Contractors Beware! The Government Wants Greater Rights To Software And Data

Wednesday, December 1, 2004 - 01:00

Editor: Why have you warned companies about the Defense Department's aggressive efforts to use the special works clause?

Cairnie: Smoke is on the horizon, and where there is smoke, there usually is fire. Contractors are observing a pattern whereby the special works clause is now appearing in many of their contracts for development of software. The Defense Department's approach could adversely affect the contractor that intends to commercialize the work product of its DOD contract. Contractors prefer to limit the government's rights in data, software and documentation, but many contractors are unaware of the rights to which the government is entitled under its contracts. Contractors usually do not learn about the scope of the government's rights until it is time to close out the contract. At that point, the contractors receive a stiff dose of reality. That dose is going to be even harder to swallow when the contractor realizes after the fact that its data and deliverables may be governed by the special works clause.

Editor: What is the special works clause and why is the government invoking it?

Cairnie: Synonymous with the commercial "work for hire" concept, the special works clause applies to "works first created, generated or reproduced and required to be delivered under the contract." The term "works" includes computer databases, computer software, computer software documentation, and any other information that explains how to install and use the software. Where such works are first produced, created or generated and required to be delivered under contract, the Defense Department shall have unlimited rights. Moreover, the contractor is required to assign to DOD copyright in all such works. Also, unless the contract expressly authorizes otherwise, the contractor is prohibited from using, disclosing, reproducing, publishing or distributing data developed under the contract, except in performance of the contract under which it was developed. With that limitation in hand, DOD can deprive the contractor of the ability to commercialize software and related data, in essence restricting the contractor to a single customer - the U.S. government. And because the government already acquires unlimited rights in such data, the contractor will have very limited ability to resell that software and data to other government agencies. For those contractors that do not plan ahead and negotiate wisely, they are destined to make some very costly errors if they unknowingly sign the special works provision. The Defense Department uses the special works clause primarily in procurement contracts, but the Pentagon could also impose it in cooperative agreements and grants.

Editor: Why the aggressive stance by the government on special works now?

Cairnie: One fallout of 9/11 has been recognition that many of our nation's key infrastructures - the electric power grid, railways, air traffic control, the Internet, gas pipelines, dams and telecommunications - are controlled or operated by the use of computer software. The government is instrumental in contracting to develop ever more sophisticated computer programs to operate and safeguard the nation's infrastructure from potential terrorist acts. One step the government has been taking over the past year is to utilize the special works clause to acquire greater rights in computer software and documentation that is developed for the government.

Editor: Why should a corporation care what rights the government receives in a company's intellectual property?

Cairnie: First and foremost, it is your company's IP. In the information age, intellectual property (trade secrets, patents, trademarks, copyrights and maskworks) may be your company's most valuable and vulnerable corporate asset. Ultimately, you want to control how and under what circumstances the IP is used to generate revenue. Granting the government expanded rights beyond those needed to meet its requirements dilutes your company's ability to exploit or prevent other companies from exploiting your government-funded IP.

Second, the commercialization of IP developed under a government contract can yield tremendous returns, often times dwarfing the original development costs funded by the government. It can help companies create product or service branding, name recognition, and, of course, good will.

Third, by more closely controlling a company's government-funded IP, the company may be able to preclude or to slow the entry of competitors into your market niche. More and more companies are discovering the commercial desirability of owning in perpetuity an item of IP and licensing that IP to others to practice. By owning the IP, the contractor can impose confidentiality, nondisclosure, and permitted-use restrictions in all of its licenses. The effect of these protections is to restrict others from exploiting a company's hard-earned IP or competing against your company.

Editor: What can a corporation do to avoid the loss of greater rights under the special works clauses?

Cairnie: The federal government has the flexibility of acquiring special works under its contracts. Before 9/11, the government used that flexibility to obtain production of audiovisual works, training and instructional materials, manuals, operating procedures and things of that nature. Special works may include computer databases, software and documentation.

In the post-9/11 world, the government has become ever more vigilant in safeguarding its investment in computer software and databases. Contractors have to be ever more mindful of the government's concerns regarding systemic or programmatic vulnerability. More than ever, the government is investing heavily in the development of new or the expansion of existing databases and software search engines in support of all forms of security measures. Imagine the damage that could be done by terrorists and their supporting organizations were they to gain access to the very tools the government is now developing to counter terrorist threats. Left unguarded, terrorists could gain access to our most critical infrastructure or to the very countermeasures developed to protect those systems and render them useless - or even worse, use them against this country.

Editor: What steps can companies take that will fulfill the government's need for more control, but also permit a company to retain more of its IP rights?

Cairnie: Pre-award due diligence is mandatory. Every company that does business with the federal government understands that a solicitation enumerates many clauses addressing all aspects of contract performance and administration, including the creation and development of intellectual property. These IP clauses deal with patents, copyrights, trademarks, trade secrets and other forms of proprietary information, ownership, allocation of rights, labeling of property delivered to the government, and a host of related issues.

An important first step for every company submitting a proposal is to review the solicitation to determine what IP provisions the government is invoking. Without that upfront understanding, everything that you do from that point forward will be reactive not proactive. Remember - once you have signed the contract without any effort to negotiate the IP provisions, you are stuck with the deal you struck. Trying to undo the deal can be quite costly and the likelihood that the company will succeed is remote.

If a company is content to give the government everything it wants, then negotiations can stop right there. However, if a company wants to retain the broadest possible rights while also conceding narrower rights to the government, it is important to address the IP rights as part of your proposal. To accomplish this, a company must understand the scope of standard rights to which the government is normally entitled.

Editor: Please explain standard rights.

Cairnie: When the government provides funds to acquire goods or services, as is typical in a procurement contract, the government is entitled to receive certain "standard rights" in data developed or produced as a result of the contract. These rights can be unlimited rights, limited rights, restricted rights, government purpose rights, license rights and SBIR rights.

Under a procurement contract, the government does not typically acquire title to the data developed under the contract. Instead, the government acquires one or more of the categories of rights in data. The kinds of rights obtained by the government are typically based on a variety of factors, including the source of funding used to develop the data and the commercial viability of the data.

If the government receives unlimited rights, it can basically do whatever it wants, including the right to use, modify, reproduce, release, perform, display, disclose technical data or computer software in any manner, for any purpose and permit others to do so as well. The other categories of rights impose some restrictions on the government's use of the data.

Of course, nothing prohibits the government from acquiring ownership of the data and other deliverables. The IP clauses only state the minimum IP rights that the government may acquire. If the government wants broader rights, it must negotiate to acquire them. But contractors beware: Hidden provisions, including "ownership" clauses, are sometimes tucked away in an attachment buried among many others in Section J of a standard formatted solicitation.

Editor: If a company objects to standard rights, can the contractor negotiate more limited rights?

Cairnie: Yes. Under the relevant regulations, if your company intends to use or incorporate proprietary information in the materials delivered to the government, the government may only be entitled to limited rights in technical data and restricted rights in computer software. But the company must inform the government that it will be using proprietary information.

Editor: What happens once the relevant materials are delivered to the government?

Cairnie: The general rule in dealing with IP rights under the Defense Federal Acquisition Regulation Supplement (DFAR) and Federal Acquisition Regulation (FAR) is if it is delivered to the government, the agency has obtained unlimited rights unless there is a separate license agreement that deals specifically with a particular item. It may be fruitful to try and negotiate fewer deliverables or identify only those items or forms of specific data that the government is interested in acquiring rights to, whether delivered or not. One way to limit the volume of data in which the government may claim unlimited rights is to restrict the amount of data and software delivered to the government. For example, if you are only delivering "access" to software to the government, but not actual copies of the software that the government could download on its networks, then, arguably, you have not delivered software and the government might not be entitled to assert unlimited rights to the software.

Editor: Is the trend toward special works increasing?

Cairnie: Absolutely. Contractors are well advised to be vigilant and proactive in their dealings with agencies on these types of issues.