On September 20, 2011, the Department of Defense (“DoD”) issued a final rule, effective immediately, amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) and its presumption that certain commercial items, components, or processes are developed exclusively at private expense when determining the DoD’s right to use the technical data (intellectual property).1 The rule has three primary effects:
- It reverses the presumption that contractors developed commercial items at private expense (and therefore own the rights to the underlying data) (“Commercial Rule”) for contracts or subcontracts for Major Systems (or their subsystems or components), implementing Section 802(b) of the FY2007 National Defense Authorization Act (“NDAA”).
- Under the new “Major Systems Rule,” when the contracting officer challenges an asserted restriction on technical data rights on the grounds that the commercial item was not developed at private expense, the prime contractor or subcontractor must provide evidence to demonstrate it was actually developed at private expense or the contracting officer’s ‘challenge’ will be sustained. It effectively reverses the pre-existing presumption that contractors and subcontractors developed commercial items at their own private expense.
- Commercial off-the-shelf items are exempt from the new “Major Systems Rule.”
In other words, the pre-existing presumption is reversed only when the government buys non-COTS commercial items under Major Systems.
Major Systems, defined at FAR 2.101, refers to a combination of elements that function together to produce the capabilities required to fulfill a mission need. The elements may include hardware, equipment, software, or any combination thereof, but exclude construction or other improvements to real property. For the DoD, it refers to systems where the total expenditures for research, development, test and evaluation are estimated to be more than $189.5 million or the eventual total expenditure for the acquisition exceeds $890 million. Or, a system can be designated a “Major System” by the head of the agency responsible for it. (10 USC §2302)
The significant difference between a “commercial item” and a “commercial off-the-shelf item” (“COTS”) is that for an item to be considered “COTS” it must be sold to the government, without modification, in the same form it is sold in the commercial marketplace. (FAR 2.101) So, while all COTS are commercial items, not all commercial items are COTS.
The new final regulations also make changes that many observers consider to be beyond the statutory authority cited. These other changes include:
- application of the DFARS non-commercial data rights clause (DFARS 252.227-7013), including marking requirements, on commercial items whenever the government has or will fund any portion of the development, in addition to the commercial data rights marking requirement already imposed by DFARS 252.227-7015;
- a requirement that, when either DFARS 252.227-7015 or 252.227-7013 is applicable, then DFARS 252.227-7037, Validation of Restrictive Markings on Technical Data, is also applicable and requires these clauses be flowed down to subcontractors; and
- extension of the changes to rights in computer software for Major Systems, even though they are dealt with in separate DFARS provisions and the statutory authority did not address the computer software clauses.
The effect of this rule is potentially far-reaching, even though the presumption that contractors own the intellectual property rights has only changed for “Major Systems” non-COTS commercial items. The other changes now require both contractors and subcontractors to know what part of any commercial item may have been funded with government funds and to be able to prove their own investment in commercial items so that they use the proper legend markings and reserve for themselves the rights afforded under the DFARS.