Wednesday, August 11, 2010

Contractor’s Intellectual Property

When IT contacts are awarded the resultant intellectual properties, (e.g. software code and application methods) are not owned by the government but remain as the contractor’s assets.

Acquisition contracts are currently written so that firms are encouraged to share their commercial technology with the Navy. The retention of the intellectual property rights by the contractor is also needed to assure the continuation of maintenance and support services because it takes advantage of a contractor’s entire commercial base for any innovation.

After a contractor wins a contract award whatever constitutes inclusion of a contractor’s own intellectual property is hard to discern. Whether a code is installed from the contractor’s own library or whether it is written as government work-for hire is practically untraceable. What constitutes the contractor’s proprietary know-how while implementing and operating applications (particularly when this also involves a proprietary network) is indistinguishable from what the government has already paid for.

When a contract expires and has to be rebid, the contractor will tend to make claims for additional compensation for the transfer of applications to others. Such a liability is a deterrent to the reopening of a project for further competition.  The new bidder will have to pay for what is claimed to be intellectual property to be taken over as a legacy.

When contacts are awarded the negotiated terms are full of traps. The government will end up with all operating and maintenance costs but without clarity how much of that is compensation for the contractor’s intellectual property. Such contracts are particularly difficult to construct if the terms require maximum contractor involvement and a minimum of oversight by government experts. This happens particularly in cases when the government is inadequately staffed while the contractor deploys huge staffs to deliver operating management, all hardware, all operating systems modifications, all applications, security and ongoing maintenance plus conversions from legacy systems. For instance, in the case of NCMI there would be few limits on the amounts of intellectual property that had to be contributed by EDS in order to deal with unplanned conditions.

One of the issues that must be resolved during contract negotiations is the determination of what share of government payments to the contractors is compensation for work done (such as delivery of computer “seats’) and what constitutes a paid-up license for the receipt of software by the government. Sorting out such situations calls for elaborate legal clauses, which are always hard to interpret. The contractual provisions can be further complicated if the contractor can claim that some of the software constitutes “trade secrets” which warrant premium compensation and often involve litigation.

The preferred way of dealing with contractors is to invoke the principle that the government would acquire “unlimited rights” to all systems and applications. This calls for using a “source of funds” test to prove ownership. In the case of NMCI this could be applied to the verification of the costs incurred by EDS over and above the approximately $8+ billion of NMCI billings to the government. Did EDS have to spend funds for which it was not compensated? Were some of these funds applied to compensate for the contractor’s own errors and inefficiencies?

Summary

The government should not enter into agreements where the contractor can invoke unrestricted claims for intellectual property. In cases where a contractor must provide proprietary software, the government should negotiate a license that will give it “unlimited rights” to all licenses. In cases when the contractor is installing off-the-shelf software, the government should always insist on using license-free “open software”. Any contract should be unambiguous to specify that it includes a full transfer (or assignment) of ownership of all licenses, regardless of source or origin. If there are any license fees, these will be paid by the government and not by the contractor. Contracts should stipulate, explicitly, that no intellectual
property claims will be made by a contractor.

However, the greatest challenge involves projects that call not only for the delivery of applications, but also for the furnishing of the entire supporting computing, telecommunications and data management infrastructures. Such costs are at least a half of all Navy IT costs. If a contractor is asked to create a special purpose infrastructure, such as in the case of NMCI, the opportunities for making intellectual property claims could be very large.

Instead, the Navy should proceed with the acquisition of generic and commercial Platform-as-a-Service (PaaS) infrastructures, which cannot make any intellectual property claims.  PaaS services are obtained on a pay-for-transaction basis, with each payment constituting full compensation. PaaS hides the complex technologies that produce such services and are managed by the vendor without government involvement. The government then pays only for the results and not for the delivery of technological complexity.

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