BOSTON // HARTFORD // NEW YORK // NEWARK // STAMFORD // PHILADELPHIA // WILMINGTON A Status Report on the Changing Terrain of Government Rights in Data and Inventions Under DoD Contracts Daniel J. Kelly September 20, 2011 National Contracts Management Association

2 World of Intellectual Property PatentsCopyrights Trade SecretsTrademarks (and Service Marks)

3 Government Contracts and Trade Secrets Threshold Questions (1)What is being delivered? (2)Who is paying for development? (3)Is the product being delivered, sold, or offered for sale in the commercial marketplace?

4 Underlying Principles Government Trade Secrets in Government Contracts (1)Government never gets to own it (2)Prime contractor gets no rights (3)Commercial development, license, and sale always an option (4)Prohibition of acquisition rights in IP developed at private expense; presumption that commercial products are developed at private expense

5 In the Weeds: DoD World (Now) ♦Two Regimes of Trade Secrets –Technical Data  DFARS subpart  DFARS ; (TD – Commercial Items) –Computer Software  DFARS subpart  DFARS ♦Regulations that Dictate Policies and Procedures ♦Contract Clauses that Dictate Rights

6 Technical Data ♦Recorded information of a scientific or technical nature (including computer software documentation) relating to supplies procured by an agency ♦Does not include computer software ♦10 U.S.C. § 2302(4);DFARS

7 Policies and Procedures Governing Technical Data ♦DoD to only acquire technical data and rights in technical data necessary to satisfy agency needs –Deliverables: separate line items and minimum necessary –Disclosure of technical data with restrictions –Alternative forms of delivery –For commercial items, no rights in technical data not customarily given to public

8 Government Rights to Non-Commercial Technical Data ♦Rights: Royalty-free, world-wide, non-exclusive, irrevocable license* (DFARS ) * computer software documentation carve-out –Standard: (1) unlimited rights; (2) government purpose rights; (3) limited rights ♦Option: Specially negotiated license rights –“Government can accept lesser rights in data in return for other consideration” (DFARS (d)) –Must be enumerated in a License Agreement made part of contract

9 Unlimited Rights (License Right) ♦Right to use or disclose technical data –In any manner –And for any purpose whatsoever –And to have others do so

10 Government Purpose Rights (License Right) ♦Right to use technical data in any activity in which the Government is a party, including: –Competitive procurement but not use for commercial purposes ♦Limited in duration –5-year benchmark (negotiable)  Begins on execution of contract ♦Disclosure to third party –Must sign NDA ( ) –Covered Government Support Contractor (subject to New Clause ) –Government gets release

11 Limited Rights (License Rights) ♦Right to use, modify, reproduce, release, perform, display, or disclose technical data within the Government ♦Cannot be used for manufacture or used by another party –EXCEPT:  emergency repair and overhaul  release to Covered Government support contractor (must adhere to new clause ) NEW  release to foreign government  need notice and agreement by third parties on restrictions on further release

12 What Gets Limited Rights Treatment ♦Technical data pertaining to any item, component, or process developed exclusively at private expense with the legend –Developed = workability –Exclusively = costs not directly allocated to a government contract –IR&D and B&P costs

13 What Gets Unlimited Rights Treatment ♦Technical data pertaining to an item, component, or process developed exclusively with Government funds –PLUS:  Form fit and function data  Necessary for installation, operation, maintenance, or training purposes  Released in past without restrictions  Technical data produced as an element of contract performance or in connection with contract performance

14 What Gets Government Purpose Rights Treatment ♦Technical data that pertains to items, components, or processes developed with mixed funding –Private expense determinations are to be made at the lowest practicable level (DFARS (b))

15 Subcontractors (Noncommercial TD) ♦Prime instructed to use same clause in subcontracts calling for delivery of TD to Government ( ) ♦Subcontractor permitted to supply data directly to Government ♦Prime cannot use power to award contacts as “economic leverage” to obtain rights in TD from subcontractors and or suppliers

16 Policies and Procedures Governing Computer Software ♦DoD only to acquire computer software and documentation and rights therein to satisfy agency needs –Deliverables: Minimum necessary (including number of users) –Disclosure of computer software with restrictions –For commercial computer software, acquire under licenses customarily given to public

17 Government Rights to Non-Commercial Computer Software and CS Documentation ♦Rights: Royalty-free, world-wide, non-exclusive, irrevocable license (DFARS ) –Standard: (1) unlimited rights; (2) government purpose rights; (3) restricted rights ♦Option: Specially negotiated license rights –To consider software maintenance philosophy, time and user sharing requirements, and other factors (DFARS (d))

18 Unlimited Rights in Non-Commercial Software and Documentation ♦Software developed exclusively with Government funds ♦Documentation required to be delivered under the Contract ♦Released in past without restrictions

19 Restricted Rights (License Rights) ♦Right to use a computer program with one computer at one time; program cannot be accessed by more than one terminal or CPU ♦Right to transfer program to another agency if original user destroys all copies of program and provides notice ♦Right to minimum number to maintain archives, backup or allow mod ♦Right to permit service contractors to use software to diagnose and correct deficiencies, adapt or merge with other programs or respond to “urgent tactical situations” (requires notice and NDA or adherence to NEW clause ) ♦Right to permit contractors performing emergency repairs or overhauls to use the software when necessary to their work (same notice and NDA requirements) ♦Right to permit Covered Government support contractors to use and/or disclose to authorized persons (must adhere to NEW clause ). NEW

20 What Gets Government Purpose Rights Treatment ♦Computer software developed with mixed funding ♦Source of funds determination –DFARS (b) ♦To be made at the lowest practicable segregable portion of the software or documentation ♦Look to see what subcomponents or subroutines are discreetly identifiable

21 Subcontractors and Non-Commercial Computer Software and Documentation ♦Prime contractor instructed to use in subcontracts. ♦No other clause may be used to enlarge or diminish rights ♦Prime expressly instructed not to use “economic leverage” to obtain rights from subs or suppliers ♦Primes instructed to disclose and protect subs rights (through id, assertion and delivery processes)

22 The SBIR Data Rights Clause: DFARS ♦Covers both non-commercial technical data and computer software ♦Rights: Royalty-free license for Government and support service contractors to use or disclose technical data or computer software generated or developed under contract for any U.S. Government purpose –Extends from contract award until 5 years after completion of project, then unlimited rights –Despite broad definition of Government purpose, disclosure to third parties is limited

23 Commercial Computer Software and Documentation ♦Commercial items (FAR 2.101) ♦Commercial computer software (FAR 2.101, DFARS (a)(i)) –Developed or regularly used for non-government purposes –Sold or offered for sale or license to public –Minor modifications to meet contract requirements permitted ♦Commercial computer software (NO CLAUSE) –To be acquired under licenses customarily provided to the public unless inconsistent with Federal procurement law or do not otherwise satisfy user needs. DFAR (Different from FAR governing commercial computer software)

24 Technical Data Pertaining to Commercial Items ♦10 U.S.C. 2320(b)(1) Presumption that commercial items are developed at private expense whether or not a justification is made in response to a challenge notice ♦DoD to get technical data customarily provided to the public with the commercial item EXCEPT: –Form, fit and function data –Required for repair or maintenance, installation or handling

25 Technical Data Rights Pertaining to Commercial Items – Clause ♦DFAR – Gives Government specific license rights – DoD may use, modify, reproduce, release, perform, display or disclose data only within the Government. ♦May not be used to manufacture additional quantities of commercial items. ♦May not be released without Contractor’s written permission ♦Additional rights to be negotiated ♦Not a mandatory flow-down for subs

26 Identification of TD and Computer Software(Non-Commercial TD and Computer Software ♦Solicitation provision ♦Requires offerors to identify any technical data for which restrictions, other than copyright, on use, release, or disclosure are asserted and to attach the identifications and assertions in the offer. ♦Contract clauses 7013/7014 permits Contractor to make additional assertions if new or inadvertent (before delivery and no material affect on source selection)

27 Marking Requirements (Upon Delivery) – Noncommercial Technical Data and Computer Software ♦Deliverables must be marked by prime and subcontractors in order to obtain protection ♦May only use legends prescribed in 7013/7014 (Limited Rights, Restricted Rights, GPR Rights, Special License Rights) and Copyright notice ♦Computer software transmitted directly from one computer to another shall contain a notice of asserted restrictions

28 Marking – Unjustified and Nonconforming ♦Unjustified Markings can be challenged under validation procedures (computer software) and (TD) ♦Nonconforming markings require a 60 day notice to remove or correct – then Government may ignore or remove or correct at Contractor’s expense

29 Identification and Marking of Commercial Computer Software and TD pertaining to Commercial Items ♦No clause governing early identification of commercial item TD or computer software ♦If a deliverable under solicitation, disclose and append license agreement to proposal ♦Mark TD, computer software and computer software documentation with restrictive legends (New clause addresses “commercial restrictive legends” ♦ and Validation Process Available (but Presumptions stand)

30 Rights vs. Deliverables ♦Data rights clauses establish Government’s license rights – not deliverables ♦Government has no right to require TD or computer software unless a deliverable unless there contract has Deferred Ordering ( ) (3 year window after acceptance) or Deferred Delivery ( ) clause ♦Changes clause is not available

31 Copyright Protection ♦Technical data and computer software in object code and source code is subject to copyright protection ♦Contractor is copyright owner (includes works by employees) ♦Prime gets no copyright interest in works created by subs ♦Government under DFARS gets a license coextensive with whatever data rights it obtains

32 Copyright Protection – Unlimited Rights ♦Government’s copyright license is coextensive with author’s rights ♦DoD IP Guidance instructs COs to not automatically pursue unlimited copyright licenses (GPR should be rule) ♦Third party rights up in the air – limited to “use”? ♦Contractor can and should “mark” with copyright notice ( (f) and 7014(f).

33 Changing Terrain – 2011 Defense Authorization Act ♦SecDef to assure that military departments have guidance to preserve option for competition for production and sustainment of systems and subsystems developed exclusively with federal funds ♦Expands definition of “exclusively with federal funds” in 10 U.S.C to include amounts spent for IR&D and Bid and Proposal Costs ♦New S (for 2012 NDAA) gives Government GPR to items developed with IR&D/B&P where contractor contributed less than 10% of total development costs not allocated to federal contracts or item integrated in major system which cannot be segregated or contractor contributed less than 50% of total development costs not allocated to federal contracts

34 Changing Terrain – Proposed Rule To Change Presumption of Commercial Item Designation – Major Systems ♦Section 802(b) of FY 2007 NDAA reversed presumption of development at private expense for commercial items under contracts and subcontracts for major systems (or subsystems or components thereof) ♦Section 815(a)(2) of FY 2008 NDAA exempted COTS items from requirements established under Section 802(b) of FY 2007 NDAA

35 Changes to Commercial Items Rule ♦September 20, 2011Final Rule (76 Fed. Reg ) ♦Implements Major Systems Rule: A CO’s challenge to asserted restrictions in TD or noncommercial computer software relating to a major system will be sustained unless contractor submits information demonstrating that the item was developed at private expense. Shifts burden except for COTS. Applies to subs.

36 Other Changes in Final Rule Clarifies that Data Rights Statutes and Corresponding Clauses Are Mandatory Flow- Downs for Subcontracts for Commercial Items Imposes non-commercial DFARS data rights clauses on commercial items so long as there is any current or future government funding for development Requires use of in all solicitations related to commercial items

37 Changing Terrain: Proposed DFARS Rewrite Federal Register Vol. 75, No. 186 (September 27, 2010) (Case No D001) 60 pages of text Comment period extended to December 27, 2010 Major groups concerned including Aerospace Industry Association and ABA, Public Contract Law Section Status: Third extension given to PD&C Committee of Defense Acquisition Regulations Council review public comments and draft final rule (12/11)

38 Proposed DFARS Rewrite – General Purpose ♦Integrate, combine and simply coverage for technical data and computer software ♦Move text that does not impact the public to Procedures, Guidance and Information (PGI) ♦Remove text and clauses that are obsolete

39 Proposed DFARS Rewrite – Key Changes ♦Combined Treatment of Noncommercial Technical Data and Computer Software –7013 and 7014 integrated into a single clause

40 Proposed DFARS Rewrite – Key Changes ♦Commercial TD, Computer Software and Computer Software Documentation –Creates a clause accepting standard commercial licenses but carves out any license terms which are inconsistent with federal procurement law. “Considered stricken from the license.” Carve outs for TD remain –Undoes policy in FASA 1994 to conform acquisition of commercial items more closely to commercial practice

41 Proposed DFARS Rewrite – Key Changes ♦Computer Software Documentation –Government gets unlimited rights in computer software documentation required to be delivered under the contract –Amends and expands definition to include “computer software design documentation, including design details, algorithms, processes, flowcharts, formulas, and related information that describe the design, organization or structure of computer software” –For commercial computer software, Government to get “same rights as those in standard commercial license... Unless those rights are inconsistent with Federal procurement law”

42 Proposed DFARS Rewrite – Key Changes ♦Mandatory Flow-Downs –Clauses arising under Bayh-Dole Act and TD and computer software are mandatory flow- down clauses for commercial item contracts

43 Proposed DFARS Rewrite – Key Changes ♦Adds “Access” as Licensed Activity –Government gets “access” as licensed use for noncommercial TD and computer software in recognition of practice of allowing government to remotely access contractor-maintained TD and computer software via the internet. –Concern is over the Government’s rights in non-deliverable/pre-delivery data or software

44 Proposed DFARS Rewrite – Key Changes ♦Pre-Award and Post-Award Identification Obligations –Removes mandatory chart format in DFARS and requires disclosure of both commercial and non-commercial TD and computer software to which the Government is getting less than unlimited rights plus copies of proposed negotiated or standard commercial licenses.

45 Proposed DFARS Rewrite – Key Changes ♦Commercial TD and Computer Software –Must mark with appropriate legend identifying Government’s rights; government’s liability excused for release and disclosure of unmarked TD or computer software ♦Unlimited Rights Markings –For noncommercial TD and computer software in which the Government has unlimited rights, Contractor must use Unlimited Rights Legend if it marks deliverable with a copyright legend clarifying the government’s rights

46 Proposed DFARS Rewrite – Key Changes ♦Doctrine of Segregability –Different license rights terms can apply to each segregable element of TD and computer software under a single contract –Standard data rights regime will apply to modifications to commercial TD and computer software

47 U.S. Supreme Court Assault on Bayh- Dole: Stanford v. Roche (June 6, 2011) ♦Bayh-Dole Act, passed in 1980, grants small businesses, nonprofit entities (including universities and research institutions) given right to retain title to inventions developed under Government funding agreements. ♦Government gets a nonexclusive, irrevocable, paid-up license to practice or have practiced on its behalf such an invention throughout the world

48 ♦DOE, NASA and NRC are given title by statute to any inventions developed under funding agreements between large for-profit businesses and those agencies; patents issued to the United States ♦Bayh-Dole extended by 1983 Presidential Memorandum to large businesses and for- profit organizations not subject to DOE, NASA and NRC funding agreements

49 ♦Under Bayh-Dole – title can revert to the Government if the contractor fails to disclose the invention, fails to elect to retain title or fails to file and prosecute a patent application within certain prescribed time periods. Failure to disclose means contractor loses all rights. Failure to elect title – contractor still gets license

50 ♦The facts in Stanford –Stanford researcher Mark Holodniy invented a procedure for calculating the amount of HIV in a patient’s blood, which was funded, in part, by a NIH grant –Holodniy worked on the invention at Stanford and at the lab of a private company, Cetus (predecessor to Roche)

51 ♦Stanford disclosed the invention to NIH, pursuant to the Bayh-Dole provisions in the grant. It elected to retain title, and prosecuted and obtained patents for the invention ♦Roche began manufacturing AIDS test kits and Stanford sued for infringement

52 ♦Problem – Holodniy agreed with both Stanford and Cetus to assign his right to the invention ♦Stanford Copyright and Patent Agreement: “I agree to assign... to Stanford... that right, title and interest in and to... such inventions as required by Contracts and Grants”. ♦Cetus Visitor’s Confidentiality Agreement: “I will assign and do hereby assign to CETUS my right, title and interest” in inventions conceived “as a consequence of my access to CETUS’ facilities or information”

53 ♦Before case got to Supreme Court, Federal Circuit found that the Cetus assignment, even though it came later, trumped the Stanford assignment. ♦Supreme Court does not challenge holding that Cetus, and not Stanford, as a matter of contract, held rights in the invention

54 ♦Supreme Court asks to examine whether Bayh-Dole vests title to federally-funded inventions in the federal contractor or the Government, if the contractor fails to obtain an assignment of rights from inventor employee ♦Court says NO

55 ♦Citing basic precepts of patent law, the Court finds that inventor, Holodniy, owned and had exclusive rights to the patent, which he was free to convey by contract to his employer or a third party. ♦Court finds that Stanford’s right to “retain title” (and by implication the Government’s reverter rights) did not apply to inventions which had not been properly assigned by the employee

56 ♦Court finds that Bayh-Dole invention allocation scheme only applies to “subject inventions” -- a term defined in statute and FAR as an “invention of the contractor”. Court finds that under U.S. Patent Law a contractor entity has no rights unless those are assigned by actual individual inventor ♦Government and contractor get no rights in inventions conceived with federal funds unless the employee assign the rights.

57 ♦Court finds that the Government does get title without an assignment under DOE, NASA and NRC statutes. Court found that exclusive grant of title in the statute “expressly deprived [inventors] of their interest.”

58 ♦STRANGE RESULT: Government gets clear and exclusive title to inventions developed under DOE, NASA and NRC funding agreements with large for-profit businesses. ♦There is no opportunity for Government or contractor to get title in DOE, NASA and NRC funding agreements with nonprofits or small businesses unless the employee inventor assigns his rights to the contractor or grantee

59 ♦Take-Away for Contracting Officers and Companies –Ensure that all employees have properly assigned right to inventions to contractor –Require employees to disclose prior assignments and closely scrutinize any agreements with third parties –Carry due diligence down to subcontractors and suppliers

60 Questions? Dan Kelly McCarter & English, LLP 265 Franklin Street Boston, MA (617)