The Department of Defense (DoD) is considering a proposed rule that would help contractors protect their technical data rights in privately-developed commercial items that are incorporated into major systems, including major weapons systems. The proposed rule likely will be welcomed news to the defense industry, which has long sought to defend contractors’ intellectual property rights in commercial items that were developed exclusively at private expense.

The Current Rules

DoD is entitled to varying levels of technical data rights in products delivered to the Government depending on a number of factors, including whether the product is a commercial item that was “developed exclusively at private expense.” If a commercial-item product was developed exclusively at private expense, then the Government’s rights typically would be limited to standard commercial uses.  DoD may challenge a contractor’s assertion that an item was developed exclusively at private expense if:  (1) the Government has “reasonable grounds to question the validity of the assertion,” and (2) adhering to the asserted restriction would make it “impractical” for the DoD to competitively procure the item or technology in the future. See DFARS 227.7103-13(a); DFARS 252.227-7037.

Under the current rules, a contractor’s assertion that a commercial item was developed exclusively at private expense is generally presumed to be valid, even if the contractor does respond to a challenge notice from the Contracting Officer. See DFARS 227.7103-13(c)(2) (explaining that a contractor’s failure to respond cannot, by itself, provide a justification for a Contracting Officer issuing a final decision denying the validity of the asserted restriction).  In fact, the Government is not permitted to challenge such an assertion unless it has information that suggests the product was not developed exclusively at private expense.  See DFARS 252.227-7037(b)(1).

But this presumption, which also known as the “Commercial Rule,” does not currently apply to DoD’s procurement of “major systems” or “subsystems or components of [major subsystems],” unless the technical data relates to commercially available off-the-shelf (COTS) items. See DFARS 227.7103-13(c)(2)(ii); DFARS 252.227-7037(b)(2); see also FAR 2.101 (defining “major system” and “COTS item”).  Thus, without the benefit of the presumption in connection with the procurement of a “major system,” contractors must justify their assertion that an item was developed exclusively at private expense if they want to restrict the Government’s rights in the underlying technical data. See DFARS 252.227-7037(b)(2), (c).  This exception to the Commercial Rule is known as the “Major Systems Exception.”

The Proposed Rule

If DoD adopts the proposed rule in its current form, it would:

1. Replace the “Major Systems Exception” to the “Commercial Rule” with a Narrower “Major Weapons Systems Exception”: The “Commercial Rule” (i.e., the presumption that commercial items were developed exclusively at private expense) would apply more broadly because the exception to this rule would be narrowed from Major Systems to “major weapons systems,”[1] which are a subset of major systems.
2. Expand the Applicability of the “Commercial Rule” by Narrowing the New “Major Weapons System Exception”: Even if an item is incorporated into a major weapons system, the presumption under the Commercial Rule would apply not only to COTS items, as is the case under the current regulations, but also to:
   1. COTS items with minor modifications of a type customarily available in the commercial marketplace or minor modifications made to meet Federal Government requirements;
   2. Commercial subsystems or components of a major weapons system, if the major weapons system was acquired as a commercial item;
   3. Components of a subsystem, if the subsystem was acquired as a commercial item.

Thus, the proposed rule would simultaneously narrow the exception to the presumption under the “Commercial Rule,” as discussed in Item 1 above, and augment the number exceptions to the new “Major Weapons Systems Exception.”

As a general matter, the defense industry will likely view DoD’s proposed changes as a positive development, particularly since they come at a time when the Pentagon is working hard to stimulate private sector innovation in the areas of national security and defense. DoD has set July 11, 2016 as the deadline for the submission of comments on the proposed rule.

[1] A “major weapons system” is defined in in the DFARS as “a weapon system acquired pursuant to a major defense acquisition program.” DFARS 234.7001.  A “major defense acquisition program” is defined in 10 U.S.C. § 2430(a) as a DoD acquisition program that is “not a highly sensitive classified program” that is designated by the Secretary of Defense as a major weapons system and exceeds $300 million for research, development, test and evaluation or more than $1.8 billion for all planned increments or spirals (in 1990 constant dollars). See also DFARS 202-101.  As of 2014, those dollar amounts equaled $480 million and $2.79 billion respectively.  In contrast, a “major system” for DoD, is one that is one that exceeds $185 million for research, development, test and evaluation or more than $835 for all planned increments or spirals (in 2014 constant dollars). See FAR 2.101.