DoD Clashes With Suppliers Over Data Rights

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?

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, Defense Watch