The Federal Circuit, in Boeing, Backs Contractors' Proprietary Markings, but Leaves Open an Important Question on Scope

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Federal contractors received some good news from the Federal Circuit this holiday season.  The court held, in Boeing Co. v. Secretary of Air Force, that the Department of Defense (DoD) Federal Acquisition Regulation Supplement (DFARS) data rights clauses do not prohibit a contractor from applying its own proprietary markings to technical data in addition to the government-specific markings prescribed by the clauses.  This is true, according to the court, even for technical data describing technologies the government has paid the contractor to develop, i.e., “unlimited rights data.”  The decision marks a victory for contractors seeking to leverage their intellectual property rights in such data in the commercial marketplace or in the government supply chain, but the decision’s true impact remains to be seen on remand to the Armed Services Board of Contract Appeals.

The DFARS data rights clauses—most prominently, DFARS 252.227-7013 for noncommercial technical data and DFARS 252.227-7014 for noncommercial computer software—establish strict marking procedures contractors must follow to protect their proprietary interests in data delivered to the government.  Failure to apply the exact legends in the clauses can have drastic consequences, including wide distribution and loss of trade secret protection.  But there has long been disagreement within the government and industry about whether additional markings may be applied.  The DFARS legends address the government’s rights, but what about other parties that might get hold of the data?

In Boeing, contractors finally have an answer, at least from the Federal Circuit.  According to the court, the plain language of the DFARS clauses demonstrates their marking instructions apply “only in situations when a contractor seeks to assert restrictions on the government’s rights,” not the rights of others outside the government.  Thus, a proprietary legend addressed to third parties is fine, so long as it does not seek to restrict the government’s rights.

But when does a third-party legend begin to encroach on the government’s license rights?  That next logical question—easily the most interesting in this case, and certainly the one with the most practical impact—the court left open, instructing the Board to address it through fact-finding on remand.  The facts in Boeing set a prime stage for this analysis; explaining why requires some brief table-setting.

Looking only to contracts with DoD, and setting aside specially negotiated licenses (preferred by statute but less often used), the government typically receives one of three licenses in noncommercial technical data: limited rights, government purpose rights, or unlimited rights.  Noncommercial software follows a similar model, but swaps “limited rights” for “restricted rights”; the rights include in the latter are tailored to software, but both essentially mean the government is prohibited from distributing technical data or software to third parties outside the government.  With government purpose rights, it can do so for any government purpose (e.g., soliciting new systems or replacements from your competitors), and with unlimited rights, it can do so “in any manner and for any purpose whatsoever” and—importantly, here—“have or authorize others to do so,” too.  As a result, the scope of the government’s license has significant bearing on a contractor’s ability to exclude others from receiving and using its data and, in turn, the contractor’s ability to maintain those data as trade secrets.

Trade secrets are often the most valuable intellectual property interests a contractor has in its technical data and software.  Although varying some by jurisdiction, a trade secret is typically defined by two key elements: (1) deriving independent economic value for not being generally known or readily ascertainable by others, and (2) being subject to reasonable efforts to maintain secrecy.  Thus, constraining the government to limited or restricted rights is critical to maintaining an enforceable trade secret, and many courts have acknowledged the government’s having unlimited rights in data likely destroys any trade secret therein.[1]  In fact, the Board, in its decision below, finding Boeing’s proprietary marking was not authorized, noted that, because “the government is under no obligation to protect the confidentiality of [unlimited rights] data and can give it to whomever it chooses or even publish it on the Department’s website,” Boeing “does not possess a trade secret in such technical data.”  (ASBCA Nos. 61387, 61388)  The Federal Circuit’s decision does not contradict or overturn this rule, at least expressly; the court, perhaps intentionally, does not once mention trade secrets.

This does not mean a contractor does not possess some proprietary interest in unlimited rights data.  Courts repeatedly have affirmed that “unlimited” rights are not “exclusive” rights,[2] and the government’s unlimited rights in data do not divest a contractor of its ability to use or to license others to use the data.[3]  But the scope of the proprietary interest, and a contractor’s ability to enforce it in court, are far from clear and often very fact-specific.

Returning to Boeing, the technical data at issue (deliverables related to Boeing’s work on the F-15 Eagle Passive/Active Warning Survivability System) were indisputably unlimited rights data.  As a result, the government has “rights to use, modify, reproduce, perform, display, release, or disclose [the] technical data in whole or in part, in any manner, and for any purpose whatsoever, and to have or authorize others to do so.”  Boeing did not dispute these rights, and claimed its proprietary marking—which states “Non-U.S. Government recipients may use and disclose [the data] only as authorized by Boeing or the U.S. Government”—does not seek to restrict them.  The government disagreed, arguing the marking restricts the government’s rights by requiring express government authorization for distribution of data, which the government argued would be “highly burdensome on the Government and, therefore [would be] inconsistent with its unlimited rights.”

Given the breadth of an unlimited rights license—which includes, for example, not only a right to disclose data to others, but also to authorize others to further disclose the data “for any purpose whatsoever”—it may be difficult for contractors to craft proprietary legends that do not encroach on the government’s rights, at least where unlimited rights data are involved.  The legend at issue in Boeing seems to toe about as close to that line as possible, and it will be very interesting to see where the Board lands on remand.  Its ultimate decision will affect not only contractors in Boeing’s position, but those throughout the supply chain who seek to support their government customers without getting entangled in costly litigation over third-party intellectual property rights.

As we continue to monitor this case on remand, contractors should in the meantime remind their employees of two important rules:

  • Always mark technical data and software in strict accordance with the rules in the DFARS (or FAR if contracting with a civilian agency); and
  • Take care in using others’ data only as authorized, whether based on the legends printed on the data or express directions from your customer.

[1] See, e.g., L-3 Commc’ns Westwood Corp. v. Robichaux, 2008 WL 577560, at *7 (E.D. La. Feb. 29, 2008) (“The Court finds that because plaintiff provided the government with unlimited rights to all of the source codes at issue, they are no longer trade secrets.”); Conax Fla. Corp. v. United States, 824 F.2d 1124, 1128 (D.D.C. 1987) (“[I]f the drawings belong to the government without limitation, [plaintiff] has no trade secrets to be protected.”); HiRel Connectors, Inc. v. United States, 2005 WL 4958589, at *4 (C.D. Cal. Jan. 4, 2005) (“The Government’s unlimited right to use form, fit, and function data in any way it wished establishes that as a matter of law, such information cannot be protected as a trade secret.”).

[2] Regents of Univ. of Colo. v. KDI Precision Prods., Inc., 488 F.2d 261, 264 (10th Cir. 1973).

[3] Northrop Corp. v. McDonnell Douglas Corp., 705 F.2d 1030, 1044 (9th Cir. 1983) (unlimited rights “were neither sole nor exclusive and did not divest [the contractor] of the residual right to continue to use the technology itself and to share it with other private parties”); see also FAR 52.227-14(d)(1).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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