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Defense Watch 

DoD Clashes With Suppliers Over Data Rights 

2,014 

By Sandra I. Erwin 

Tensions are brewing in the defense contracting business over government efforts to secure rights to manufacturers’ intellectual property. The clash pits military buyers who want to break up suppliers’ monopolies against companies whose livelihood depends on keeping tight control over their designs.

With the Defense Department under pressure to slash costs as budgets shrink, officials are targeting weapons programs for potential savings. They are particularly keen on reducing the cost of weapons maintenance and production by opening up the market to new competitors.

To do that in a market that is dominated by single-source manufacturers, the Defense Department needs what is known as “rights in technical data.” When the Pentagon buys a weapon system, it retains unlimited rights to the data if the item was designed with government funds. But when a product is financed by a private company, the firm keeps full control of the intellectual property and the government is simply a buyer.

Except in limited circumstances, contracting officials cannot disclose a private company’s proprietary data outside the government.

As the Pentagon in recent decades has become more dependent on the private sector for high-tech equipment, it now realizes that many of the existing arrangements restrict the government from seeking competing bids for maintenance or production of that equipment unless the manufacturers grant data rights. For most suppliers, that equates to killing the goose that lays the golden eggs.

In the spare-parts and equipment repair business, particularly, manufacturers fear so-called aftermarket vendors who take other companies’ designs and make them for a bargain price. Pentagon program managers would like to benefit from the cutthroat deals but cannot legally release design data to competitors without the manufacturer’s permission.

Friction over data rights has ebbed and flowed in cycles over the past several decades. The tensions are once again becoming palpable as the defense budget falls, said Jason A. “Jay” Carey, a government contracting attorney at McKenna Long & Aldridge LLP.

“The government is being significantly more aggressive trying to obtain data rights,” Carey said. “That effort is driven by a desire to use the data for follow-on procurements.”

Frustration on both sides is coming to a head. The origins of the conflict can be traced back to the mid-1990s, when the Defense Department saw its R&D budgets collapse and decided it should tap into the commercial market for innovation. The thinking was that the government would save money and benefit from industry’s investment. “As a result, the government was very solicitous of industry intellectual property rights,” Carey said. The attitude was, from the private sector’s standpoint, quite reasonable.

What sowed the seeds of the current discontent were contracts agreed upon years ago in which data requirements were not well defined. Deals were negotiated on the basis of fairly limited data delivery, Carey said. The Pentagon is now searching for less expensive options to maintain its aging equipment and finds that, in some cases, it cannot compete the work because the original manufacturer owns the IP, he noted. “You don’t have the options you need to pursue a full and open follow-on competition.”

Some military agencies have begun demanding IP rights without properly compensating the contractor, said Carey. “That is the environment we are in right now.”

The cards are being stacked against contractors, as the Pentagon has Congress’ full backing on this issue. The 2012 National Defense Authorization Act includes provisions that strengthen the government’s ability to obtain unlimited data rights. Under the law, government officials would be allowed to release a contractor’s data outside the government if the data is necessary for the integration of the item into a larger system. DoD and Congress believe this flexibility is needed to ensure market competition, Carey said. The law would permit the government to give a company’s data to other contractors, which is a nightmare scenario for most manufacturers. Nobody yet knows the potential ramification of this rule, he said. The Defense Department has been rewriting its procurement regulations for about a year to reflect the new statute. And whatever final regulations are adopted could come down on industry as a big bombshell.

As IP disputes become more frequent, contractors confront a dilemma. They can agree to their customers’ demands or take them to court.

Disagreeable contractors risk angering their customer and jeopardizing future work, Carey said. A contracting officer can issue a bad performance rating, which would prevent the contractor from competing for future work. “The customer can bring a significant amount of pressure to bear,” he said.

The topic was discussed last month at an industry conference, where Air Force acquisition official William LaPlante urged executives to engage in constructive dialogue with the government.

“Industry has a legitimate business case. We get that,” LaPlante said. “But we have to have that discussion,” he added. “We need a compromise where government has appropriate data rights and industry can stay competitive. We can get the best deal for everyone.”

Carl A. Avila, director of advanced weapons and missile systems at Boeing, said there are “alternative ways to get the government what it wants without having to share all our investment and IP. We don’t want our competitors to benefit from our investment,” Avila said. “The dialogue has to continue to find that middle ground so the government can have more control of a program.”

Finding an acceptable compromise will not be easy, said Tom Keck, vice president of Air Force programs at Raytheon Missile Systems. “We’re not really motivated to release data. Where it makes sense, that’s fine,” he said.

Attorneys suggest that, to get beyond this impasse, the government should consider licensing agreements so companies are compensated for their IP.

There is no easy solution, said Louis D. Victorino, an attorney at Sheppard, Mullin, Richter & Hampton LLP.

“Free and open competition is a fundamental tenet of procurement policy,” he said. “But unless the government chooses to fund all R&D costs, it needs manufacturers’ data rights.”

If the government wants rights, he said, it should pay for the R&D. Unless the Defense Department can find a way to satisfy industry’s concerns, he said, it soon will find that companies are not going to be willing to invest upfront R&D money.

The debate is unfolding as contractors are being asked by a cash-strapped Pentagon to invest in technology. As one executive noted, industry CEOs will have to ask themselves before they compete for Pentagon work: Do I want to risk losing control of my intellectual property?
Reader Comments

Re: DoD Clashes With Suppliers Over Data Rights

Every year you will see one of these articles, but nothing really changes. Ultimately, the Gov’t needs an industry that can produce taxable revenue from non-Government sources; otherwise, the entire system collapses. Every time the Gov’t takes control of a piece of IP, it reduces the opportunity to for industry to sell it in the commercial space and generate taxable revenue. Think about the impact that NASA has had the economy by allowing companies to keep IP. For example, the Gov't complains about the aircraft being proprietary, but the aerospace industry has sold 100s of planes on the international market, which has returned real money to the Tax base. Unless we want to be like the Soviet Union, I think the Gov’t IP grab is very dangerous for the economy and national security.

Mike on 01/15/2014 at 11:40

Re: DoD Clashes With Suppliers Over Data Rights

This is yet another tactic that is destroying the defense industry and endangering America's security. The Government needs to do a retrospective evaluation of the procurement policies they have started instituting since the 90s from the perspective of what ensures a healthy, competitive, environment rather than just scraping for lowest costs. Defense companies have already dropped their investment levels to new lows. The defense industry is not and can never be a commercial, capitalist driven business and should not be managed or expected to react as if it were. Yet, policies like the disastrous "Better, Faster, Cheaper" mandate of the early 90's were employed with the misguided intention of reducing the costs of providing defense systems. Instead what happened is that they experienced spectacular failures and massive cost and schedule overruns to bail projects out of the hole. Companies folded or merged left and right so that today, there are essentially only a handful of major giant firms that are capable of providing these systems. That is why we have lost the competitive influence we once held. The government is now reacting by trying to strip industry of their rights to intellectual property to force or bully competition back into the scenario. Mr. McGee suggests that companies would invest just to get the initial leg up on competition. But, there is no advantage in this industry to getting the initial lead. Most projects involving a new defense product lose money for the company. They're depending on the follow-on contracts. If that technology can then be shared with competitors so they can bid lower without having made the initial investment, companies will have no reason to invest in IR&D at all and American defense will suffer. To illustrate the severity of trying to force competition back into the environment after having allowed it to collapse in the first place, take this true scenario. A huge next generation product line contract was awarded without a competitive bid to a defense contractor because they were the only company with the technology that could meet the requirements. Shortly into the contract, the government changed direction and added a second contractor to produce two separate designs so that they could build up the capabilities of the second company to be able to compete on the future contracts. The contract to the first contractor had to be slashed to fund the second contractor and the capabilities and performance requirements reduced so that the contractor could still deliver an inferior product at a drastically reduced cost. The IP and competitive nature of the new arrangement now adds significant complexity to being able to design and develop the product because the first contractor is still required to subsidize the shortcomings of the second contractor in the areas that had made them unable to compete initially. The government set up a sort of "clearing house" committee to sanitize intellectual property of the first company before providing the necessary information to the second company. Management of the first company has now become so disenchanted with the prospects in this particular product line that few internal resources are being directed toward further R&D. They recognized that the second company now has an advantage in being able to provide their design at a lower cost and do not have confidence in the protection of their IP rihts. Not to mention that many highly skilled and trained engineers were cut from the program (some laid off) because of the reduced contract price. Do you think any commercial company would put up with this kind of bullying from a non-government customer? How many defense industry companies will survive to be here in the next decade?

T.M. on 01/11/2014 at 18:20

Re: DoD Clashes With Suppliers Over Data Rights

The best argument for the Government’s assertion of total rights in technical data is that this data is a critical element in the life cycle of a weapon system. The flexibility that this data gives the Government is that the technical data will be available in future efforts to define a design and to produce, support, maintain, or operate the weapon system without constraints from the original developer. Because a weapon system may remain in the defense inventory for decades following initial acquisition, technical data decisions made during acquisition can have far-reaching implications over its life cycle.

Program offices therefore need to develop acquisition strategies that provide for future delivery of technical data should the need arise to give them the option to select an alternative source for logistics support or to offer the work out for competition.

According to a 2004 (August) GAO study, both the Army and the Air Force have encountered limitations in their sustainment plans for some fielded weapon systems because they lacked needed technical data rights. The lack of technical data rights, according to the GAO study, has limited the services' flexibility to make changes to sustainment plans that are aimed at achieving cost savings and meeting legislative requirements regarding depot maintenance capabilities. GAO identified seven weapon system programs that encountered such limitations--C-17, F-22, and C-130J aircraft, Up-armored High-Mobility Multipurpose Wheeled Vehicle, Stryker family of vehicles, Airborne Warning and Control System aircraft, and M4 carbine. Although the circumstances surrounding each case were unique, earlier decisions made on technical data rights during system acquisition were cited as a primary reason for the limitations subsequently encountered. As a result of the limitations encountered, the services had to alter their plans for developing maintenance capability at public depots, developing new sources of supply to increase production, or soliciting competitive offers for the acquisition of spare parts and components to reduce sustainment costs.

The bottom line, therefore in asserting Government rights in data and thus acquiring the flexibility for Government in asserting its data rights requirements is that “…the Government pays now or pay later…” Deferring the payments for data rights acquisition to later could be much more costly with respect to schedule & performance of the weapon systems.

Dr. R. LeWayne Johnson on 01/10/2014 at 14:32

Re: DoD Clashes With Suppliers Over Data Rights

What can be learned from the pharmaceutical product development business model?

Bill Mccormick on 01/07/2014 at 16:33

Re: DoD Clashes With Suppliers Over Data Rights

Most companies will not go ahead with any kind of IRAD and even prototyping unless there is a market. For the US industries this means the US Military. Almost all weapons have been produced under US Gov Contracts. In these contracts the DoD is paying industry to develop, test, and produce items for its warfighters. The notion that industry even if using its overhead funds are totally industries funds alone. Most of the overhead funds that industry generates has been on their DoD contracts. So in essence from a accounting standpoint the funds used in most concept and IRAD work is using funds that come form DoD to start with. I have seen many large DoD defense contractors take US Gov drawings and data and mark it their proprietary data. I think the notion should be that if doing DoD work that DoD should have exclusive rights to all the information that in some way or another they have already paid for

John durda on 01/07/2014 at 14:17

Re: DoD Clashes With Suppliers Over Data Rights

In a competitive environment, not "all" IRAD and investment costs are included in wrap rates. The other major limiting factor for industry is the government's ability to inhibit selling a product to anyone other customer. The only opportunity to recoup these costs is through a US Government contract. IF DoD wants to improve costs let industry sell their products commercially and internationally. The broader sales base will allow industry to recover costs and may be a path forward to less stringent data rights claims.

Alan on 01/07/2014 at 12:51

Re: DoD Clashes With Suppliers Over Data Rights

But when a product is financed by a private company, the firm keeps full control of the intellectual property and the government is simply a buyer". It is not quite as simple as that. The government has at least limited government purpose rights for data required to operate, maintain, install, and train as well as that data describing form, fit, and function. Through experience, this data provides a vast majority required to support the system over its lifecycle. Probably not the info to re manufacture, but in reality that is a rare occurence. If remanufacture is being considered, typically the product will be re-engineered ot leverage current technology.

Ben on 01/07/2014 at 09:01

Re: DoD Clashes With Suppliers Over Data Rights

The Competition in Contracting Act of 1984 provided the guidelines for US procurement and receipt of level III data sufficient to reproduce defense articles. Many corporations simply did not include all requisite data into the data packages....today the isssue has evolved to the pont where industry increases the cost of data to the point where it does not make business sense for governement to procure. Liscensing agreements are a viable way forward, where indeed industry spends it's own funds on R&D. However, the burdened rates given to industry include funds for R&D.

Tim Kelly on 01/07/2014 at 08:28

Re: DoD Clashes With Suppliers Over Data Rights

Since all IRAD, Selling, and B&P costs are included as part of a companies' wrap rate, is not the government (and us the taxpayers) already paying for the IP development. I assumed the companies would want to develop the IP - even if the covernment would own it, so they could have the initial leg up on competition to build the item.

John McGee on 01/06/2014 at 11:27

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