DoD Issues Final Rule on Presumption of Development Exclusively at Private Expense

September 20, 2011

DoD is issuing a final rule to amend the Defense Federal Acquisition Regulation Supplement to implement sections of the Fiscal Year (FY) 2007 and 2008 National Defense Authorization Act, including special requirements and procedures related to the validation of a contractor's or subcontractor's asserted restrictions on technical data and computer software. Effective date: September 20, 2011. Reference Federal Register Volume 76, Number 182 (Tuesday, September 20, 2011).

This final rule amends the Defense Federal Acquisition Regulation Supplement (DFARS) to implement section 802(b) of the FY 2007 National Defense Authorization Act (NDAA) (Pub. L. 109-364) and section 815 of the FY 2008 NDAA (Pub. L. 110-181). Section 802(b) modified 10 U.S.C. 2321(f)(2) with regard to the presumption of development at private expense for major systems. Section 815 revised 10 U.S.C. 2321(f)(2) to exempt commercially available off-the-shelf items from the requirements that section 802(b) established for major systems.

This final rule implements special requirements and procedures related to the validation of a contractor's or subcontractor's asserted restrictions on technical data and computer software. More specifically, the final rule affects these validation procedures in the context of two special categories of items: Commercial items (including commercially available off-the-shelf items), which may be referred to as the ''Commercial Rule;'' and major systems (including subsystems and components of major systems), which may be referred to as the 'Major Systems Rule.''

DoD published a proposed rule with a request for comments in the Federal Register on May 7, 2010 (75 FR 25161). Two respondents provided comments.

Discussion and Analysis of the Public Comments
A discussion of the comments and the changes made to the rule as a result of those comments are provided as follows.

A. Prescribing a Noncommercial Clause for Technical Data Related to a Commercial Item
Comment: Two respondents described the prescriptions at DFARS 227.7102-3(b) and 227.7103-6(a) as new requirements that exceed the changes necessary to implement the statute.
Response: The operative elements of the clause prescription at DFARS 227.7102-3(b) were a part of the last major revision of Part 227 in 1995. The substance of the prescription has not changed in the proposed rule; the requirement was redesignated as DFARS 227.7102-(4)(b) and revised to cross-reference the prescription added to DFARS 227.7103-6(a). This follows DFARS drafting principles to use only a single prescription for each clause, using cross-references when necessary. As such, the prescription at DFARS 227.7103-6(a) serves as
the primary source for prescribing all uses of the clause at DFARS 252.227-7013, with a cross-reference at 227.7102-(4)(b).

Comment: A respondent recommended that the criteria ''or will pay any portion of the development costs'' should be eliminated because the Government should not receive the benefit of something it may or may not pay for in the future outside of the contract.
Response: The ''will pay'' criterion has been used since 1995. The term ''will'' is used to denote an anticipated future action or result, and there is no evidence that this criterion has been or should be interpreted as seeking to be used in a contract when the criteria used to invoke the clause has not, and is not, expected to occur during the contract.

Comment: Two respondents outlined specific concerns that prescribing use of the noncommercial clause for technical data related to a commercial item is unnecessarily burdensome with regard to the noncommercial marking requirements. One respondent argued that this could result in the contractor unintentionally forfeiting its intellectual property rights by delivering with commercial markings that do not comply with the DFARS noncommercial marking requirements.
Response: The prescription for the use of the clause at DFARS 252.227-7013 in this scenario already exists. Use of commercial restrictive markings would not directly result in the forfeiture of the contractor's intellectual property rights in cases in which the noncommercial marking rules were used. The restrictive marking required by the clause at DFARS 252.227-7015(d) for technical data related to commercial items should be sufficient to: (1) Preserve the contractor's rights under the noncommercial clause procedures for correcting
''nonconforming'' markings (see DFARS 252.227-7013(h)(1)) or (2) validate asserted restrictions under DFARS 252.227-7037, which is used regardless of whether the clauses at DFARS 252.227-7013 or 252.227-7015 are included.

The final rule is amended to address concerns about the desirability of requiring noncommercial markings for the entire technical data package, in cases where the Government may have funded only a small portion of the development. The final rule revises the prescriptions at DFARS 227.7102-4(b) and 227.7103-6(a), to clarify that in cases when the Government ''will have paid'' for any portion of the development of a commercial item, both the commercial clause at DFARS 252.227-7015 and the noncommercial clause at DFARS 252.227-7013 should be used together. In these cases, the noncommercial clause will apply only to the technical data related to those portions of the commercial item that were developed in some part at Government expense, and the commercial clause will remain applicable to the rest of the data. This preserves the preexisting allocation of rights between the parties, but avoids the necessity of applying noncommercial markings to data related to commercial technologies that were developed exclusively at private expense. In addition, the flowdown requirements of DFARS clause 252.227-7013(k) and clause 252.227-7015(e) are clarified to enable the use of the appropriate clause(s) to lower-tier subcontracts.

Comment: Two respondents commented that the proposed revisions result in a commercial item losing its commercial item status. One of these respondents recommended the elimination of the ''developed exclusively at private expense'' component of the proposed revisions to the clause at DFARS 252.227-7019, to avoid the application of the noncommercial clauses to commercial technologies.
Response: The prescription for the use of the clause at DFARS 252.227-7013 does not affect the commercial status of an item that otherwise meets the definition of commercial item at FAR 2.101 (based on 41 U.S.C. 403(12), and 10 U.S.C. 2302(3)(I)). If the item still qualifies as a commercial item, then it is a commercial item. If that commercial item was not developed exclusively at private expense, then the rules apply that govern the treatment of technical data deliverables and associated license rights related to that commercial item.

Comment: Two respondents identified several ways in which the prescribed use of the clause at DFARS 252.227-7013, instead of 252.227-7015, appears to be inconsistent with FAR and DFARS policies regarding data deliverables and data rights in commercial technologies. The respondents noted that DFARS 227.7102-1 states DoD's basic policy that DoD shall acquire only the technical data deliverables that are customarily provided to the public, with a few exceptions.
Response: The prescription for the use of the clause at DFARS 252.227-7013, when the item has been developed in part at Government expense but the item still qualifies as commercial, does not change the applicability of this policy statement. The policy provides exceptions, one of which allows the Government to require the delivery of technical data that describes modifications made at Government expense even if such data is not typically provided to the public (see DFARS 227.7102-1(a)(3)).

Comment: A respondent recommended the elimination of the ''developed exclusively at private expense'' component of the proposed revisions to the clause at DFARS 252.227-7019, to avoid the application of the noncommercial clauses to commercial technologies.
Response: The respondent's basis for concern is unclear in view of the limited applicability of the clause at DFARS 252.227-7019 to only noncommercial computer software, and the proposed revisions address only the noncommercial aspects of the Major Systems Rule. Accordingly, the proposed revisions to the validation procedures for noncommercial computer software at DFARS 227.7203-13 and 252.227-7019 are retained in the final rule.

Comment: One respondent noted that DFARS 227.7202-1 states the basic policy governing commercial computer software and computer software documentation is that the Government acquires the licenses customarily provided to the public unless such licenses are inconsistent with Federal procurement law or do not otherwise satisfy the agency's needs.
Response: The proposed rule creates no issues or conflicts with this policy since there are no changes proposed for any DFARS coverage related to commercial computer software or documentation.

Applying Data Rights Clauses to Subcontracts for Commercial Items
Comment: Two respondents recommended that 10 U.S.C. 2320 and 10 U.S.C. 2321 not be removed from the list of statutes set forth in DFARS 212.504(a), which prohibits their application to subcontracts for commercial items. One respondent concluded that removing these statutes from the list appears to ''unilaterally overturn the express intent of Congress and the FAR Council'' and that the proposed rule did not explain the basis for the decision to remove the statutes from the list.
Response: The proposed rule explains the basis for this determination. The decision to remove these statutes from the list is based on the appropriate statutory determinations that doing so is in the best interest of the Government. The proposed revisions to DFARS 212.504(a) are retained in the final rule.

Application of Statutory Technical Data Rules to Computer Software
Comment: A respondent argued that the proposed rule should not make any changes to the validation procedures for computer software; in particular, the clause at DFARS 252.227-7019, ''Validation of Asserted Restrictions--Computer Software,'' should not be amended to include the proposed new paragraph (f) that implements the ''Major Systems Rule.'' In addition, a respondent contended that the decision to cover software was flawed because: (1) There is no statutory basis for the change and (2) not all rights determinations are ''black and white.''
Response: (1) Although 10 U.S.C. 2320 and 2321 apply only to technical data and not to computer software, it is longstanding DoD policy and practice to apply the same or analogous requirements to computer software, whenever appropriate. Accordingly, the proposed rule implements revisions to the validation procedures for computer software only to the extent that those procedures are based on the technical data validation procedures that are affected by the statutory changes. The result is that it is only the Major Systems Rule that is adapted for application only to noncommercial computer software. (2) The new Major Systems Rule is applicable only to challenges of contractor assertions that development was exclusively at private expense. Thus, the proposed adaptation of the new Major Systems Rule to noncommercial software validation also is not applicable to assertions based on mixed funds, and does not in any way restrict the ability to segregate mixed-funding development into its privately-funded and Government-funded portions.

Two Separate Standards for Civilian and DoD Agencies
Comment: One respondent stated that the proposed rule creates two separate standards for civilian and DoD agencies in that ''the practical result could be that an item will be treated as commercial for purposes of intellectual property rights by civilian agencies, and as non-commercial by the agencies of DoD.''
Response: Without analyzing the required treatment under the FAR of a commercial item by a civilian agency when the Government has paid a portion of the development costs, the proposed rule has not changed the criteria for whether an item is a commercial item (i.e., under the definition at FAR 2.101). Since 1995, DFARS 227.7102-3(b) has required the use of the noncommercial clause at 252.227-7013 in lieu of the commercial clause at 252.227-7015 if the Government will pay any portion of the development costs of the commercial item. Although the proposed revision of the DoD validation scheme to include a ''Commercial Rule'' and a ''Major Systems Rule'' may have no equivalent in the civilian validation scheme, DoD's process is driven by the changes to 10 U.S.C. 2321, for which there is no equivalent in the civilian agency statute (41 U.S.C. 253d). No revisions are necessary.

Administrative, Technical and Typographical Issues
Comment: A respondent identified a citation error, which seeks to remove and reserve 212.504 paragraphs (a)(v) 10 U.S.C. 2324, Allowable Costs Under Defense Contracts and (a)(vi) 10 U.S.C. 2327, Reporting Requirements Regarding Dealings with Terrorist Countries, when it appears that the intent is to remove paragraphs (a)(iii) 10 U.S.C. 2320, Rights in Technical Data and (iv) 10 U.S.C. 2321, Validation of Proprietary Data Restrictions.
Response: The respondent is correct. This change is reflected in the final rule.

Comment: A respondent recommended changing the cross-reference in the second sentence of DFARS 252.227-7037(c) from paragraph (b) to (b)(1) for further clarification.
Response: The respondent is correct. This change is reflected in the final rule.

Changes to Rule Resulting From the Public Comments
Changes made in the final rule based on the public comments received, include the following:
Removed DFARS 212.504 paragraphs (a)(iii) 10 U.S.C. 2320, Rights in Technical Data, and (a)(iv) 10 U.S.C. 2321, Validation of Proprietary Data Restrictions, instead of DFARS 212.504 paragraphs (a)(v) 10 U.S.C. 2324, Allowable Costs Under Defense Contracts and (a)(vi) 10 U.S.C. 2327, Reporting Requirements Regarding Dealings with Terrorist Countries.
Revised the prescriptions at DFARS 227.7102-4(b) and 227.7103-6(a) to clarify that in cases when the Government ''will have paid'' for any portion of the development of a commercial item, both the commercial clause at DFARS 252.227-7015 and the noncommercial clause at DFARS 252.227-7013 shall be used together.
Revised 252.212-7001(b) to add 252.227-7013 and 252.227-7037 to be used, as applicable.
Revised 252.212-7001(c) to add 252.227-7013, 252.227-7015 and 252.227-7037 to be flowed down to subcontractors, as applicable.
Revised the clause flowdown requirements of DFARS 252.227-7013(k) and 252.227-7015(e) to enable the use of the appropriate clause(s) to lower tier subcontracts.
Changed the cross reference in the second sentence of the clause at DFARS 252.227-7037(c) from paragraph (b) to (b)(1).
Revised 252.244-7000 to add 252.227-7015 and 252.227-7037 to be flowed down to subcontractors, as applicable.

FOR FURTHER INFORMATION CONTACT: Mr. Manuel Quinones, 703-602-8383. 






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