Page 18 - GovCon M&A Blog Articles

Government Contracts & Investigations Blog
• Intellectual Property: The Government generally obtains very broad license rights in computer software developed under government contracts and in technical data pertaining to items, components, or processes developed under government contracts. Contractors can limit the Government’s rights in technical data and computer software pertaining to privately developed technologies, but this requires planning and discipline, including, for example, use of prescribed restrictive legends and maintaining adequate records to establish development at private expense. With regard to patents, the Government generally obtains broad license rights in, and the contractor generally retains ownership of, inventions conceived or first actually reduced to practice under a government contract (i.e., “subject inventions”). The contractor can lose all of its rights in a subject invention, however, if it does not timely disclose that invention to the Government. In addition to the standard data and patent rights clauses, government contracts also may include less frequently used clauses that grant the Government ownership of data and patents. Most government contracts data and patent rights clauses must be flowed down to subcontractors. Thus, whether the target is a government contractor or subcontractor, the buyer should analyze the specific clauses included in each material government contract, what technology was developed at private versus government expense, and whether the target has complied with the administrative burdens necessary to protect its intellectual property rights, including obligations relating to disclosure, marking, and recordkeeping. Some buyers also seek robust government contracts intellectual property representations and warranties, particularly where intellectual property is an important aspect of the target’s business.
• Organizational Conflicts of Interest: An organizational conflict of interest (“OCI”) arises where, in connection with the performance of a government contract, a contractor: (1) obtains confidential or proprietary information under one contract that may place it at an unfair competitive advantage in obtaining another contract (“unequal access to information”); (2) sets the ground rules for another procurement, such as by preparing specifications or a statement of work (“biased ground rules”); or (3) a contractor’s objectivity may be impaired, such as where it could be required to evaluate its own products or services (“impaired objectivity”). The Government cannot award a contract to a contractor that has an OCI unless the conflict has been mitigated or waived. OCIs are often mitigated by some agreed upon preclusion on future work. Moreover, a contractor and its affiliates are generally treated as a single entity for purposes of biased ground rules and impaired objectivity OCIs. Purchasing a target that advises the Government on acquisitions or evaluates products or services for the Government, for example, could preclude the buyer – not just the target – from competing to supply those same products or services to the Government under other contracts. Thus, the buyer should evaluate not only whether the target itself has any OCIs (based on a review of its contracts and mitigation plans) but also whether acquiring the target will create any OCIs for the buyer (based on an analysis of both the target’s and the buyer’s contracts and mitigation plans). It is also important to consider whether and how those OCIs could be mitigated and what impact they will have on both existing business and the ability to compete for future opportunities. In addition, some buyers will require representations and warranties relating to the absence of OCIs and/or compliance with all OCI mitigation plans.
• Cost/Pricing/Accounting Issues: Contracts for commercial items and services, e., those of a type generally available to the public and used for non-government purposes, are exempt from many government contracts statutes and regulations, and thus present a lower compliance risk than contracts for non- commercial items and services. At the opposite end of the spectrum, cost-reimbursement contracts and contracts awarded on a non-competitive basis impose a higher level of risk. Depending on the dollar value of the relevant contract or subcontract, the Truth in Negotiations Act (“TINA”) may require the government contractor or subcontractor to certify that it has disclosed current, accurate, and complete cost or pricing data, i.e., that it has disclosed to the Government all facts that one would reasonably expect to affect price
What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers | 15 Volume IV — Key Issues in Government Contracts Due Diligence