do not want to share their private cost details with the government or anyone else. In fact, the unwritten rule – the driving motivation behind any entrepreneur – is the ability to reap the rewards related to risks taken in product development. Companies invest lots of money in product development (often times funding multiple failures before getting it right) and price the winning product in a way to recover their investment over the projected lifespan of the product. That is a theory lost on the Government. In simplest terms, Government accounting regulations state that losses on unrelated projects and/or in previous accounting periods are not recoverable this year or on this project (the winning project). So, what incentive is there for a contractor to bring technology to market for the Government?

On the flip side are cost-type contracts where the Government loosely defines a requirement and reimburses a company all of its allowable expenses (up to contract ceilings) to develop an item. In this case, the item is a work for hire – the Government paid all of the allowable expenses and gets to own all of the intellectual property.

 

Things to consider regarding IP in negotiating contracts:

What is being licensed

What is being delivered

Who paid for, owns, or is licensed to sell the IP

What is being purchased? Modified items cause problems. Contractors have developed commercial items at private expense and the Government wants to buy the item with modifications that do not alter the inherent function of the item. Those modifications may affect form or fit, but not alter inherent function. Contractors should focus on selling their ability to make the modifications versus the modifications themselves. The Government (or any customer) is paying for your knowledge and ability to perform a task. Avoid getting into discussions where you dissect the product into smaller pieces. Remember that you are selling the top-level part and that is the item being licensed. When you dissect the top-level part into its modules and pieces and try to assign licenses at a sub level, you create a quagmire of licenses that will likely lead to legal involvement or litigation. In the very least, it is a confusing list to sort.

Solution

Match what you are selling with the license and the deliverables.

Assume that company makes parts ABC and 123 and normally sells them separately. The Government wants to buy the parts assembled in package. You as the manufacturer know how to make them work together.

ItemLicenseDeliverablesIP Claim
ABC123Use and sell ABC123Interface Control Drawing and installation manuals provided to all customers.Developed at private expense
ABC123

 

Types of Rights

Government Purpose Rights – expiration after set or agreed-upon time and reverts to unlimited rights – including dissemination for commercial purposes.

Examples:

What kind of intellectual property do you expect in the following situations:

Plumber installing a custom bathroom.

Mechanic installing after-market accessories.

Tailor altering or designing custom-fit clothes.

 

Note that in FAR 52.227-11, the contractor retains ownership (title) in any patent regardless of the license granted to the U.S. Government. As such, our contract with Lockheed should not be any different. I need to see if the Lockheed contract references this clause, which it probably does not since they are procuring items for an IRAD project. That said, the spirit should be the same, especially since we all know that the ultimate customer is the U.S. Government. The technical catch may be the absence of a patent.

FAR 52.227-11

Don’t ever give up title!

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Robert Jones

Robert E. Jones knows government contracts: How to qualify for them. How to manage them. And how to profit from them. With over 14 years of Department of Defense contract and accounting experience, he helps companies successfully navigate the complex legal and regulatory framework of federal contracting. Robert Jones' full biography

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