May 12, 2016

DoD Proposes to Expand Presumption of Development at Private Expense for “Major Weapons Systems”

Arnold & Porter Advisory

The Department of Defense (DoD) has proposed to revise the data rights provisions of the Defense Federal Acquisition Regulation Supplement (DFARS) in order to implement section 813(a) of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016 (Pub. L. 114-92).

These proposed revisions generally work to the advantage of federal contractors, expanding existing presumptions of development at private expense.

In general, the DFARS permits contractors to assert restrictions on their technical data that limit the Government's rights to use and disseminate that technical data, and permits contracting officers to challenge those assertions if reasonable grounds exist to question their validity. At present, the DFARS contains two significant presumptions regarding technical data, which are designed to more clearly circumscribe when a data rights challenge is appropriate:

(1) the "Commercial Rule," wherein a contracting officer is required to presume that a commercial item has been developed entirely at private expense, unless shown otherwise in accordance with certain procedures;1 and

(2) the "Major Systems Rule,"2 which functions as an exception to the Commercial Rule, and provides that a contracting officer's challenge to asserted restrictions on technical data relating to a major system3 shall be sustained unless the contractor or subcontractor submits information demonstrating that the item was developed exclusively at private expense. However, there is an exception to the Major Systems Rule for commercially available off-the-shelf (COTS) items, which remain subject to the Commercial Rule in all cases.

While the Commercial Rule generally works to the advantage of the contractor, an item that qualifies as a major system, or a component or subsystem of a major subsystem, is not entitled to the presumption of the Commercial Rule if the item is commercial but does not rise to the level of a COTS item.4 This includes minor modifications to a major system, component, or subsystem. In each case, the item is presumed to have been developed at the Government's expense even if it is a commercial item. This leaves the decision to challenge the data rights assertion in the discretion of the contracting officer, and can result in unnecessary challenges – expending unnecessary time and resources of both the contractor and the contracting officer.

Under the proposed rewrite, the Commercial Rule would remain intact, but the Major Systems Rule would expand the list of items presumed developed at private expense.

First, the Major Systems Rule would be revised to only apply to major weapons systems5 – and more appropriately retitled the "Major Weapons System Rule."6 Thus, major systems that are not major weapons systems would remain subject to the beneficial presumption of the Commercial Rule.

Second, the COTS exception to the Major Systems Rule has been expanded in the new Major Weapons Systems Rule to include three more categories of items that always would be subject to the Commercial Rule:

(i) COTS items with modifications of a type customarily available in the commercial marketplace or minor modifications made to meet Federal Government requirements;

(ii) commercial subsystems or components of a major weapon system, if the major weapon system was acquired as a commercial item in accordance with 10 U.S.C. § 2379(a); and

(iii) components of a subsystem, if the subsystem was acquired as a commercial item in accordance with 10 U.S.C. § 2379(b).7

These revisions address the shortcomings in the existing rule, extending the presumption of development at private expense to all commercial items relevant to a major weapons system. This should, in theory, reduce the number of data rights challenges brought by contracting officers and improve contractors' data rights position vis-à-vis the Government – particularly for contractors who are primarily in commercial items businesses.

DoD will be accepting comments on this proposed rule until July 11, 2016.

  1. See 10 U.S.C. § 2321(f)(1); see also DFARS Part 252.227-7037(b)(1).

  2. See 10 U.S.C. § 2321(f)(2); see also DFARS Part 252.227-7037(b)(2).

  3. In the context of DoD acquisitions, a "major system" generally refers to a system fulfilling a mission need and for which the total expenditures for research, development, test, and evaluation for the system are estimated to be more than US$185 million. See FAR Part 2.101.

  4. In order to qualify as a "COTS" item, the item must not only be a commercial item, but must also be sold in substantial quantities in the commercial marketplace, and offered to the Government without modification and in the same form in which it is sold in the commercial marketplace. See FAR Part 2.101.

  5. A "major weapon system" is a weapon system acquired pursuant to a major defense acquisition program. See DFARS Part 234.7001.

  6. See (proposed) revised DFARS Parts 227.7103-13(c)(2)(ii) and 252.227-7037(b)(2).

  7. See (proposed) DFARS Parts 227.7103-13(c)(2)(ii)(1) through (3), and 252.227- 7037(b)(2)(i)).

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