Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.
Those familiar with Government contracting know at least a little bit about the elusive and fickle regulatory requirements for Independent Research and Development (“IR&D” or “IRAD”) costs. IR&D is a means by which the U.S. Government supports a Contractor’s independent R&D efforts. By reimbursing a Contractor’s independent R&D costs, the Government long has hoped to advance the state of the art without stifling a contractor’s innovation under the weight of a federal bureaucracy, while simultaneously banking on the fact that the U.S. Government also will benefit from the technology advancements. But two recent developments may change the essential nature of IR&D, making it less “independent” and more “dependent” on Government rights and oversight. To quote Bob Dylan – “the times they are a changin’.”
A great deal of discussion has transpired regarding recent legislation that reportedly could alter significantly the established “follow-the-funds” test used for the allocation of intellectual property rights in data developed under a government contract. The legislation involved is a provision of the National Defense Authorization Act for Fiscal Year 2011 (the “Act”), signed into law on January 7, 2011. In particular, Section 824 of the Act provides “Guidance Relating to Rights in Technical Data” and, more importantly, amends Section 2320(a) of Title 10 of the United States Code, the provision that defines the allocation of rights in intellectual property under Government contracts.
A controversy with a more than 35 year life has finally been addressed by the US Court of Appeals for the Federal Circuit – and in a pro-contractor fashion. In its March 19, 2010 decision in ATK Thiokol, Inc. vs. United States, Fed. Cir. No. 2009-5036 (3/19/10), the Court of Appeals, in affirming the Court of Federal Claims decision from 2005, determined that research and development costs not specifically required by a contract may be treated as Independent Research and Development ("IR&D") under FAR 31.205-18. While this might seem a fairly unremarkable holding, and one consistent with reason, sound procurement policy, and a harmonious reading of the relevant regulations, the Government has for years taken the contrary view that costs of implicitly required development cannot be treated as IR&D. And, as a result, those contractors who treated such costs as IR&D have been treated to cost disallowances, citations for CAS non-compliance, and even accusations of fraud.