The Tech Startup's Guide to the Pentagon

Dear “Silicon Valley,”

The Defense Department realizes it needs to do business with you.  However they are a business partner whose process and culture is as foreign to you as any far away market.  This post attempts to outline the differences.

How Government Procurement Differs from Industry
The federal government is broken down into agencies, and each agency runs initiatives called “programs.”  Program Managers (PMs) are like business managers, and Contracting Officers (COs) are independent of them, and enact contracts with industry to effectuate each program’s mission.  

The first thing to realize is that these folks are not into making money.  The government is a public trust, husbanding the taxpayers’ money.  They are risk averse actors who are very process driven.  Congress authorizes and funds these programs annually for the public good, and the PM and CO want to protect the program and not look bad in front of politicians.

The governing regulations are the Defense Federal Acquisitions Regulation Supplement (DFARS) and the Federal Acquisition Regulation (FAR) for the rest of the government.  Remember, bid competition and favoring small/disadvantaged businesses are guiding principles of COs.  Your counsel must have good facility with the DFARS rules and exceptions,…a crafty CO can find a clause to make just about any deal work.

Types of Intellectual Property…with the Government
Imagine you are commissioned to build a sculpture or statue in which you already started work on, or made a miniature version of.  You need a foundation in the ground with concrete and rebar.  Then you need a pedestal.  Lastly you need the structure itself which has both physical property and intellectual property value.  There were artistic drawings, technical drawings, and there is the issue of whether replicas will be sold.   It is crucial to determine who paid for each step of construction and design, and what is considered a material change.  

As a tech entrepreneur, IP is probably your most valuable asset.  With the government you will be dealing with patents and copyrights, which you are probably familiar with.  Trademarks are not dealt with much here, but technical data rights and trade secrets are.  Technical data are written descriptions of technology including blueprints, drawings, test reports, and research.   It is a guide to your product configuration.  Trade secrets include information your company has that 1) is not widely known, 2) has economic value, and 3) that your company routinely takes steps to protect (with NDAs and placing in safes).  It is essential that you have experienced counsel in Intellectual Property with government procurement.

If your company has already funded, produced, and sent a product to market, you have the strongest rights with the government: a Commercial License.  

If your company paid for the development of a technology, you have very favorable Limited Rights; as in limited for the government.  The government can use that version of the technology but cannot share it.

Government Purpose Rights pertain to DoD contracts only.  They are processes and products that were jointly funded by your company and Uncle Sam, and the government, and its contractors, can use the technology for government programs and purposes.  Private contractors cannot legally use the technology for its own purposes.  This requires labeling versions of products and software, and tracing development to dollars.  The level of modification to an original invention is a major topic of dispute.  Government purpose rights last for five years,…but that is negotiable.  

Unlimited Rights occur in what are essentially work-for-hire agreements where the government entirely funds a project.  The government is free to use the technology for its own programs, and give it away to industry.  The iPhone, the Internet, Gore-Tex are all examples of government-funded technology.  As a subcontractor to a Prime Contractor in a work-for-hire situation, you need to stay on guard at the time of contract review to protect your IP.

To sum up: Pre-contract, design, build, and draw up plans for the future to the best of your ability.  While under contract, integrate your product development with your accounting system.  As for your IP rights after the contract,…hopefully your legal, accounting, and engineering teams followed the other advice in this paragraph.

The Way Forward
You need to see government procurement as a great opportunity to serve the country and make some money doing it.  Here are some pointers:

-Learn the organization of the Defense Department writ large, as well as the Military Departments and Commands.  Contracting activities are organized at a relatively low and localized level.  Research the types of Programs and the technologies behind them. 
-The real key to successful contracts is having a relationship with Program Managers and Contracting Officers and learn what capabilities will be needed in the coming years.
-Each contracting unit has a small business advocate whose job is to guide companies likes yours.  Also, the Small Business Administration has plenty of local workshops.
-To repeat, to have the strongest bundle of rights, your lead engineer, accountant, and attorney to work in concert before you go into any contract or subcontract. 

The Pentagon spends north of $100 Billion on contracts every year, and they are looking for small businesses.  This, and the companion piece, should de-mystify the process. 

An addendum from Paxton’s Federal Contract Law Lead Don Holmes:

No one says that dealing with the federal government is easy. Yet large and small contractors continue to do so for various reasons. Over the years they have adopted procedures for dealing with the federal government that may provide better protection for their proprietary data, products and information.  For example:

-- Many contractors will not deal directly with the government. They believe that if they are several contract links away from the government they have better protection against all sorts of government demands, including appropriation of proprietary rights. It is not unusual to see a highly proprietary company selling as a sub-subcontractor, to a sub, who sells to a prime, who may in turn sell to a reseller. As a practical matter this may help protect proprietary rights --as a long-term legal strategy it probably doesn't work.

-- The federal government will undertake a pre-determination of any contractor's legal rights in proprietary information, before a contractor sells anything to the federal government.  The government can sign a written agreement setting out the contractor's proprietary rights.  But, what happens if there is a disagreement later after the proprietary information is disclosed?  This could result in potentially years of litigation at a board of contract appeals or at the US Court of Federal Claims.  Pre-determination is a marginal solution.

--Virtually no subcontractor who has proprietary information or products will disclose that to prime contractors.  They fear that the prime will become one of their competitors and use the proprietary information, notwithstanding contract clauses that say it will not.  It is possible to disclose directly to the federal government, and avoid the prime contractor completely.  But again, you are simply relying upon a contract clause.

-- The government can and will reverse engineer virtually any proprietary product. It has a legal right to do so. It will most often not agree to a no reverse engineering clause as occurs in commercial contracts. The government spends millions of dollars each year on reengineering contractors who tear apart and test products that are proprietary.   They do this to come up with performance data, and in some cases drawings, that can be utilized in re-procurements -- thereby avoiding completely a contractor's proprietary rights claims.

--The Defense Production Act lurks in the background of all agreements -- public and private -- protecting proprietary rights. Given a national security need, the government can expropriate anything of a proprietary nature from a contractor, including forcing him to build the unit and sell it to the government. The only saving point is that the government must pay the contractor its actual costs of production plus a fair profit.

The bottom line is the government has needs that it wants to satisfy. The contractor needs to protect its proprietary data and products.  The contractor needs to do that in a thoughtful and considered way based upon what has gone on in the past, as summarized above.

The contents of this blog and web site are for informational purposes only and do not constitute legal advice. Use of and access to this blog and web site do not create an attorney-client relationship between the user and Paxton Law Group. The opinions expressed on this blog are the opinions of the individual author and may not reflect the opinions of the firm.

The Pentagon's Guide to Silicon Valley

This was an old post on the defunct website of the law firm I used to work for.

The Defense Department realizes that its procurement system cannot supply it with the best technology in the future.  Its Better Buying Power 3.0 initiative, Defense Innovation Initiative, and its Advanced Capability and Deterrent Panel are all attempts to correct this situation.  This post, and its companion post attempts to bridge the cultural gap.

The Difference Between Silicon Valley and the Defense Industry

Here is a real estate analogy to contrast a typical Northern Virginia defense firm with a Northern California technology startup.  One is like a “slum lord”, and the other is like a “house flipper.”  The owner of an old apartment building in an impoverished neighborhood is looking for renters with governmental “Section 8” housing vouchers, and barely keeps the building up to code.  In other words this land lord’s business model focused on government revenue streams and performing upkeep for government inspectors.  The investor-rehabber has a completely different type of business.  In a hot market like San Francisco, not having a tenant raises your property value significantly.  The investor-rehabber would gladly forgo rental income and spend ten times that amount on rehabbing the house to get a big return on investment.  Furthermore, the market is global, to include Chinese, Russian, and Middle Eastern millionaires looking to park their money.  In short, this businessperson wants equity, and is less concerned with property management.  

The DoD is used to firms whose business model revolves around its acquisition and appropriation process.  Thus, Program Managers and Contracting Officers are used to having tremendous leverage in negotiating with these companies.  Some companies use the government to fund their research and products; others have developed smaller products, processes, and services to help the government or prime contractors to the government.  Over time, the focus of these companies tends to become the chase for the next contract option, or to service the newest version of a weapons system.  The focus is less on innovation, and while intellectual property is important, ultimately, survival is about inking contracts with the government.  

Silicon Valley (a metonym for the Bay Area’s tech industry) is a completely different animal.  For many entrepreneurs, and almost all investors, the “exit” is the North Star.  The focus of the company is one piece of technology, and the aim is to raise the value of the company so it will be acquired.  The investor-rehabber paradigm compared to the Northern Virginia’s low-income landlord paradigm in the example above. 

Here are six others differences: 

1. Defense programs move more slowly than Valley product development. 
2. The DC-NoVa area has law firms, consulting firms, and a workforce with a lot of knowledge about governmental regulations and funding processes.  That represents  cultural and professional anathema in California. (What the accompanying blog post hopes to elucidate) 
3. As difficult as it is for an innovative technology firm to convert part of its company to servicing the government, it is nearly impossible for a government contractor to internally convert its culture, and change its processes to market new technology products commercially. 
4. In Silicon Valley, a failed company is just part of R&D in a large economic ecosystem.  In the Washington area, a failed Program is a political disaster.  If the federal government wants to be a proverbial lion in the tech food chain with Googles and Apples (no food pun intended), the Department and its 535 overseers on the Hill will need a transformational change in outlook.   
5. Silicon Valley firms are vigilant about protecting intellectual property and assets, so they are more likely to be vertically integrated.  Or simply buy smaller firms that add capabilities.  This makes subcontracting a problem given the government’s socio-economic policy goals. 
6. Nationality is a big issue with defense contractors.  The large immigrant population of Silicon Valley is a large problem to be navigated for national security work. 

Major Issues to be Worked Through 

The Defense Department needs Silicon Valley’s genius to maintain it’s global dominance.    In the Nov-Dec 2014 Issue of Foreign Affairs, former Deputy Defense Secretary William Lynn describes the history of the defense industry and the need to tap into America’s technology industry.  The Valley is the world’s bleeding edge of technological research, we are lucky to have this ecosystem within our borders.  However, here is a summary of issues, many more complicated than the DoD is used to, in dealing with the Valley:   

Big Picture Innovation

Does it mean supporting and incentivizing companies to have the very best conception of something?  Or spurring a business environment that has a dozen companies with a solution nearly as good as the very best one?  Departmental policy decisions, as well as negotiating tactics of individual contracting officers will determine the quality of products coming from American companies. 

Small Picture Innovation

Realize that the trend in high technology is the “Lean” approach to doing business.  This means a very iterative product development process guided by consumer feedback along the way.  Once the product is developed, then a young company can model its business.  Furthermore, program managers, acquisition officials, and their legislative overseers will have to design a system where the culture of failure is politically acceptable. 

Bid Competition

Traditionally, competition meant better products at lower prices.  However, market research in technology is very difficult.  There are numerous software and hardware projects being developed in secret in garages all over the United States.  By contrast, we know every airplane factory, and those of our adversaries.  Furthermore, the collective imagination of technology innovators far outstrips the ability of a Program Manager generating requirements for a solicitation.  The DoD would do well to ingratiate itself with incubators, venture capital firms, and law firms that are most connected to the newest products in development.  

Small Business

The U.S. Government has a strong bi-partisan agenda to support small businesses through contracting regulations.  The Small Business Administration usually classifies businesses as “small” based on revenues.  This does not include venture capital.  So a company like Facebook or Instagram (which Facebook bought) can go for years without making any money, still get pumped full of venture capital, have a large valuation and still be a small business.  In fact, with such little revenues, the SBA might not have even considered them viable businesses, even though they made revolutionary products with potential governmental value.  

As already mentioned, most technology firms are not set up to farm out subcontracting business, like Lockheed or Boeing.  Ironically, some of that problem is obsolesced by the reality that many “small” businesses have created great products, and are capable of servicing the military in ways that could enhance our forces. 

Pushing Public R&D into the marketplace 

It is well documented that almost all of the technology in the iPhone is based on research commissioned by the American Defense Department.  Much of that research was through the government’s own labs and research organizations.  Thus, there wasn’t the issue of private entities not wanting to share technology for the benefit of the economy.  In fact, a negative side effect of the decades long trend of privatizing historically governmental functions is that modern companies see the government less and less as a public trust, and thus do not feel safe lending them their intellectual property. 

The Way Forward 

Solutions will have to be found. The key for the government is to understand that the company cares most about it’s valuation, and that valuation is based on its technology remaining proprietary.  The onus is thus for skilled contracting officers to use clauses in the FAR that give innovative companies the peace of mind that their core intellectual property will remain viable in the future.  The government will have a lot less leverage in the Valley.

The contents of this blog and web site are for informational purposes only and do not constitute legal advice. Use of and access to this blog and web site do not create an attorney-client relationship between the user and Paxton Law Group. The opinions expressed on this blog are the opinions of the individual author and may not reflect the opinions of the firm.

Compilation of National Security Law & Policy posts

Some of my favorite posts on technology, federalism and how it connects to national security law.

Defense Procurement and the High Tech Industry

http://www.paxtonlawgroup.com/blog/the-tech-startup-s-guide-to-the-pentagon

http://www.paxtonlawgroup.com/blog/the-pentagon-s-guide-to-silicon-valley

http://tekathomaslaw.blogspot.com/2015/01/federal-tech-procurement-for-lean-times.html

http://tekathomaslaw.blogspot.com/2014/09/will-better-buying-power-30-bring.html

National Security Law and Technology Evolution

http://tekathomaslaw.blogspot.com/2014/02/how-do-you-appropriate-funds-for-cyber.html

http://tekathomaslaw.blogspot.com/2013/05/legal-issues-with-technology-on.html

http://tekathomaslaw.blogspot.com/2013/05/rorschach-infrared-blot.html

http://tekathomaslaw.blogspot.com/2013/03/defining-inherently-governmental.html

Localization of National Security

http://tekathomaslaw.blogspot.com/2013/04/local-police-and-counter-terrorism-in.html

http://tekathomaslaw.blogspot.com/2013/02/federalism-issues-with-cyber-security.html

Federal Tech Procurement for "Lean" Times

Dear Program Managers and Contracting Officers,

    You have probably heard that the Lean Methodology is sweeping the high technology industry and are now being taught at major business schools.  Here is a whirlwind survey of the concepts, and more important, the mindset that the Lean method requires.

LEAN

The federal acquisitions system is obsolete for the information age, and the military in particular has an imperative to change.   RFPs in the future will be a bit more general about the capability goals needed by a system.  In evaluating a vendor charged with a new technology, the key is that there is a robust, iterative learning process in the company.  Prototypes are tested, results are studied with rigorous quantitative analysis, and then adaptations are integrated into the new prototypes.

Proposals with cutting edge technology will have less detailed plans and milestones than established goods and services.  Product development will have a more scientific approach, with designs and features being tested constantly with customers, or control groups standing in for customers.  Feedback is then analyzed to determine things like if certain features fit the government’s needs, interfere with other government systems, and are profitable for the company etc. 

PROGRAM EVALUATION

As Program Managers, instead of focusing on hitting milestones at cost, on time, and up to par, the focus is on whether lessons of old iterations are being learned and adapted to.  It is a company that knows how to maximize its adaptability that ought to be awarded high technology contracts.

As for the business, once the product is designed, then the business model can be designed.  That is how a venture capitalist would determine viability.

CAUTIONS & JARGON

The Federal Acquisition Regulation (FAR) guides Contracting Officers to pick well run brick and mortar companies, of all sizes. Generally, a vendor with good past performance and solid financials is a sign of a good bet to award a federal contract.  To a Silicon Valley businessperson however, a well managed company is a perfect candidate for being disrupted by an innovation.  Thus, the type of futuristic product that the government should want, is often not what the FAR guides you to.

Another thing to beware of is that the culture of high tech is to bring everything in-house and vertically integrate.  That flies in the face of the government’s process oriented way both at the political level and the bureaucratic level. This will cause problems in meeting subcontracting goals.

MVP- a minimum viable product is produced after many prototypes’ features have been tested.  It minimally meets the customer’s needs.  The MVP is the new Milestone B, if you will.

Pivot- a “pivot” is to San Francisco what a change order is to Washington.  It simply means taking lessons learned from prior iterations of the products, changing the assumptions, and moving the design in a new direction.

Will Better Buying Power 3.0 bring the Pentagon and Silicon Valley Closer?

Led by California’s Silicon Valley, America leads the global economy in technological innovation.  At the same time, official Washington seems to realize that the federal acquisition system is obsolete for the Information Age.  As such, the military is losing its technological margin with potential rivals.

In September 2014, the Defense Department released a concept draft of Better Buying Power 3.0.  It details changes in acquisition designed to spur and capture innovation for military purposes.  The acquisition process is guided by the Defense Federal Acquisition Regulations Supplement (DFARS), and most programs are implemented by a combination of government management and contract law.  Of course the entire system is ultimately governed by the Constitution which diffuses power, interests, and accountability among many.

Today much technical innovation comes from small companies, and indeed individuals.  In Silicon Valley’s ecosystem, most startups die, but more still get funded with some getting acquired and others growing into their own.  That process amounts to research and development in and of itself.  As Clay Christensen writes, ironically because some large companies are well managed with resources aligned for the present, they often cannot react to inventions from smaller companies.

Thomas P.M. Barnett says that the role of the Pentagon is to “predict the threat, buy the force.”  Much of that “force” consists of “programs” for goods and services.  The contracts for those programs begin with requirements.  A growing problem is that the “threat” to be predicted mutates a lot faster than during the Cold War.  In the twelve months prior to this writing, the Syrian government’s Syrian Electronic Army has quickly become a force hacking into Western media sites to get their narrative out.  Also, ISIS has taken control of territory with a speed that has destabilized the entire Middle East.

This amounts to making planning and programming for the Defense Department exceedingly difficult.  In other words, the threat is rapidly changing as are the technologies we need to buy for the force.  Writing requirements for contracts will become a dynamic process.  Changes to the DFARS and new contractual vehicles like awarding prizes can be expected.

An substantial growth in business between the Pentagon and Silicon Valley would be difficult for both.  There are some vast differences between Silicon Valley (a metonym for the ecosystem  and spirit of the Bay Area’s technology industry) and the community of defense related firms, many concentrated in the Washington, DC area.  For starters, many Defense software firms begin with a public policy goal in mind.  Over time their business models tend to become addicted to capturing the next government contract and focus all energy on the regulated bureaucracy that is the Pentagon.  Silicon Valley firms generally begin with an attractive idea that may or may not be immediately monetizable.  A company will be as innovative as its market is dynamic, so much value is to be derived out West.

Other differences will complicate the Better Buying Power 3.0 initiative. The tech business moves very quickly, the federal government does not.  Entrepreneurs may have difficulty understanding the role of government, even though they understand the product or service for delivery. 

There is also the issue with the federal government’s efforts with subcontracting to small and socio-economically disadvantaged businesses.   To integrate configuration control and intellectual property, commercial tech firms are generally more vertically integrated than defense contractors.  This would make subcontracting more difficult.  Interestingly, a lot of commercial tech firms that have little to no revenue may have very high market capitalizations in the private sector, since their products have so much potential.  An economic reality generally unknown to small businesses in the defense world, which are focused on getting the next contract extension.

It is clear that the Defense Department intends to buy more commercial products, spend more on research and development, and use incentive based contracts.  The latter not only includes structuring more profit for performance, but also prizes and “challenge” awards for technologists who make products most meeting specification.   Military acquisitions will become more of a science fair, and less of a business plan contest.

In the end, the government needs to focus on how to skim the cream of technology ideas, without spending a lot on trial and error.  To do that, it will need to become an attractive customer to do business with.  This includes simplifying registration for startups to be vendors, and make the requirements and solicitation process move quickly.

A Legal Path for the 1033 Program

Civil policing is not soldiering.  It is indeed intellectually more difficult.   The “militarization of American police” over the past decade has been the most talked about domestic issue this month, with support from many parts of the political spectrum.  Even the president himself ordered a review  of the Defense Department’s program for supplying local police with its excess equipment.  This post seeks to outline a centrist legal path for the program moving forward.

Sixteen months ago, the Boston area population readily submitted to a curfew as heavily armed and armored police searched Watertown for a bombing suspect.  He was suspected of detonating a bomb with hundreds of casualties, shooting a police officer in cold blood, and, with his accomplice brother, hurling homemade bombs at police officers in a shootout.  I was surprised that day by the level of armament of the police as well as the lack of commentary about it.  As the suspect was captured, the Boston area police were cheered by the townsfolk and widely celebrated across the country.

This month, the police shooting of an unarmed black man in suburban St. Louis set off much controversy and intense national media scrutiny.  Police procedures regarding the shooting itself in the hours and days following have drawn criticism  for a lack of accountability and respect for the public.  However, the focus of this post is the Ferguson, Missouri Police’s show of force against protesters who were largely peaceful.  Armored vehicles and snipers appeared at protests.  Video footage showed police officers with guns drawn and pointed up at protesters.  All of these actions are against convention.

The police show of force has sparked a public debate on the level of armaments the police should have.  Congress is out on recess at this writing, but this initiative, known as the 1033 program, will likely come up during the next session.

My take is that in an era of mass shootings, criminals with body armor, and the threat of domestic terrorists intent on mass murder, police ought to have a reserve of heavy equipment.  Simply put, a trained cop with a semi-automatic rifle (e.g. and AR-15/M-16) should be within a ten minute response time, anywhere in America.  Surplus from the Defense Department is a free, logical way to put the materiel to use.  But that implies local police commanders who know how to tactically deploy the materiel, as well as officers who know how to use it.

Ferguson, Mo has laid bare the weak underbelly of this federal program.  This police department does not have the organizational discipline to handle the powerful equipment, and their officers were demonstrably ill-trained.

The U.S. Justice Department has programs to coordinate and provide support to local police.  However, it is its Civil Rights Division that may show the way forward.  Those attorneys sue departments that systematically deny civil rights to their citizens.  This often occurs from organizational dysfunction.  Thus many of their consent decrees have guidance for managerial reforms and processes to lead to more professionalism.  From studying those legal agreements, I have come up with some basic guidelines:

-With individual crimes, in hot pursuit or with warrants, procedures should be established and understood regarding how and when high power weapons and armored vehicles should be deployed.

-Similar procedures need to be established for large protests and civil disturbances.

-Training for marksmanship and properly brandishing weapons should be funded and planned before the receipt of any equipment.

-Using military style weapons needs to be documented after every use.  This data must be collected and continually evaluated.

The 1033 program is free regarding the Defense Department.  Training costs money, and could be provided by municipalities themselves if they feel it is that important to them.  Alternatively, the Department of Justice could assist with money.  The Department of Defense is not expert in the use of tactics for civil policing, and there could be issues under the Posse Commitatus Act if there is deemed to be undue influence of the military on law enforcement.

The 1033 program should continue, but only in departments which prove to the Justice Department that they are ready for it.  Hopefully, untrained departments (there are certainly other Fergusons out there) will after the fact, begin to adopt the policies and procedures of their sister cities and change can occur at the local level nationwide.