Government Contracts

Doing Business With Uncle Sam: Maintaining intellectual property in government contracting can be tricky

We asked Daniel Kelly and Bonnie Vanzler, who have a combined nearly four decades of experience representing companies that do business directly with the federal government or are somewhere along the government contract supply chain, about the hot issues in government contracting and what a new federal administration will mean to those companies. Their answers below were edited for length and style.

MCC. What kinds of companies do you represent, and what do you do for them in terms of government contracting legal work? Put another way, what are the major issues in government contracting and legal representation of those engaged in it?

Vanzler: Our government contracts practice is split between representing prime contractors, which do business directly with the government and its many agencies, and companies that do business with those primes, somewhere in the supply chain. There are some differences in the legal needs of primes and subcontractors, but the basic premise is the same: they all need to comply with regulations and laws that would never apply in commercial contracts. Those regulations and laws are many and dense, and in most cases, far from intuitive.

The prime contractors we tend to represent are those primarily in the commercial space and that may not have staff or in-house counsel dedicated solely to advising on the unique requirements of doing business with the government. In representing these companies, we act as an extension of the general counsel, providing advice on a range of issues from gifts and gratuities policies to protection of IP that is modified or enhanced for use in a contract with a government agency. Many of the subcontractors we tend to represent start out not even knowing that they are subcontractors under a government contract. These companies, supplying their standard products, receive purchase orders from large contractors. The sales department may not recognize that PO’s include indicators that the product ultimately goes to the government and, as a result, the company is subject to rules and requirements in the Federal Acquisition Regulation (FAR) and one or more of its supplements. Many companies don’t realize that the purchase order they received incorporates by reference -- either with a laundry list of FAR provisions stuck at the end of the form in fine print or by reference to additional terms and conditions on the customer’s website -- new and sometimes onerous provisions that are part of being a government contractor or subcontractor. We assist these suppliers in understanding their compliance obligations and arm them to negotiate with their customers, from a position of knowledge and strength, on the applicability of the clauses that the customer is attempting to flow down.

MCC. What do the impending changes in Washington, D.C. mean to your client base?

Kelly: With a new incoming administration, led by a President-elect who, as a candidate, signaled a general desire to lessen government regulation and more specifically eliminate on day one many of President Obama’s executive orders, it is possible that the government contracting regulatory landscape may become less demanding or, as some would say, onerous. A great deal of President Obama’s executive orders were aimed squarely at government contractors and their employment practices. They include, among other things, hiring restrictions, requiring certain fringe benefits, and reporting on violations of labor laws. Many government contractors would welcome relief from these mandates. In addition, an increase in military spending, which our new President has promised, will be a boon to many in the defense industry. All of this, of course, remains to be seen. Juxtapose, for example, the President-elect’s stated intent to eliminate executive orders with his recent threat to cancel Boeing’s contracts to supply new Air Force One jets. We may be entering a new, unprecedented environment where the president uses the bully pulpit to single out and rebuke government contractors that he believes – using his words – are “doing a little number” and “making too much money.” This kind of conduct, while it may be good politics, is bad policy and will inject more uncertainty and risk for the companies that arm, clothe, and transport the men and women defending this country, including their Commander-in-Chief. This is not a good thing.

MCC. The government often pays for the development of technology, and software companies, for instance, develop that technology. What are the legal considerations? Who has the rights to what?

Kelly: Protection of a company’s intellectual property has become a large part of our work. We represent a lot of exciting emerging tech companies who are interested in exploring the government market or taking advantage of government programs such as the Small Business Innovative Research (SBIR) program, which gives money to small businesses to develop technology that has both commercial and government applications. The government’s rights to technology whose development it funds is a complicated business. To maximize a company’s interest in both patentable inventions and trade secrets -- in the form of drawings, specifications, source code for software, or similar -- a company needs lawyers well-versed in statutes and clauses that dictate both the government’s and the company’s rights. Interestingly, the Department of Defense (DOD) is taking additional steps to offer to innovative tech companies – both new and established – nontraditional contracting devices, some of which do not even require FAR clauses.

Many companies are unaware of how IP rights under government contracts and grants work and are distributed. For the last 35 or so years, the government has had a policy that allows contractors who develop technology with government funds to keep ownership of that technology – whether it comes in the form of patentable inventions or technical data and software a company develops. Ownership rights for inventions are secured, however, only by providing appropriate notice and elections of title according to timetables established by statute and regulation. When the government pays for the technology, it typically gets an unlimited royalty-free license to use the technology for any purpose. Companies often get into trouble when they take pre-existing and valuable technology, whether in the form of software or drawings or specifications, and are asked to modify or enhance the technology for government use. In these mixed funding situations, companies need to be very careful in documenting and disclosing the technology they bring to the table at the outset of the contract, and negotiating government rights to protect the technology. Another point is that the regulations addressing the government’s rights are different depending on which agency a company is contracting with. DoD and the civilian agencies have different sets of rules governing rights to data funded partially or exclusively with public funds.

A last point we will make involves subcontracts. When it comes to IP rights, subcontractors have the right to negotiate directly with the government with respect to the rights in technology the subcontractor will develop and/or deliver under the contract. Subcontractors need to beware overzealous primes that either inadvertently or intentionally attempt to take more rights than those to which they are entitled.

MCC: The FY 2017 National Defense Authorization Act (NDAA), which is expected to be signed by the President, extends the federal Small Business Innovative Research (SBIR) program for an additional five years through 2022. Do you see the new administration and Congress continuing a push for bringing innovation to the government marketplace?

Kelly: Under SBIR and its companion Small Business Technology Transfer program, the government acts as a venture capitalist of sorts, giving companies free – but strings-attached – capital in tranches to develop technology. Generally, companies get products to the prototype stage, with a goal of enabling the company to launch products into the commercial market, the government market, or both. To give you an idea of what that means to commerce, consider that the Air Force alone invested $4 billion in SBIR projects from 2000 through 2013. SBIR has launched a number of successful companies, including some of our clients. Having just attended a day-long roll-out by NAVSEA and NAVAIR of their SBIR/STTR topics for the upcoming fiscal year, I can attest to the relief and enthusiasm of the Navy and the contracting community regarding the extension of the program. General James “Mad Dog” Mattis, Secretary of Defense, has expressed concern in the past about what he sees as over-reliance on technology. But the Department of Defense and Congress have made it clear, most recently manifested in the FY2017 NDAA, that they intend to continue to provide incentives to innovative commercial technology companies to join the fray and provide assistance to the Warfighter. These incentives will include increased reliance on commercial items, non-FAR based contracting and sole-source follow-ons to prototype R&D contracts.

MCC. What is the federal government’s view of seemingly meat-and-potatoes issues like affirmative action at companies that want to be government suppliers?

Vanzler: The government imposes a number of what are commonly referred to as socio-economic requirements on the companies that choose to do business with it. One of these is a range of equal employment obligations requiring that contractors not discriminate in their hiring practices and to establish goals and preferences in the hiring of minorities, veterans, and persons with disabilities. This extends to subcontracting goals for large businesses. Large businesses are required to have a robust plan for subcontracting with small businesses and, more particularly, women-owned, minority-owned, and disadvantaged businesses operating in certain geographic locations.

Most important to the government is that contractors have a code of ethics that addresses the unique ethical obligations associated with government contracting. To remain in good standing with the government, contractors should have policies, enforcement mechanisms, and regular training regarding prohibitions on gratuities and gifts, the employment of government officials, and access to confidential information related to the sourcing and competing of government awards, among other things. The government wants to see just as much devotion to a true culture of ethics as it does to producing a superior product or service. This includes encouraging employees, agents, and subcontractors who suspect wrongdoing to speak out, via an ethics compliance officer, hotlines, and other devices, and instituting protections for whistleblowers.

MCC. How motivated is the federal government to oversee what subcontractors are chosen for subcontracts, and how compliant those subcontractors are with various regulations?

Kelly: It is important to understand that regulations are constructed to hold subcontractors to the same constraints as prime contractors when they enter the government supply chain. The government essentially leaves the policing of subcontractor behavior to the prime contractors, as there is no privity between the government and the subcontractors. Primes have become much more vigilant in enforcing the obligations of subcontractors, and now as a matter of course typically flow down an obligation for their suppliers to adhere to the prime contractor’s code of ethics. It is one more item on an already long list of terms and conditions that subcontractors should be on the lookout for when new purchase orders cross their desk.

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