Co-written by Mark Abrajano
From 1960 to 1999, the military’s share of research and development has dropped from about one half to one sixth of the country’s total spending, while the private sector’s share has risen from one third to two thirds during the same timeframe. The reason? Private companies are taking it upon themselves to fund much of their own research, due in large part to the complicated statutory schemes that regulate government contracts.
While we greatly admire the private companies that take it upon themselves to push forward and innovate, we see intellectual property and technical data rights pop up constantly. If you are deciding whether or how to sell goods or services to the government that you have spent time and money creating, here are some things to keep in mind.
The Government Calls it What?
When deciding whether to do business with the federal government, the first consideration should be whether your item can be classified as a “commercial item” for government contract purposes.
Commercial items are broadly defined under the federal acquisition regulations as any item, other than real property, that is publicly available and used for non-governmental purposes. Interestingly, “commercial items” don’t just include products, but also “[s]ervices of a type offered and sold competitively in substantial quantities in the commercial marketplace.” Security services, for instance, might be characterized as a commercial item.
Moreover, the term doesn’t just include items a contractor has sold; even if a business hasn’t sold a single unit, the item at issue can still be considered a “commercial item” if it has been offered for sale to the public.
A commercial item that has undergone minor or customary modifications in order to fit government purposes is still considered “commercial” under applicable regulations. It is unclear, however, just how minor or customary a modification must be to retain commercial item status. The Federal Acquisition Regulation defines “minor” modifications as those that “do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process.” Additionally, courts may look to the value and size of the modification as compared to the final product itself.
Yet, whether a modification is “minor” is not necessarily linked directly to a modification’s size or value; both the government and the courts are free to interpret the word as they please. Given the government’s track record, you should take extra care before agreeing to modify commercial items to make them more suitable for the government.
Unlike the term “minor,” the term “customary” is not defined by any government contracting regulation. While you might think you understand what “customary” means, there is no definite limit on how expensive “customary” modifications can be. Here again, then, the government has significant discretion in defining what constitutes “customary” modifications.
So What Am I Giving Away?
Once the government has contracted with a company for a commercial item, the next question is what rights the government obtains with respect to the item.
The default is that the government obtains the same rights afforded to the public because the contractor is presumed to have funded its own development. When additional information is handed over along with the item, though, the government’s rights to that information might be wildly different.
With regard to “technical data,” for instance – a category that includes recorded information, regardless of the form or method of recording, of a scientific or technical nature (including computer software documentation) – the government essentially obtains unrestricted royalty-free use rights, except that the government must obtain permission from the contractor before releasing or disclosing the data outside the government. When it comes to “form, fit, and function data” – that is, data that relates to interchangeability or identifies certain key system interface components – the government obtains unlimited rights.
These defaults can be altered to an extent, but not without affirmative action on the part of the contractor handing over the information at issue. It is also worth noting that the whole situation is made more complicated by the FAR’s statement that, with respect to any given commercial item, title to the item furnished passes to the government unless the contract states otherwise. While this regulation might be interpreted several ways with respect to an item that incorporates intellectual property, the safest bet would just be to parse out exactly what the government is getting its hands on and incorporating this understanding to the contract at issue.
The last thing to consider is whether and how to mark or cloak certain portions of your deliverables. In some cases, certain proprietary data contained within a commercial item can be restricted. Component and sub-component parts can be protected as well, all the way down to specific lines of code in software. The government can always challenge your restrictive attempts, however, especially when you do not similarly restrict items sold to the general public.
This is Not Your Regularly Scheduled Programming.
As ever, the key take-away here is that contracting with the government is not at all like contracting with anyone else. You need to understand exactly what you have agreed to deliver, keep track of how items are being classified, and restrict proprietary material appropriately. Challenging the Government as to whether it correctly followed commercial item procedures can be tricky; being proactive early in the negotiations can make a big difference.
Contracting officers have considerable leeway in sculpting their deals, and an unsuspecting government contractor could easily end up giving away far more than it thought it bargained for. Doing business with the federal government can be fundamentally rewarding, but it comes with the need to understand the ground rules so that the relationship can be a successful one.
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