DoD IP policy undermines the DIB by pushing new entrants out of the market, reducing innovation

Scott Freling represents civilian and defense contractors, at all stages of the procurement process, in their dealings with federal, state, and local government customers and with other contractors Alex Hastings advises clients across a broad range of government contracting issues, including advising clients in transactional matters involving government contractors and assisting defense contractors and pharmaceutical companies in securing and performing government contracts. DoD Signals Increased Scrutiny of Gov Con M&A and Renewed Interest in Background IP Rights; Global Policy Watch-Key Public Policy Developments Around the World; https://www.globalpolicywatch.com/2022/02/dod-signals-increased-scrutiny-of-gov-con-ma-and-renewed-interest-in-background-ip-rights/

In the meantime, contractors might expect DoD to increase its focus on securing greater rights in contractor IP when conducting procurements. The report raises concerns that data rights held by contractors limit competition in DoD procurements and result in “vendor lock” — by which contractors with proprietary data rights in a government system gain an advantage during future procurements. In response, DoD suggests that it could increase competition by enhancing its rights in contractor background data, including by requiring contractors to provide form, fit and function data sufficient to allow the government to “reverse engineer” the proprietary elements of a larger system and plug in alternative components or subsystems. The report also suggests that DoD should negotiate broader special license rights in background IP on the front end that would essentially allow DoD to provide background IP to third parties for incorporation into larger systems during follow-on procurements. The report recognizes, albeit in passing, that “IP rights encourage technology innovations that are critical to DoD’s capabilities and mission by enhancing the return on investment for those entities that invest in creating such technology.” However, the report does not address the potential impact that requiring additional IP rights in background IP could have on DoD’s persistent efforts to expand participation in the defense industrial base. Indeed, many companies (particularly those with commercial offerings) rely on protection of their background data rights when developing solutions for DoD platforms, as these rights are often core to a company’s value, including in the commercial market. Requiring contractors to turn over rights that would allow the government to reverse engineer proprietary solutions or provide those proprietary solutions to competitors is likely to discourage new entrants in the defense industrial base, further highlighting the tension between the report’s stated objectives.