2018 was a particularly rich year for intellectual property in government contracts (and elsewhere). Continuing with our annual theme of focusing on an event or issue, we will address the hot topics of Other Transactions…
- Other Transactions (“OTs”) or Other Transaction Agreements (“OTAs”)
OTs are not new. They were first authorized for NASA in 1958; codified in 1989 at 10 USC § 2371 for pursuit of advanced research projects by DARPA, and later for DARPA “prototyping”; expanded in 1996 beyond DARPA for the military services (and off and on to 11 executive agencies); and, through Section 815 of the 2016 NDAA, OT Prototype authority was made permanent and codified at 10 U.S.C. § 2371b, reinvigorating their use within DOD.
In conjunction with OTs rising popularity at DOD as a perceived substitute for procurement contracts (or perhaps because of it), two events turned our attention to OTs in 2018: (1) the GAO’s decision in Oracle America, Inc., B-416061 (May 31, 2018), rejecting a sole source follow-on to a prototype OT; and (2) the DOD’s December 2018 “Other Transactions Guide,” (the “2018 Guide” available on-line at https://aaf.dau.mil/ot-guide/ ), which refreshingly replaces the January 2017 “Other Transactions Guide for Prototype Projects.”
If one takes the time to read them, these two writings highlight and ameliorate much of the confusion surrounding OTs. And confusion has been more the rule than the exception about OT requirements generally and their IP obligations particularly. So, let us clarify a few key points and then turn to the IP issues.
- How Many and What Types? Although their particulars can and do vary considerably, there are only three primary types of OTs at DOD: research, prototype, and production.
- Research OTs really only are for research, whether for basic, applied, or advanced research projects. 10 USC § 2371. As the 2018 Guide points out, this is for work that pushes the state of the art, has dual application (government and commercial), and has only incidental prototype work.
- Prototype OTs. These are used when the goal of a program is to create a single prototype that will be delivered to the Government or is to acquire a reasonable number of prototypes to test in the field before making a decision to purchase in quantity. They are covered by 10 USC § 2371b.
- Production OTs are what they sound like. They flow from Prototype OTs, and, according to the 2018 Guide, can be awarded to a sole source if competitive procedures were utilized in awarding the Prototype OT, the participant successfully completed the prototype, and the solicitation and original agreement allowed for a follow-on for production contract or other transaction. These rules flow principally from the Oracle decision.
- Contracts: Yes, OTs are contracts, enforceable for breach and disputable. They simply are not FAR-based procurement – i.e., acquisition – contracts. Nor are they grants, cooperative agreements, or Cooperative Research and Development Contracts (“CRADAs”). This means none of the statutes, regulations, or decisions that apply to those instruments applies to OTAs.
In turn, this means the data rights statutes at 10 U.S.C. §§ 2320 and 2321, their corresponding FAR and DFARS provisions and data rights clauses, and the Bayh-Dole Act do not apply. The data rights clauses can be used if you wish, but you are not obliged to do so. Necessarily, therefore, there is no such thing as mandatory “standard” OT agreements or IP clauses, no matter what an agency or a contractor tells you.
- Other Laws Do Apply: Freedom from the FAR and DFARS is liberating, but there always are rules. OT holders must remain conscious, amongst others, of the False Claims Act, Fair Labor Standards Act, nondiscrimination laws, environmental laws, export control, classification, and other national security laws and regulations. Furthermore, although often people think this makes OTs immune from protests, the Government Accountability Office will review bid protests challenging an OT award to the extent an agency has improperly used an OT beyond its statutory authority or when a procurement contract is expressly required. The Court of Federal Claims similarly will review bid protests alleging an agency is improperly using its OT authority when a procurement contract is required. The court also may have jurisdiction to review challenges to an OT evaluation and award decision in certain circumstances. Although this jurisdiction has not yet been tested, the 2018 Guide recognizes the possibility.
- Greater Freedom from Administrivia: Once the procurement regulations are shed, there is room for streamlining day-to-day administration of OTs. For example, OTs are not required to be administered by Defense Contract Management Agency. They can be if the agency wishes and you agree, but it is not required.
Better yet, OTs are not required to be audited by DCAA. An agency can request DCAA’s support, but one would hope this urge is resisted. If audits do become necessary, the Government has the ability to use outside independent auditors, and the parties should be able to negotiate the scope of the audits.
However, in accordance with 10 USC § 2371b(c)(1), a Prototype OT that provides for payments in a total amount in excess of $5 million must include a clause that provides Comptroller General access to records. This clause is not required for Research OTs.
- Freedom to Negotiate: Although there are benefits to having certain mandatory FAR and DFARS clauses – the Changes clause comes to mind (you are entitled to equitable adjustments) – and although there is comfort in knowing what you are up against – for example, the FAR’s Termination for Convenience provisions are some of the most rational ever written – there is, again, almost no constraint on what you can negotiate. This might mean work for both sides: they have got to figure out how best to handle disputes, terminations, and of course IP. But the corollary is OTs offer great flexibility and the ability for both sides to tailor terms to accommodate their real needs rather than “needs” set by regulation. This is the inverse of the maxim that “boilerplate is a substitute for active thought.”
- So, YES, You Can Negotiate Your IP Rights: Therefore, the most important point to keep in mind when negotiating intellectual property rights in an OT is the agreement is a blank slate to be etched as far as your government customer is willing to go. Guidance differs by agency, but taking DoD as an example, agreements officers (the contracting officer equivalent for OTs) are instructed to rely on their understanding of Bayh-Dole and DFARS frameworks only as a starting point from which to craft IP clauses that consider “project goals,” including commercialization and follow-on support, and “balance the relative investments and risks borne by the parties both in past development of the technology and in future development and maintenance of the technology.” These are words with meaning when it comes to negotiations.
These considerations are to be built on the parties’ identified business plans for the subject technology at one year, three years, five years, and beyond – something the industry participant should take the lead in shaping early on.
The 2018 Guide identifies an array of possible IP approaches: royalty provisions; licenses limited in scope, duration, and manner; options; conditions; rights of first refusal; and exclusive dealing arrangements as examples of terms that may tailored to the parties’ needs.
And when the Government will be able to rely on the commercial marketplace to produce, maintain, modify, or upgrade technology, the 2018 Guide suggests the Government has a reduced need for extensive intellectual property rights and may condition its rights to kick in only upon commercial obsoleteness.
Thus, for IP matters particularly, OTs are an open field. Neither contractors nor agencies should be hidebound by traditional FAR and DFARS IP rules.
III. LEGISLATIVE, POLICY AND CASE LAW DEVELOPMENTS
- Legislative and Policy Developments
- Defense Innovation Unit (“DIU”) and use of Other Transaction Agreements (“OTAs”) for pilot prototype projects.
On February 7, 2018, the DoD awarded REAN Cloud a contract with a value of up to $950 million to help defense agencies migrate existing applications to commercial cloud solutions. DoD issued this award as a sole source follow-on production contract to an OT prototype agreement awarded by DIUx. This award demonstrates DoD’s increasing comfort with issuing production contracts after preliminary work with DIU under OT prototype agreements.
During a February 12, 2018 media briefing, DoD Comptroller David Nordquist said that the DoD will be requesting $71 million in FY 2019 for DIUx, almost twice as much as the $41 million DIUx received in 2018.
On August 9, 2018, the then-Deputy Secretary of Defense Patrick Shanahan announced that the DoD was dropping the “Experimental” part of the Defense Innovation Unit’s title. Removing “experimental” is a formal move to establish DIU’s permanent place in the DoD.
Section 211 of the National Defense Authorization Act for Fiscal Year 2019 (“NDAA”) modified Section 10 U.S.C. 2371(b) to allow follow-on production OTAs before completion of predecessor prototype projects. This change was made pursuant to the GAO’s decision in Oracle America, Inc., B-416061 (May 31, 2018), where it sustained a protest because the agency issued a follow-on production OTA before completing the prototype project.
Section 244 requires the Under Secretary of Defense for Research and Engineering to submit a report on DIU to the congressional defense committees. The report must assess DIU’s effectiveness, DIU’s impact on DoD’s access to technology, and an analysis as to how DoD is learning from DIU in order to alleviate technology access and timely contract execution problems. Section 1111 gives DIU Personnel Management Authority to recruit eminent experts in science and engineering.
Section 873 requires DoD to collect and analyze data regarding its use of OTAs, update policy and guidance regarding the use of OTAs, and report to Congress annually on its data. The data collected must be stored in a manner that allows for future access. The Section mandates the Secretary of Defense to submit a report, no later than December 31, 2018, to the congressional defense committees covering the DOD’s use of OTAs during the preceding fiscal year.
- Navy Space and Naval Warfare Systems Command OTA. In June, the Navy gave its first OTA authority to Space and Naval Warfare Systems Command with the hope that companies would pitch new technologies to the Navy. As of September 26, 2018, the Navy has given each of its system commands the authority to use OTAs up to $100 million. The Navy has five system commands, giving the Navy authority to execute OTA agreements totaling in the aggregate up to $500 million.
- Department of Defense, Other Transactions Guide. In early December 2018, the Under Secretary of Defense for Acquisition and Sustainment (USD, A&S), issued a new Other Transactions Guide. This new Other Transactions Guide, available on-line at https://aaf.dau.mil/ot-guide/ rescinds in its entirety and replaces the Other Transactions Guide for Prototype Projects (version 1.2.0, dated January 2017). The Other Transaction Guide is dramatically different in content and tone from the guidance it replaces, containing significant information on virtually all aspects of Other Transaction Agreements (OTAs) that can be entered into and used by DoD. Pertinent to Intellectual Property, the OT Guide counsels that it is a best practice for the government and contractor (referred to as a solution provider) to identify business plans for the subject technology at 1-year, 3-years, 5-years, and beyond. By establishing the short-term and long-term needs of the parties, a tailored IP scheme can more easily be determined and factored into the Government’s IP negotiation strategy. The OT Guide states:
- Tailored IP terms may include, but are not limited to: royalty provisions, limited licenses (scope, duration, manner), options, conditions, right-of-first refusal, and exclusive dealing terms, amongst others.
- The negotiated IP terms and conditions should facilitate all parties’ business plans and project goals, including any likely production and follow-on support of the prototype developed, and balance the relative investments and risks borne by the parties both in past development of the technology and in future development and maintenance of the technology. The Government team should consider the effect of other forms of IP (e.g. trademarks, registered vessel hulls, etc.), that may impact the acquisition strategy for the technology.
- Where the project goals call for reliance on the commercial marketplace to produce, maintain, modify, or upgrade the technology, there may be a reduced need for rights in IP for those purposes. However, since the Government tends to use technology well past the norm in the commercial marketplace, the Government team should plan for maintenance and support of fielded prototype technology when the technology is no longer supported by the commercial market and consider obtaining at no additional cost a license sufficient to address the Government’s long-term needs to the technology.
- Government Accountability Office.
- In Oracle America, Inc., B-416061, 2018 WL 2676823 (Comp. Gen. May 31, 2018), a cloud vendor protested that the Army’s production Other Transaction Agreement (“OTA”) with another cloud vendor (REAN Cloud) did not meet the requirements of the 2018 NDAA. GAO sustained the protests. It concluded that the Army did not have authority to award the sole source follow-on production OTA and recommended that the Army terminate it and conduct a new procurement, or prepare a justification to award the contract without competition, or see if it may comply with statutory conditions for entering into a production OTA under other transaction authority.
In 2017, the U.S. Transportation Command (“TRANSCOM”) and DIUx, issued a traditional six-month OTA to REAN Cloud to move legacy applications to the cloud. They then extended a production OTA to REAN Cloud to perform more work for TRANSCOM. Oracle argues that the Army’s use of other transaction authority to award the production OTA to REAN Cloud violated the NDAA, that is, that the award violated the express statutory language regarding the conditions under which DoD may award a sole-source, follow-on production contract.
GAO began by determining whether it could hear the protest. GAO does not typically review agreements by agencies issued under “other transaction” authority because such agreements are not procurement contracts. However, GAO does review protests concerning whether an agency is properly using its other transaction authority. GAO limited its review to whether the agency’s use of discretionary authority was proper in order to stay within the bounds of its bid protest jurisdiction. GAO also determined that Oracle was an interested party and could submit a protest, because, although Oracle did not compete for the solicitation the subject matter of the OTA award had changed, potential offerors of the initial OTA award were not sufficiently advised of the potential for a follow-on production OTA award to the successful vendor.
GAO considered whether the prototype OTA was actually commercial, which would disqualify it as a prototype project that could be solicited through production OTA. GAO looked to the Department of Defense OT Guide for Prototype Projects, which described a prototype project as, among other things, “a preliminary pilot.” GAO found that the original prototype OTA was a prototype project because it was a pilot program to demonstrate REAN’s capabilities. Therefore, the prototype OTA was not commercial and qualified as a prototype project.
GAO focused on the NDAA’s text to determine whether the agency had statutory authority to give a follow-on production OTA where the solicitation under which the prototype OTA award was made did not expressly provide for (that is, give notice of the possibility of) a follow-on production OTA. The NDAA allows for a prototype OTA to provide for a sole source follow-on production OTA, but only if notice that such a follow-on award may be made is a provision included in the solicitation for the prototype OTA. In this case the GAO found that the required notice was not in the original solicitation. Therefore, the agency did not have authority to award a follow-on production OTA. The Commercial Solutions Opening (CSO”) Special Notice issued by DIUx referencing a possible follow-on production OTA was inadequate, in GAO’s view, to confer notice because that Notice was a standalone announcement rather than a notice in the solicitation or in the transaction document, and the NDAA requires that possibility of the follow-on production OTA must be provided for in the solicitation.
GAO also examined whether the agency had authority to award the production OTA before the prototype project had been completed. It also is a statutory requirement that a prototype requirement be completed in order to award a follow-on production OTA without competition. The agency acknowledged that there was ongoing work on the prototype OTA when the performance OTA was issued, but argued that the aspects of the prototyped project included in the originally issued prototype OTA had been completed by that time. GAO turned to the text of the statute, finding that completion of the prototype project means completion of “the prototype project provided for in the transaction,” which meant the entire prototype project, as modified. GAO sustained the protest, finding that the agency did not have statutory authority to award the production OTA because of the inadequate notice and because the prototype project, as amended, was not completed before the follow-on award was made.
This excerpt discussing “Other Transactions” is from conference materials published in, and presented at, the 2018 Government Year In Review brief, pages 12-1 to 12-32, by W. Jay DeVecchio, Esq. and Fernand A. Lavallee, Esq., originally published February 2019, © 2019 Thomson Reuters.
Strategic Institute wishes to thank Thompson Reuters and the authors for graciously allowing us to republish the article on this website.