In two recent GCA DIGEST articles (First and Second Quarter, 2004) we reported on and analyzed the implications of the recent Newport News Shipbuilding case.  The case basically established that once a contract is signed, then the research and development costs related to that contract, whether they are “explicit” or “implicit” requirements of the contract, must be considered direct expenses of the contract and hence may not be charged as an indirect independent research and development expense.  We came across a recent article by Professor Ralph Nash in the September 2004 issue of the Nash & Cibinic Report where he discusses how the accounting issue can directly affect the government’s rights to contractors’ patents, copyrights and trade secrets where those rights are minimal if the work is a result of IR&D effort but substantial if the work flows out of directly funded work.

Work that is directly funded by the government normally provides it with unlimited rights to the intellectual property that results from that work while work partially or totally funded by the contractor creates only limited rights for the government.  The traditional view is that since IR&D effort is not considered work on a contract, the government’s rights in intellectual property from such work are limited.  For patent rights, this means that an invention during the performance of IR&D work would not be a “subject invention” and hence the government would get no rights to any patent on the invention.  For technical data and computer software, the treatment of IR&D is covered by contract clauses giving the government either limited rights or restricted rights when work is done “exclusively at private expense” where one clause (DFARS 252.237-7013) defines the term as “accomplished entirely with costs charged to indirect cost pools.”   FAR 52.227-14, “Rights in Data – General” also uses the “private expense” test to determine whether the contractor can protest its proprietary rights in data and computer software – either by withholding delivery or furnishing it with limited rights or restricted rights legend.  Thought the FAR does not contain a definition of “private expense”, Professor Nash says “it is fair to assume the term would be given the same meaning as the DOD definition” above, resulting in the conclusion that IR&D would be considered private expense.        

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