Current DoD policy undermines IP protections for defense contractors- federal reversal is key to spark innovation and preserve national security

President of Etherton and Associates, a consulting and lobbying firm specializing in defense acquisition, industrial base, and cybersecurity policy; Communications Manager at the Acquisition Research Program at the Naval Postgraduate School (NPS); The Slow Destruction of the Defense Industrial Base; Acquisition Research Program Department of Defense Management Naval Postgraduate School; Excerpt from the Proceedings of the Nineteenth Annual Acquisition Research Symposium; Acquisition Research: Creating Synergy for Informed Change May 11–12, 2022

Too often, the DoD pursues policies that seek to save money in the short term at the expense of driving companies out of the marketplace, with the long-term ramifications of disincentivizing industry. Another example is the way the DoD misunderstands the value of intellectual property (IP) rights. Intellectual Property and Data Rights Nothing is going to drive a company away from the DoD faster than fear of losing control over its IP. Chapter 275 of Title 10, Proprietary Contractor Data and Rights in Technical Data, opens with a simple principle, written as a requirement for the secretary of defense, that recognizes this simple truism: “The Secretary of Defense shall prescribe regulations to define the legitimate interest of the United States and of a contractor or subcontractor in technical data pertaining to an item or process.” The interests of the United States in proprietary and technical data are straightforward—the more the DoD owns and has access to such data, the easier it is for the DoD to ensure technology can be sustained over its life cycle, either in-house or by a contractor who competes for and gains access to these rights from the DoD. What seems to be less recognized is that it is in the long-term interest of the DoD to protect industry’s rights in proprietary and technical data. The most recent NDIA report on the health of the industrial base stated, “Intellectual Property rights are essential to the health of the DIB. The perception of risks to IP rights shapes investor’s willingness to invest in research and development and commercialization activities” (NDIA, 2022, p. 36). IP rights represent the crown jewels of industry and the lifeblood of company competitive advantages. The DoD seems to fail to recognize this, too often seeking broader IP and technical data rights, and not wanting to pay for such rights. The Regulatory Morass Companies seeking to enter the NSIB must contend with a multitude of laws and regulations that are cost- and time-prohibitive, disrupt established supply chains, and require implementation of new systems, processes, and procedures. And in return for this effort, the promise is sometimes profit margins lower than those available in the private sector, plus threats to maintaining control over IP. Just to give some examples, companies operating in the private sector who wish to work for the DoD as a traditional contractor must • Prepare for cybersecurity standards on Cybersecurity Maturity Model Certification (CMMC); • Abide by Section 889 requirements that prohibit the federal government from entering into or extending or renewing contracts with any entity that “uses any equipment, system, or service that uses covered telecommunication equipment or services as a substantial or essential component of any system, or as critical technology as part of any system;” • Adhere to Buy American requirements that can disrupt supply chains and hurt cost competitiveness in the commercial market; • Install costly IT and Cost Accounting Systems; and • Build out a compliance capability to deal with government-unique requirements and potential government audits or congressional investigations and hearings. These are but some of the challenges facing companies who consider joining the NSIB. And the reward for overcoming these hurtles can be profit margins below those offered by commercial markets. Margins That Do Not Compete With Commercial Markets Under the Truthful Cost or Pricing Data Act (formerly known as the Truth in Negotiations Act, or TINA), government contractors and subcontractors must submit certified cost or pricing data (TCoPD) for negotiated contracts, subcontracts, or modifications above the threshold, if the government contract is awarded without “adequate price competition.” The contractor must provide “accurate, complete, and current data” about costs to ensure that the negotiated price is “fair and reasonable.” Contracting officers can also request a “price adjustment remedy” if a contractor did not previously provide sufficient data (FAR 15.4). This requirement often delays the contracting process (Adjei & Hendricks, 2021, p. 24). It also is sometimes used to squeeze margins from contractors, making the DoD a less lucrative—and therefore unappealing—customer. The recent case of TransDigm demonstrates a tendency to object to what is considered excess profit in the case of sole-source contracts. The DoD Office of the Inspector General (2021) considered any profit over 15% to be excessive and suggested the contractor voluntarily refund profits above that range. Coca-Cola, by contrast, reported gross profit margins of 60.3% in 2021, up from 59.3% in 2020 (The Coca-Cola Company, 2022). And as mentioned above, Pfizer’s commitment to protecting the health of global populations—a mission comparable to defense contractors supporting national security—resulted in a 27% profit margin in 2021. Conclusion The DoD recently issued the report, State of Competition Within the Defense Industrial Base. We believe that the DoD got it backwards. The question is not, what are companies doing to compete for the DoD’s business? It should be, what is the DoD (and Congress) doing to compete with commercial market buyers to induce industry to work with the DoD? Until the federal government looks inward and matches policies to the realization that it cannot dictate to industry the terms of contracts, the DoD will often get what it pays for: less innovation, less access to leading commercial companies, fewer commercial capabilities incorporated into national security capabilities, and a loss of ground in the race for technology overmatch.