Amid the growth of AI and its follow-on applications, defense contractors are increasingly expected to innovate so that America can stay ahead of the technological curve. While innovation can certainly help to win contracts and deliver a huge payoff for years of investment, offerors regularly risk their IP in responding to a government solicitation. With the White House’s announcement of a $140 million investment in AI alone, companies have a lot to gain with a contract that includes IP, but there is also a lot to lose.
These kinds of contracts are notoriously tricky and they vary based on the procuring agency and types of products. From infrastructure development to defense systems, these contracts leverage unique expertise to create best-in-class solutions that are the envy of our global counterparts. This is why it is so crucial for contractors to participate in contracts that include IP as a deliverable.
Make no mistake: The government does not just want you to deliver the IP, it wants you to cede your rights to it. Perhaps that is not too much to ask if the government pays for the development of the data. But what about your prior investment in it close to the finish line? If the government pays you to develop the icing and to deliver the whole cake, should that entitle it to the recipe? What if the government pays you to add lemon? Should Uncle Sam have the right to give others the whole recipe? Most contractors would say no. The trick is knowing how to maximize the ability to retain control.
For starters, successful contractors know how to read RFPs to identify what IP rights the Government is looking for and understand the negotiating power the company may have. The contract data requirements list and its accompanying data item descriptions are key to this.
Sometimes, the RFP will explicitly describe the rights the government seeks, but often, the contractor needs to carefully look for risks to its IP. Use of the term “develop” in the RFP and proposed contract terms is a key indicator of government intent. This is particularly relevant in today’s environment, where the United States is seeking to stay ahead of countries like China.
If the contract requires the contractor to “develop” an item or process under the contract, the government will be seeking “unlimited rights” (effectively ownership, but without title) in that item or process. On the other hand, a requirement to “demonstrate” an item or process suggests that the item or process already exists and, therefore, is not being developed under the contract. In the former case, a contractor may seek to negotiate a language change to “demonstrate.” If successful, this change could allow the contractor, depending on the agency involved, to retain rights to its technology while providing its services.
The Federal Acquisition Regulations (FAR) and DoD Federal Acquisition Regulations (DFARS) govern contract IP. Both generally give the government unlimited rights to IP produced under a contract, but the DFARS grants greater rights to products partially developed at private expense. Thus, the DFARS accords a measure of protection to IP developed with mixed funding — i.e., a mixture of government and private funding — while the FAR asserts unlimited rights unless the IP has been developed “at private expense.”
To make the most of the FAR and DFAR protections, contractors must properly identify the IP in which it is giving the government less-than-unlimited rights. In a practice known as “list it or lose it,” contractors list IP developed at private expense, prior to the contract, that would be delivered under the contract with less than unlimited rights, using government-prescribed markings to identify the rights classification as well as a basis for that classification. For example, a contractor who has developed AI-based traffic flow software on its own accord should indicate restricted government rights to this software in its table and throughout the scope of work, or otherwise risk the government assuming unlimited rights.
In addition to marking their rights, companies must keep comprehensive records of the provenance and timing of IP development. These records serve to justify limitations on government’s use of IP by proving private development of items, components or processes wholly at private expense. Contractors should maintain proof of their development in IR&D project files, as well as keep their records after contract’s end. More than one contractor has lost its IP rights by allowing its private development records to be purged.
Finally, contractors may want to seek special rights such as staggered licenses, which provide a time frame for control of IP to eventually transfer to the government. This is particularly relevant to new technologies, such as AI, that will likely be updated or iterated upon. Such IP may begin as “limited rights” data but convert to “government purposes” or “unlimited rights” over the course of a set number of years. These kinds of rights are negotiable and are often a deal sweetener to a contracting agency while also allowing a contractor to monetize its creation.
As new technologies such as AI are emerging in the national security space, government contractors have more reason than ever to protect their developments. But the opportunities these new fields have created can be risky without a clear understanding of the measures needed to protect companies’ existing technologies. Taking care to understand the scope of work, mark properly and maintain meticulous records are all crucial to protect legitimate property interests in the innovations that keep American technology preeminent.