April 16, 2020 - Intellectual Property

The Data Rights Black Hole: DOD Lobbies Congress to Eliminate Proprietary Rights in Your Most Valuable Trade Secrets — Your Detailed Manufacturing and Process Data

FCPAA long time ago in a galaxy far, far away, the Department of Defense (“DOD”) and industry came together after more than seven years of discussions and created a rational, logical, and fair constellation of regulations and laws governing the DOD’s and contractors’ rights in technical data and computer software.  These were, and essentially remain, the 1995 “data rights” regulations and clauses of DFARS Subparts 227.71 and .72, as well as the principal statute they implement, 10 USC §2320.  For almost two decades there was calm, with private technology development thriving and the government’s real needs met.  Then disturbances began to appear in the force.

DOD agencies and programs began aggressively to pursue increased delivery of and rights in technical data and software.  This included evaluating contractors more favorably if they gave up their data rights; ad hoc contract clauses to gain unlimited rights in software, contrary to law; attempting to create a perpetual right for deferred ordering of data the government forgot to identify, and therefore you could not price; and trying last year to erode key due process protections against DOD data rights challenges.

All bad enough, but nothing compared to what DOD now is lobbying for in the 2021 National Defense Authorization Act (“NDAA”).  DOD wants to be able to give your most closely held trade secrets — i.e., all your detailed manufacturing and process data — to your most vicious competitors.  Here is the exception DOD is pitching to Congress in 10 USC §2320 to eliminate limited rights in your most essential technical data for items, components, or process that you developed entirely at private expense:

[T]he United States may release or disclose technical data to persons outside the Government, or permit the use of technical data by such persons, if—

(i) such release, disclosure, or use—

(IV) is a release, disclosure, or use of detailed manufacturing or process data necessary for operation, maintenance (including depot-level maintenance, repair, and overhaul), installation, training, airworthiness determinations, testing and evaluation, or accident or incident investigations.  [10 USC 2320 (a)(2)(D)(i)(IV)(emphasis added).]

Read that again:  We all know that DOD procuring activities think just about everything is necessary for operation, maintenance, installation and training (“OMIT”), but the law currently forbids DOD from getting anything other than limited rights for data necessary for OMIT that comprise “detailed manufacturing or process data” developed at private expense.  That prohibition disappears with this language, which goes even beyond OMIT to include testing and evaluation, as well as the airworthiness and investigations pretext DOD is advancing for this proposal.

This is the exception that will swallow the rule.  It is the data rights black hole that will consume the well balanced design of the 1995 regulations.  It is a guaranteed disincentive to creative development and to doing business with the government.  And it is contrary to rationality, logic, and fairness, which is a nice way of saying it is stupid.  That is a fact, not an opinion, and here is why.

Let us all proceed from two fundamental, logical, and irrefutable principals:  First, if you developed an item or process in the privacy of your garage, tapping into your 401(k) account and without being paid to do it under a government prime contract or subcontract, you would have absolutely no doubt about who had rights of use and ownership in the item or process and its technical data.  Without hesitation you (and the courts) would say that you — not any agency of the federal government — own it, have the greatest rights in it and its associated technical data, and can elect to hold it as a proprietary trade secret without fear of confiscation by the government.  Why? Because it was exclusively your time, talent, and money that developed the thing and its technical data, not the government’s.  The same necessarily is true in these United States if a corporation rather than a natural person does the development exclusively at its private expense.

Second, the most important technical data associated with your hard work are those data that reveal how the item is made or the process works.  These are the detailed manufacturing or process data — e.g., drawings, specifications, formulae, tolerances, and process sheets — that describe the steps, sequences, and conditions of manufacturing, processing, or assembly used to produce an item or component or to perform a process.

There is no rational, much less logical or fair, way to dispute these points.

Although the Congress of the United States does some unique things, it rarely defies rationality, logic, and fairness, at least not all at once.  Congress also generally accommodates DOD’s legitimate needs.  That is why when Congress codified, in 10 USC §2320, the DOD’s rights in technical data, Congress vested government contractors with the right to limit the government’s use of technical data developed at private expense and, in particular, expressly constrained the government’s use of detailed manufacturing and process data; but Congress also recognized the DOD’s legitimate need for technical data necessary for operation, maintenance, installation, and training.  Here was Congress’ elegant solution.  10 USC §2320(a)(2)(B) protects contractor rights in private development but provides appropriate exceptions to those rights:

Except as provided in subparagraphs (C), (D), and (G), in the case of an item or process that is developed by a contractor or subcontractor exclusively at private expense, the contractor or subcontractor may restrict the right of the United States to release or disclose technical data pertaining to the item or process to persons outside the government or permit the use of the technical data by such persons.

Of the three exceptions, “(C)” is relevant here.  Specifically for OMIT, the statute at 2320(a)(2)(C)(iii) provides that the ability to restrict the government’s rights does not apply to technical data that are:

necessary for operation, maintenance, installation, or training (other than detailed manufacturing or process data, including such data pertaining to a major system component).  [Emphasis added.]

Since 1995, this statutory arrangement — with its expressly carved-out protection for detailed manufacturing or process data — has been reflected in the DOD’s technical data regulations.  DFARS 252.227-7013(b)(1)(v); 227.7103-5(a)(5).  In turn, the DFARS clause addressing “Rights in technical data — noncommercial items,” 252.227‑7013(a)(6), defines detailed manufacturing or process data as:

technical data that describe the steps sequences and conditions of manufacturing, processing or assembly used by the manufacturer to produce an item or component or to perform a process.

In recent years, the Department of Defense, regrettably, has not been daunted by rationality, logic, or fairness, at least when it comes to acquiring ever broader data rights.  DOD consistently tries — under one guise or another — to erode or evade those obvious, irrefutable, fundamental principles with which we started.  This is certainly true with respect to OMIT data.

In 2018, for example, we saw the Air Force unsuccessfully try to enforce unique contract “H” clauses seeking unlimited rights in OMIT data that encompass computer software.  Those clauses were contrary to law, because the statute’s exception for OMIT data does not apply to software, and there is no exception in the regulations for unlimited rights in OMIT software.  DFARS 252.227-7014(b)(1).  See The Government Contractor FEATURE COMMENT: Data Rights Assault: What In The H (clause) Is Going On Here? Air Force Overreaching On OMIT Data.

When those Air Force clauses were challenged in a bid protest, the agency backtracked, sending  a letter to all offerors clarifying that its clauses did not require contractors to give up more than limited or restricted rights in OMIT data.  With this obstacle gone, the GAO denied the protest, correctly noting the Air Force could require delivery of OMIT data, because delivery is not covered by the data rights clauses (a point commonly misunderstood), and the Air Force was not seeking more than limited rights in the data, consistent with the regulations and statute.  See Sikorsky: What the GAO Said and Did Not Say About Soliciting Data Rights.

Now, the DOD wants to avoid the OMIT data rights issue entirely by rewriting the statute, although its reason is an unvarnished pretext tied to aircraft.  This is the DOD’s pitch to Congress:

DOD has a substantial inventory of manned and unmanned aircraft that must be maintained in an airworthy condition, including a growing inventory of “commercial derivative aircraft (CDA).”  For civil aircraft, Title 14 of the Code of Federal Regulations (Federal Aviation Administration (FAA) Regulations) requires that original equipment manufacturers (OEMs) provide airworthiness maintenance data, known as Instructions for Continued Airworthiness (ICA), to owners and maintainers. . . . This provision is intended to enable the release, disclosure or use of operation, maintenance, installation or training data, including ICA data, that is detailed manufacturing or process data to commercial maintenance, repair, and overhaul firms, seeking to compete for DoD maintenance and repair work, including depot-level maintenance . . .

Even if there was a need for ICA data, a point hardly established by DOD, the DOD’s explanation goes dramatically beyond FAA data, and dramatically beyond OMIT as currently defined, without any rationale or support whatsoever.  DOD does not even try, but rather expands the derogation of existing rights without reasons or reason:

In addition, this provision would enable DoD to share detailed manufacturing or process data with firms seeking to compete for contracts to support engineering analysis, testing and evaluation, training, airworthiness determinations, and data necessary to conduct accident or incident investigations.

But none of the supposed FAA concern is the focus of the proposed amendment itself, which is essentially unconstrained.  Once again, here is the proposal’s language, permitting an override of your limited rights for:

a release, disclosure, or use of detailed manufacturing or process data necessary for operation, maintenance (including depot-level maintenance, repair, and overhaul), installation, training, airworthiness determinations, testing and evaluation, or accident or incident investigations.

The black hole swallows everything.

Ah, but the DOD would say it is proposing safeguards, explaining: “the person to whom the data is released or disclosed is subject to a prohibition on the further release, disclosure, or use of such data and the owner of the data is notified of such release, disclosure or use.”  Well, that surely will seem like a good bargain to your shareholders, until they think about it for a New York minute.  Translation:  Any of your competitors now can get access to your most closely held technical data they’ve been trying to figure out for years, compete against you with it, be awarded contracts they never could before using technology you alone developed and paid for, while destroying your market value; but fear not, you will be notified so that you can somehow monitor everything they do and be free to sue them if they use your formerly proprietary data for some non‑DOD project even though you no longer have a trade secret.  Comforting, isn’t it?

Every contractor with any significant portfolio of proprietary data needs to challenge this irrational, illogical, unfair, and unsupported assault on its business.  Otherwise, as someone in a galaxy far, far away wisely observed:

“Once you start down the dark path, forever will it dominate your destiny.”