Federal Contract Law: Agencies have upper hand in control of data rights

Joseph J. Petrillo

The Court of Federal Claims recently issued a rare decision dealing with the operation of the standard rights-in-data clause of the Federal Acquisition Regulations.

The decision, Ervin and Associates Inc. vs. the United States, offers some insights into an important but rarely litigated topic. Data rights may be only incidentally related to security but nevertheless can have a serious impact. The FAR clause appears in thousands of civilian-agency federal contracts, and the Defense Department uses a similar clause.

The story starts in 1993. The Housing and Urban Development Department had to analyze thousands of financial statements each year, so it sought a contractor to help automate the process. Ervin and Associates, which already had an established business analyzing these financial statements, submitted a proposal. It planned to use and enhance its existing system.

Initially, HUD required analysis of all statements. Evidently, this cost too much, and HUD scaled back this requirement to analysis of 30 percent of the statements. Ervin sought to distinguish itself by offering to analyze all the statements, not just the required 30 percent. Because of the scaled-back requirements, Ervin thought it would own the database improvements and cut its price accordingly.

Ervin won the award, and its proposal became a part of the contract. During performance, various private concerns requested Ervin's data'from the company and from HUD. Some requests were ostensibly related to other HUD contracts.

At first, Ervin resisted the requests. In response to its concerns, various HUD officials affirmed that Ervin owned the data. These officials allegedly included lawyers from the general counsel's office and managers of HUD loan programs. None of these assurances, however, came from the contracting officer.

HUD also applied pressure in various ways. While Ervin resisted one request for a download that HUD wanted for its own data warehouse, HUD dragged its feet on a task order needed to authorize payment of option year work. The receivables mounted, and some invoices were five months overdue.

Ervin capitulated but warned HUD not to release the data outside the agency. Again, HUD officials allegedly agreed. They disclosed the data anyway to third parties, some of whom were Ervin's competitors.

As you might expect, bad went to worse, and Ervin ended up with a contract terminated for default. Several lawsuits ensued, including this one, which resolved the question of what rights the government had in the intellectual property Ervin had delivered.

The court held that various data downloads Ervin delivered to HUD were a contract requirement. The judge faulted Ervin for not objecting to the contracting officer when other HUD officials insisted on the data.

But the key to the ruling was a standard FAR clause that gives the government unlimited rights to data first produced under the contract. The court applied this provision ruthlessly to obliterate every single claim by Ervin that HUD had infringed or misused its intellectual property.

Ervin tried to accommodate its customer and thought it had an agreement on the use and ownership of its intellectual property. But its intellectual property ended up in the hands of competitors, and Ervin was without rights or remedy.

The lessons drawn from this sad tale:
  • It pays to be clear in the technical proposal about what intellectual property will and won't be delivered to the government.

  • If there is a question about intellectual property rights, only the contracting officer's opinion counts. If that opinion matters, get it in writing, preferably in a formal contract modification.

  • It's nice to please the customer, but think twice before handing over the company's critical intellectual property. The best way to protect intellectual property is simply not to deliver it.

  • Although they weren't in place to help the contractor here, the intellectual property rules for commercial items give the parties flexibility to fashion fair arrangements.

  • Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

    (Updated May 17, 2004)

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