Pratt & Whitney spent 20 years and a billion dollars developing a geared turbofan engine that burns 16 percent less fuel.
The Pentagon’s largest consumer of jet fuel, the Air Force, is said to be a potential customer for this new engine.
It is conceivable that — as a condition of purchase — the government could demand rights to engine drawings, specifications and manufacturing methods so it can buy spare parts in the future from someone other than Pratt & Whitney.
This scenario is not unlike the grief other high-tech hardware manufacturers experience as part of doing business with the Defense Department. For some companies, it can be a serious dilemma: Turn over valuable intellectual property and trust the government to protect it from competitors, or walk away from a lucrative Pentagon contract.
As long as Uncle Sam has acquired products from the private sector, corporations have fretted over the protection of their intellectual property. But the issue has moved up on the radar screen in recent years, especially for manufacturers of equipment that is sold both to the military and to commercial customers. A string of legislative amendments to contracting rules — which give the Pentagon greater authority to allocate IP rights — and an increasingly assertive posture by Defense Department buyers have fueled corporate anxiety.
When technology is developed with Pentagon funds, there is no ambiguity: The government owns the IP and the rights to share it with whomever it wants. It becomes far more complicated when the Defense Department buys products that were developed by the private sector, or when the Pentagon wants to end a company’s monopoly in a particular area and seeks IP rights to a design so it can compete the after-market work.
In the defense contracting business, IP disputes are growing and keeping lawyers busy, says Louis D. Victorino, a partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP.
The Pentagon’s desire for the latest and greatest technology and policies that call for competition in the marketplace are fundamentally irreconcilable, he says.
One problem is that the Pentagon procurement culture is rooted in the Cold War, when the Defense Department funded more than half of all U.S. research-and-development projects. Most cutting-edge R&D today is funded by the private sector, but many high-tech firms shun the defense market. A 2001 report by the Pentagon’s acquisitions office acknowledged that one of the reasons is companies’ fear of compromising their intellectual property.
“The concept of IP is fundamental to a capitalist society,” the report says. “A company’s interest in protecting its IP from uncompensated exploitation is as important as a farmer’s interest in protecting his or her seed corn.”
In defense contracting, Victorino continues to see a tug-of-war between capitalism and central planning.
Almost every government procurement regulation endorses the notion of competition as the best way to ensure fair prices and quality products. But the defense market is not a free enterprise, and is dominated by monopolies. The manufacturer of a tank or aircraft usually is the only one capable of supplying spare parts or doing major repairs. To create competition, the Pentagon asks manufacturers to turn over a system’s technical data so they can be shared with potential bidders.
The terms of these contracts require that competitors sign non-disclosure agreements and destroy any proprietary data after the completion of the work. “But that is cold comfort to a company,” says Victorino. “You can never prove that competitors have not taken advantage of that technology to leapfrog their own technology, or learned secrets about how you do business.”
Whereas the Pentagon holds all the cards when dealing with weapon manufacturers, it has far less leverage in the commercial world. Smartphone technology is a case in point. Imagine if the Defense Department bought iPhones and demanded that Apple turn over the specs and software source code in case that, five years from now, when it needs spare parts, the military can go to other manufacturers.
Senior leaders at the White House and federal agencies tend to hold the more capitalist view that the government should incentivize industry to invest in R&D, not deter it. But down in the working-level bureaucracies, short-term thinking prevails and there is more pressure on industry to release technical data packages, Victorino says.
Views on IP rights also vary within the private sector. Original equipment manufacturers want to control their technologies, but a growing sector of after-market companies wants the government to seize technical data from OEMs so they can compete for spare-parts contracts, Victorino says.
So would Pratt & Whitney pass on a government contract out of concern over IP rights? It depends, says company President David P. Hess. Although the Pentagon makes up 25 percent of the company’s business, P&W wants to keep growing its government sales to hedge against the vagaries of the civilian market, Hess says in an interview on Capitol Hill.
“DoD requires industry to turn over data rights,” says Hess. “We invest heavily in our IP. Some of the technical data we provide to DoD was developed with our own money. All that is going to be considered when we negotiate contracts.”
The Pentagon has the right to seek the best deal for itself. But the market also has a choice. “If you start confiscating IP to give it to competitors, companies might think twice before selling to the government,” Victorino says. “I see this every day.”