On June 16, 2016, the Department of Defense (DoD) issued a proposed rule to implement Section 815 of the National Defense Authorization Act for Fiscal Year 2012, which was originally enacted in December 2011.  Under the proposed rule, DoD would be given additional flexibility to release technical data or computer software to third parties (including competitors) if the data qualify as “segregation or reintegration” data.  Although the data would include limited-rights data or restricted-rights software, the recipient would be permitted to use the data or software only for segregation or reintegration, and must destroy the data or software at the “completion of authorized activities.”  The rule also permits, among other changes, the DOD to require delivery, without any time limits, of various technical data and software that either have been generated or merely “utilized” in the performance of a contract.  Four years in the making, this proposed rule attempts to implement and clarify statutory changes introduced in section 815 of the National Defense Authorization Act for Fiscal Year 2012 (the “2012 NDAA”).  Despite the attempt to clarify, the proposed regulations still leave open significant questions for contractors with respect to technical data rights.

The 2012 NDAA

In Section 815 of the 2012 NDAA, Congress created a new exception to the restriction on sharing outside of DoD technical data relating to an item or process developed exclusively at private expense. The statute permits the DoD to disclose limited rights technical data to third parties if the information is necessary for “segregation” or “reintegration.”  The statute did not define “segregation,” “reintegration,” nor did it explain what types of technical data would fall within this exception.  Moreover, the statute failed to differentiate segregation and reintegration data from “form, fit, and function” data, which – prior to the passage of the 2012 NDAA – was required to be delivered to the Government with unlimited rights, even if the item, component, or process that it describes has been developed solely at private expense.[1]

Section 815 also expanded the Government’s ability to require delivery of technical data after contract award. The NDAA modified 10 U.S.C. § 2320(b)(9) to permit DoD to require “at any time delivery of technical data that has been generated or utilized” in the performance of a contract if DoD makes certain findings. Specifically, DoD must determine the data are needed for reprocurement, sustainment, modification or upgrade (including through competitive means) of a major system or subsystem, a weapons system or subsystem, or any noncommercial item or process if (1) the data pertain to an item or process that was developed in whole or in part with federal funds or (2) is necessary for “segregation” or “reintegration.”

The Proposed Rule

With its recent proposed rule, the DoD has attempted to answer some of the questions that have lingered since the passage of the 2012 NDAA. Key provisions of the proposed rule include the following:

Defining “segregation or reintegration data”

Under the proposed rule, “segregation or reintegration data” means

technical data or computer software that is more detailed than form, fit, and function data and that is necessary for the segregation of an item or process from, or the reintegration of that item or process (or physically or functionally equivalent item or process) with, other items or processes.

The definition further states that the term “may include, but would not typically require, detailed manufacturing or process data or computer software source code to support such segregation or reintegration activities.” Despite the apparent attempt to limit, the use of the term “typically” in the definition could provide contracting officers with an argument that the source code or manufacturing or process data is essential.

Although the proposed rule represents an attempt to provide additional clarity, the definition of segregation or reintegration data still leaves many questions of concern to DoD contractors. For example, the proposed rule states that segregation or integration data may include detailed manufacturing or process data or computer software source code – potentially exposing contractors to the risk of having to provide third parties, including competitors, with closely held intellectual property.  And in the event of disclosure, only minor comforts are provided to contractors under the proposed rule:  (1) that the contractor will be notified of disclosure to third parties; and (2) that the third party will be restricted from using the technical data for purposes other than segregation or reintegration.

Revising the definition of “form, fit, and function data”

In connection with its attempt to define segregation and reintegration, the proposed rule would make changes to the DFARS definition of “form, fit, and function data.” In its comments, the DoD noted the inconsistency between the FAR and DFARS definitions; the FAR definition includes computer software, while the DFARS definition does not.  As explained in the Federal Register, the DoD understood that one of the underlying concerns that led to the statutory creation of the concept of segregation or reintegration data were situations where DoD and contractors could not reach agreement on the type of data could be appropriately characterized as form, fit, and function.  In response, the proposed rule would amend the DFARS definition to include computer software but also expressly provide that “[t]he term does not include computer software source code, or detailed manufacturing or process data.”

Other expansions of the Government’s data rights

The proposed rule also expands when DoD can order technical data on a deferred basis. In addition to technical data that is already subject to contract delivery requirement, the DoD would be authorized to require delivery of technical data that has been “generated or utilized” in the performance of a contract.  “Generated or utilized” are defined broadly to include (1) “[t]echnical data pertaining to an item or process that is developed, delivered, or incorporated into the design of a system,” (2) technical data or computer software “used to provide services’ during performance of a contract, and/or (3) technical data or computer software “other than commercially available off-the-shelf software, necessary to access, use, reproduce, modify, perform, display, release, or disclose” any of the technical data or computer software otherwise generated or utilized under the contract.

The proposed rule would require DoD to insert the deferred ordering clause into is virtually all solicitations and contracts, with the exception of FAR Part 12 contracts that are not for major systems, weapons systems, or subsystems thereof.

The proposed rule would offer some protection for contractors regarding deferred ordering. Specifically, it clarifies that an obligation to deliver data to the Government under a deferred order is not intended to create an implied obligation to preserve data in cases when it would otherwise be unreasonable to do so.

Finally, the proposed rule also reflects Section 815’s extension of time in which the DoD could challenge a contractor’s assertion of data rights in both technical data and computer software. Under the proposed rule, the standard duration of the DoD’s right to challenge the validity of an asserted restriction would be extended from three to six years.  In addition, for technical data that are the subject of fraudulently asserted restrictions, there is no time limit on the Government’s right to challenge asserted restrictions.

Conclusion

Despite the attempt to bring clarity to the new concept of segregation and reintegration data, the proposed rule raises some concerns for government contractors. The definition of segregation and reintegration data still remains unclear, which will likely lead to disputes between the DoD and contractors as to what type of data is appropriately characterized as such.  Moreover, under the proposed rule, contractors could face the prospect of providing highly sensitive information – including, potentially, source code or other detailed manufacturing and process data – to competitors, with relatively little clarity as to how that data could be used by the competitors.  To protect their data, contractors could proactively identify what they consider to qualify as segregation and reintegration data before they are requested to provide to DoD.  This would put them in a better position to negotiate with the Government.

Interested parties may submit comments on the proposed rule online or by mail.  Comments should reference DFARS Case 2012-D022 and must be submitted by September 14, 2016.

[1] Form, fit, and function data is defined as “technical data that describes the required overall physical, functional, and performance characteristics (along with the qualification requirements, if applicable) of an item or process to the extent necessary to permit identification of physically or functionally equivalent items or processes.” DFARS 252.227-7013.