Department of Defense’s Proposed Rule Would Change SBIR/STTR Data Rights and Markings Rules

On December 19, 2022, the Department of Defense ("DOD") issued a proposed rule seeking to amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) to implement the data rights portions of recent Small Business Innovation Research Program and Small Business Technology Transfer Program Policy Directive, which emphasizes the need to protect the intellectual property interests of small businesses. In addition to addressing the small business directives, the proposed rule seeks to update markings requirements related to (1) small business data rights and (2) concerns raised by the Federal Circuit’s decision in The Boeing Co. v. Secretary of the Air Force, 983 F.3d 1321 (Fed. Cir. 2020).

The Small Business Innovation Research (“SBIR”) and Small Business Technology Transfer (“STTR”) programs are designed to encourage domestic small businesses to engage in research and development with the potential for commercialization. Under the SBIR/STTR programs, a portion of a federal agency’s research and development effort is reserved for award to small business concerns through a uniform process having three phases. Phase One involves determining the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase Two involves further development of proposals that meet the particular program needs, pursuant to which contracts are awarded based on the scientific and technical merit and feasibility of the proposals, (as determined in Phase One), while also considering the proposal’s commercial potential. Phase Three typically involves the commercialization of SBIR/STTR-funded research and development.

The proposed rule makes several changes to the primary DFARS clause applicable to SBIR/STTR participants—DFARS 252.227-7018. The clause makes permanent the single, non-extendable, 20-year SBIR/STTR data protection period, which has been in place since the DOD issued Deviation 2020-O0007, rather than the previous language in the DFARS, which only prescribed a 5-year period that could be extended indefinitely. The proposed rule also provides the government with perpetual Government Purpose Rights (“GPR”) license rights after the expiration of the SBIR/STTR data protection period, rather than unlimited rights. The clause will also now indicate that the term “SBIR/STTR data” encompasses all the technical data or computer software generated in the performance off a Phase One, Phase Two, or Phase Three SBIR/STTR contract or subcontract. The proposed rule also removes an alternate clause for DFARS 252.227–7018, which previously allowed the government to elect not to exercise its right to publish or authorize others to publish SBIR data.

The proposed rule also amends guidance at DFARS 227.7104 (Contracts under the Small Business Innovation Research (SBIR) Program) to make the policies at DFARS 227.7301-1 related to noncommercial items or processes applicable to SBIR/STTR program participants.  DFARS 227.7301-1 instructs that offers offerors shall not be required, either as a condition of being responsive to a solicitation or as a condition for award, to sell or otherwise relinquish to the government any rights in technical data related to items, components or processes developed at private expense. However, the regulations will also be amended to permit the government the evaluate, as part of a source selection decision, the impact of an offeror’s restrictions on the government’s ability to use or disclose technical data or computer software in a manner consistent with acquisition preferences and other guidance applicable to SBIR/STTR participants.

The proposed rule also updates the markings requirements in DFARS 252.227–7018. The DFARS 252.227–7018(f) markings requirements instruct contractors, subcontractors, and suppliers to conspicuously and legibly mark the appropriate legend to all technical data and computer software consistent with the rights in technical data and computer software acquired by the government in the contract. It also limits the markings that contractors may use to those provided for in the DFARS unless the contracting officer and the contractor have agreed to a special license right. Those markings currently include “Limited rights markings”; “Restricted rights markings”; “SBIR data rights markings”; and “Special license rights markings” at DFARS 252.227-7018(f)(2), (3), (4), and (5), respectively. Notably, the DFARS does not provide standard “Unlimited rights” markings. Nor does it explicitly address nonconforming markings other than those that restrict the government’s rights.

The proposed rule further requires the creation of an “Unlimited rights markings.” This addition to DFARS 252.227-7018(f) may help reduce unnecessary confusion. When the government receives a contract deliverable including technical data or computer software without any restrictive markings, the government personnel reviewing the deliverable may not know whether the data or software has been delivered to the government with an unlimited rights license or whether the more restrictive markings indicating limited rights were inadvertently omitted from the deliverable. By requiring the contractor to include unlimited rights markings where appropriate, the proponents of the rule believe the government will spend less time scrutinizing deliverables and seeking verification from the contractor to detect incorrectly omitted markings. This change should also help SBIR/STTR program participants better protect their intellectual property. By requiring contractors to apply markings to all applicable deliverables, including those delivered with unlimited rights, the proposed rule should reduce the number of inadvertently omitted restrictive markings because it forces an affirmative identification of unlimited rights in the markings.

Lastly, the proposed rule includes revisions to the requirements governing restrictive markings intended to address concerns raised by the Federal Circuit in The Boeing Co. v. Secretary of the Air Force, 983 F.3d 1321 (Fed. Cir. 2020)). The court determined, contrary to the government’s position and the preceding Armed Services Board of Contract Appeals decision, that nonconforming markings instructions in DFARS 252.227–7018 are only applicable to markings that restrict the government’s rights. In other words, the current construction of DFARS 252.227-7018 lacks enforceable instructions concerning other markings, such as those that restrict the rights of third parties. The proposed revisions aim to clarify this issue by prohibiting non-standard markings, limiting markings to those specified in the contract clauses, and prohibiting restrictive markings directed to non-governmental third parties. The proponents of this rule anticipate that this standardization of all markings will eliminate the time-consuming case-by-case determinations regarding the acceptability of nonstandard markings. In addition, this change simplifies markings procedures, which may make those procedures more understandable to SBIR/STTR program participants without much experience complying with the DOD’s markings requirements. Similarly, the proposed rule also clarifies the markings requirements for commercial technical data governed by DFARS 252.227–7015. The revisions clarifying that the restrictive markings selected by the contractor must accurately reflect the government’s license rights.