New Legislation On DoD’s Rights To Technical Data Creates A Contracting And Legal Nightmare

In the fiscal 2012 National Defense Authorization Act (NDAA), Congress attempted to address a longstanding dispute between the Department of Defense (DoD) and industry over rights to the technical data related to major military equipment and systems. In its most innocent interpretation, the new provisions of the law are intended to end the practice by private companies of using the leverage created by their ownership of intellectual property critical to the design, production or operation of a weapons system to hold the government hostage. Backers of the new provisions were concerned that companies either could charge an exorbitant price for the rights to that technical data or could simply ensure a monopoly position for the life cycle of that platform or system. Never mind that the evidence of such behavior has never been well-documented, there have been anecdotal reports of such behavior floating about the Pentagon and Capitol Hill for many years.

As I wrote in an earlier blog, this legislation makes some significant changes to DoD’s ability to demand technical data from private companies that previously was considered their intellectual property (IP). The government would have unlimited rights to technical data produced wholly with government funding. Revising last year’s NDAA, the defense department now retains only limited rights to technical data funded in whole or in part by Independent Research and Development and Bid and Proposal, which are considered legitimate cost categories in government contracts. However, when it comes to technical data developed with mixed government and private funding, the government gets to access rights based on the relative size of the two funding streams. Finally, DoD now has the right to demand access to and then release outside the government technical data developed wholly with private funds if it “is necessary for the segregation of an item or process from, or the reintegration of that item or process … with other items or processes.”

On a second review of the new law, it is even worse than I first thought. DoD now has some claim on any technical data regardless of its origin if it: 1) was utilized in the performance of a contract; 2) contributes in any way to the development and operation of a major platform, weapons system or subsystem and; 3) is needed to support a government effort to develop an alternative approach, item or process (segregation/reintegration). This applies even to privately created technical data or IP developed for the commercial market but being used on a government contract. In addition, with some limits the government can release that data to entities outside the government, like a competitor.

The legal and contracting problems created by this legislation are enormous. One knowledgeable observer commented that this is looked like the circles of Hell in Dante’s Inferno. There is no definition provided in the law for either segregation or reintegration. In fact, there is no generally accepted definition anywhere of these terms. Moreover, there is no way of a priori limiting what technical data may be required in order to segregate or reintegrate a particular item or process, technology or capability. For example, when it comes to software, either segregation or reintegration could require access to proprietary source codes.

Similarly, what is the definition of “utilization” of technical data in a contract? Does it include proprietary industrial processes, process data or software used in the production or sustainment of highly complex and sophisticated platforms, weapons systems or major subsystems but not generated by that contract or itself a deliverable? It would seem so.

By the way, just to make the situation even more challenging, the new rules apply not just to prime contractors or original equipment manufacturers but to their chain of vendors as well. Thus, a niche third or fourth tier private sector company with a specific unique process or software application selling an item or service to a subcontractor higher up the chain could easily and without warning find its IP vulnerable.

The new law has the potential to drive a stake through the heart of DoD’s efforts to expand its access to commercial companies. This is particularly likely to be the case with respect to areas such as information technology, software, advanced manufacturing and new materials where a company’s success is so often the result of a clever idea that it turns into marketable IP. As a result, DoD is likely to fall further behind the private sector in its ability to access and exploit critical new technologies.

Also, this legislation is likely to result in increased net costs to both the private sector and DoD. Just producing a credible and consistent definition of terms like segregation and reintegration is likely to take years and hundreds of thousands of man hours. Then there are the inevitable lawsuits over DoD’s determination of the relative contributions of public and private funds to the development of a specific product or process or its definition of segregation and reintegration. It really will be Dante’s vision of the circles of Hell but with lots of lawyers. Let’s hope that DoD takes a very long time to develop the implementing legislation, thereby allowing an alternative approach to emerge.