Primes Contractor Overreaching in Obtaining Subcontractor's Intellectual Property Rights

[garth]

Primes Contractor Overreaching in Obtaining Subcontractor's Intellectual Property Rights

Has anyone had any experience with DCMA ensuring prime contractors do not overreach in obtaining rights in subcontractors' technical data?

Many prime contractors include Intellectual Property clauses in their standard terms that appear to enlarge the prime contractor's rights in its subcontractor's and suppliers' technical data and intellectual property in contravention of DFARS 252.227.7013 Rights in Technical Data -- Noncommercial Items.

 

DFARS 252.227.7013 Rights in Technical Data -- Noncommercial Items states:

 "No other clause shall be used to enlarge or diminish the Government's, the Contractor's, or a higher-tier subcontractor's or supplier's rights in a subcontractor's or supplier's technical data ….", and

 "The Contractor and higher-tier subcontractors or suppliers shall not use their power to award contracts as economic leverage to obtain rights in technical data from their subcontractors or suppliers…". 

 

Some examples of prime contractors' Intellectual Property clauses that seem to violate this requirement:

 

Example #1

"Seller-Owned Intellectual Property. Seller shall retain ownership of all Background Intellectual Property and of any Foreground Intellectual Property not assigned to Buyer pursuant to this Article paragraphs (d) and (e) (collectively, "Seller-Owned Intellectual Property"). Unless otherwise expressly agreed in writing to the contrary and in addition to U.S. Government's Intellectual Property rights, Seller grants to Buyer an nonexclusive, irrevocable, sublicensable, paid-up, royalty-free worldwide right to make, have made, sell, offer for sale, use, execute, reproduce, display, perform, distribute (internally or externally) copies of, and prepare derivative works of any and all Seller-Owned Intellectual Property in the performance of its Government Contract or higher-tier contract obligations (including obligations of follow-on contract or contracts for subsequent phases of the same program)."

Example #2

"For Technical Data and Computer Software in which the Government has Unlimited Rights, Supplier hereby grants to Buyer an irrevocable, non¬exclusive, paid-up, worldwide license, with the right to grant sublicenses, to Use, including the right to make or have made, such Supplier's Technical Data and Computer Software for any purpose whatsoever, and to have or authorize others to do so."

 

The requirement appears to have originated from the Hearings on Proprietary Rights & Data before Subcommittee No. 2 of the House Select Committee on Small Business, 86th Cong. 2d Sess. (1960).   Among the concerns voiced by industry was that higher-tier contractors were inappropriately requiring language in subcontracts that granted the higher-tier contractor rights in the subcontractor's technical data.   Some before the committee argued that the government has no role to play in the negotiations of contracts between contractors and their subcontractors, and it is incumbent on the subcontractors to defend their rights more aggressively.   However, the argument that prevailed was that while it is true subcontractors should stand up for their own rights it is also true that: 

 

" we [the government] do have an interest in subcontracts, because if we find that prime contractors are requesting from their subcontractors more data or more rights in data than we required or than we ask the prime contractor to get, it may well be in a given case that the Government is, in fact, paying for this as part of the cost of the subcontract, in which case we are very interested because we do not want to pay for it.  We are not asking for it and we do not want to pay for it."  

 

The House of Representatives, Subcommittee No. On Government Procurement on the Select Committee to Conduct Studies and Investigations of the Problems of Small Business, (July 1964) recognized DPC No. 6 as having satisfied the concerns raised in the earlier hearings; and pointed out the role of the DOD contracting community in monitoring the enforcement of the policy:

 

"Those of you in the contract administration who have responsibilities for the review of contractors' purchase systems or approval of subcontract, must assure that prime contractors also do not overreach in dealing with their subcontractors.  Our past experience has shown that prime contractors will frequently word their purchaser orders so that all data which they are to obtain from subcontractors is to be with unlimited rights."  

 

It appears from the history that Congress expected the U.S.G. to provide a check by what is now the Defense Contract Management Agency (DCMA) under what is now a Contractor Purchasing System Reviews (CPSR); however, given the number of contractors that included similar provisions it does not appear DCMA is performing this function.  

[Neil Roberts]

12 hours ago, garth said:

Has anyone had any experience with DCMA ensuring prime contractors do not overreach in obtaining rights in subcontractors' technical data?.

No, and I have been involved with many CPSR reviews where DCMA is involved.. The intellectual property area is complicated in its technical meaning. In my experience, very few people involved in government contracts and subcontracts are well versed enough to analyze if there has been an overreach. I don't recall any government CPSR Guidebook item that covers this. I have been involved with many negotiations between prime and subcontractor where objections by the subcontractor were raised and resolved or at least understood better. Some were not. I don't doubt that what you say appears to or actually has taken place. Under the circumstances, it may be that way as much or more by substance ignorance or misapplication of the company's standard terms than intentional.

[joel hoffman]

7 hours ago, Neil Roberts said:

I have been involved with many negotiations between prime and subcontractor where objections by the subcontractor were raised and resolved or at least understood better. Some were not. I don't doubt that what you say appears to or actually has taken place. Under the circumstances, it may be that way as much or more by substance ignorance or misapplication of the company's standard terms than intentional.

It doesn’t appear that Garth is asking what can be done, only asking if anyone has experience with DCMA ensuring that prime contractors don’t expand their rights beyond what the contract stipulates. I noted that the cited policies and those who espoused them are dated in the early 1960’s. I don’t know what current policy guidance is. 

So what can a prospective contractor do when the proposed subcontract terms extend the prime’s rights to the sub’s intellectual property?

You can first raise your objections and explain your concerns to the prime before agreeing to the terms. Try to resolve the issues, as Neil describes.

If that doesn’t work and you can’t accept the terms, can the firm attempt to notify the DCMA office of the nature and details  of the unacceptable terms? Ask the DCMA to become involved in resolving the impass? Depending upon the firm’s leverage in the proposed action, this may or may not result in a subcontract.

Ultimately, the proposed sub/supplier will have to decide how badly they want the subcontract/sale, right?

If the government agency doesn’t/won’t  do its job and it is impacting a supplier/subcontractor, I do know that complaints to Members of Congress used to result in our Agency or immediate organization having to justify its actions to the Member. It often resulted in resolutions of the complaints. The complaints were often from industry when our terms and conditions favored or unfairly restricted various products.

That might or might not immediately help a prospective supplier/subcontractor or it’s chances to obtain an acceptable subcontract. 

 

[Neil Roberts]

53 minutes ago, joel hoffman said:

So what can a prospective contractor do when the proposed subcontract terms extend the prime’s rights to the sub’s intellectual property?

  I suggest a subcontractor protect its reputation by engaging an experienced government contracts/subcontracts intellectual property attorney before contacting a Government Agency or Members of Congress.

[joel hoffman]

14 minutes ago, Neil Roberts said:

  I suggest a subcontractor protect its reputation by engaging an experienced government contracts/subcontracts intellectual property attorney before contacting a Government Agency or Members of Congress.

Yes.  

[garth]

Neil / Joel, 

Thanks for the thoughts. 

Its seems the USG would be have a vested interest in addressing this issue as the cost is most likely being absorb by them.  In my experience, and according to various surveys (WCC and NCMA),  the IP clause is one of the most heavily negotiated provisions, and the time and resources (cost) the contracting community expends, along with the cost of the licenses grants the prime contractors obtains,  for their own use, are no doubt being passed on the USG.  

[Neil Roberts]

Garth, before we leave this, I wanted to point out that DFARS 252.227-7013 admonishment you rely on in your post is not the only language that may be applicable. See DFARS 252.244-7001 CONTRACTOR PURCHASING SYSTEM ADMINISTRATION-BASIC (MAY 2014) (c) (2) as follows:

(c) System criteria. The Contractor’s purchasing system shall—

(2) Ensure that all applicable purchase orders and subcontracts contain all flowdown clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract;

So, in each case where you suspect something, you should ask the prime contractor  or other Buyer, what the rationale is for needing it. The answers to that might not be obvious to a subcontractor.

[garth]

Hey Neil,

Solid points.  

I will add I have negotiate terms with most of the major DOD contractors over the last 10 years and I have not heard a sound argument in support of this type of language. 

The most common argument is that it is required to perform their prime contract obligations.  Which if true would only require a license grant to the limited extent to make us of the work performed or delivered in the performance of the prime contract obligations under  which the subcontract was issued.