One of the most challenging cases we've been involved with was FN Manufacturing, Inc. v. United States, a 1998 bid protest before the United States Court of Federal Claims regarding the award of a sole-source contract to Colt's Manufacturing Co., Inc. (Colt's) for the production of the M4 Carbine (M4). It began with a dispute between Colt's and the U.S. Army that was resolved through the negotiation of an addendum to a technical data sales and patent license agreement acknowledging Colt's proprietary technical data rights. The agreement was subsequently utilized as the basis for a sole-source award to Colt's; the sole-source award led to the bid protest. The bid protest was unusual because it dealt with an issue of timeliness in the electronic, "paperless" contracting environment and, moreover, the protest explored the legality of the license agreement, not the procurement process itself. Furthermore, the protest centered on interesting issues relating to ownership of technical data as between the federal government and Colt's.
The Background of the Colt M4 Carbine - The Colt M4 Carbine has become a popular military weapon in the last decade. However, the development of a precursor to the M4 began during the Vietnam-war era. Specifically, in 1967, Colt's and the Army entered into Contract No. DAAF03-67-C-0108, and the "Technical Data Sales & Patent License Agreement" (the 1967 License Agreement or Agreement). Pursuant to the Agreement, Colt's, among other things, gave the Army certain rights regarding the M16 Rifle (M16) and the XM177 Carbine (XM177)1 . The M16 went on to become one of the most successful military weapons in history. The XM177, however, did not fare so well. In late 1967, the Army, faced with an internal report recommending an expensive ballistics and kinematics study of the XM177, decided not to provide funding, and abandoned development of the weapon. Nonetheless, Colt's continued to work on the weapon at its own cost, albeit sporadically. With rare and minimal exception, Colt's solely funded the development of the weapon. The weapon ultimately developed by Colt's was so different from the XM177 that it was given the new designation "XM4" in the 1980's. While the M4 shares some common parts with the M16, the M4 contains many critical and unique parts that were the result of significant engineering efforts to make the weapon shorter and lighter than its "big brother," the M16. By 1990, the weapon had passed Government testing and was designated the "M4."
Problems Begin to Brew…- By this time, the Army began buying M4s. The 1967 License Agreement did not discuss the M4, but was referenced in some of the M4 contracts. This initially made sense, since the M4 had some common parts with the M16, which was covered under the Agreement. Moreover, the 1967 License Agreement provided the procedures for the protection of Colt's technical data - - procedures that had been in place for over twenty years. Arguably, the parties should have clarified the issue as to whether the critical and unique M4 parts fell under the 1967 License Agreement - - but then hindsight is always 20/20.
While the M4 issue was looming in the background, Colt's became increasingly concerned that the Army was failing to protect its proprietary data. These two issues came to a head in 1996 when the Army provided the M4 Technical Data Package (TDP) to the U.S. Navy, which improperly used the TDP in a procurement for the purchase of M4A1 adaptor kits, and, moreover, released the TDP to contractors without implementing protective measures as required under the 1967 License Agreement. In fact, Colt's learned of the release when it received a copy of its own TDP from the Navy. Colt's became further concerned when a competitor, FN Manufacturing Inc. (FNMI), delayed returning the TDP or signing a certification that it had not utilized, disclosed or retained the TDP, and submitted an unsolicited proposal for the M4 to the Government.
The Army's use of the M4 TDP rapidly became a critical issue. Colt's position was that the M4 was not encompassed under the 1967 License Agreement and that, at any rate, the Army had materially breached the Agreement. Moreover, Colt's believed that the Army did not have a right to use proprietary data for the M4 critical and unique parts developed solely at Colt's expense. The Army posited that the M4 fell under the 1967 License Agreement and that the violations of the Agreement did not amount to a material breach of that agreement.
Successful Negotiations - In August 1997, the Army and Colt's began a series of meetings to resolve these issues as well as some lesser matters. Undoubtedly, the most significant issue was whether the critical and unique M4 parts fell under the 1967 License Agreement. After the lawyers argued for several days, two very knowledgeable senior small arms engineers - - one from Colt's and one from the Army - - were brought in and literally deconstructed an M4 before our eyes, debating the development of the components, sometimes going year by year. The detailed knowledge of these gentlemen was critical to unraveling the history of the M4 and, consequently, the rights to the M4 TDP. The two engineers eventually agreed that a number of M4 parts were "critical and unique" - - not related to the M16 - - and not funded by the Government.
This analysis meant that the Army had rights to the M4 that resembled Swiss cheese - - filled with big holes. After a round of tough but fair negotiations, the Army and Colt's resolved all outstanding issues and entered into a global settlement. Because neither side wanted to "reinvent the wheel," the 1967 License Agreement was amended to address the M4 issue. The result was the 1997 "M4 Addendum" wherein, among other things, the Army recognized that the critical and unique M4 technical data was proprietary to Colt's. Consequently, if the Army wanted to purchase M4 Carbines, it would have to look to Colt's.
The Beginning of the Bid Protest - On March 19, 1998, the Army published an announcement of an intent to make a sole-source award to Colt's for the M4/M4A1 Carbine in the electronic Commerce Business Daily (CBD). The CBDNet notice stated that the sole-source award was "due to a lack of data rights" and referred to "Note 22," which states that while "this notice of intent is not a request for competitive proposals," a capability statement or a proposal could be submitted, and those received within 45 days after the date of the CBD notice would be considered. A hard-copy version of the CBD appeared on March 23, 1998.
On May 5, 1998, 47 days after the CBDNet announcement, the Army published electronic notice of the award to Colt's. On May 6, 1998, FNMI delivered a proposal to the Army, alleging that FNMI could produce a M4/M4A1 Carbine. Thereafter, on May 15, 1998, FNMI filed a protest at the U.S. Court of Federal Claims. FNMI's protest alleged that:
- The Army failed to consider FNMI's "timely expression of interest";
- The award failed "to consider alternative competitive procedures" such as reverse engineering; and
- The sole-source award to Colt's was based on "unenforceable data rights restrictions" - - i.e., the M4 Addendum was invalid as an improper "give away" of Government rights.
The case was assigned to Judge John P. Wiese. Little did we know then that we would be visiting Judge Wiese's courtroom for the next year. Fortunately, Judge Wiese would prove to be intelligent, inquisitive, and personable.
Round One: Protest Timeliness in the Electronic Age - Colt's promptly intervened and submitted a Motion to Dismiss, arguing that FNMI was required to respond within 45 days of the date of the electronic (Internet) version of the CBD, and therefore it was not an interested party to protest or its protest was untimely. On June 30, 1998, the Court denied Colt's Motion, stating:
Colt's urges the court to adopt the former [electronic version] date on the grounds that the Internet site represents the "official" version of the Commerce Business Daily, that reliance on the Internet is in keeping with both developing industry practice and governmental policy initiatives (notably Vice-President Gore's efforts to minimize paper-based transactions in government) ...
During oral argument, both Colt's and the Government contended that ACALA's2 reliance on the Internet date in calculating the 45-day period was not improper because--they asserted--the relevant procurement regulations do not preclude an executive agency from relying on Internet posting as the means by which to satisfy the "publication" requirement imposed by 41 U.S.C.A. § 416 ... We disagree. A review of the statute reveals that, for procurements in excess of $100,000 (the case here), the "publication" that is intended may only be accomplished through the printed version of the Commerce Business Daily, and not through its electronic equivalents. …
While ACALA may in fact employ electronic media and may do so both with the Administration's encouragement and with the contracting community's knowledge and participation, its action alone--lacking any formal pronouncement--cannot alter the existing, statutorily-directed method of publication. … There can be only one publication date applied to all offerors ...
41 Fed. Cl. 186, 189-90 (1998). Because of this ruling, a disclaimer was added to the CBDNet noting that the time period for filing a protest or taking other action starts running after the publication of the paper version of the CBD.
Round Two: The Adequacy of FNMI's Proposal - Next, the Army challenged the adequacy of FNMI's proposal. The Court held:
… in a case such as this, where the sole-source procurement is based on the Government's informed judgment that the planned procurement involves technology that is exclusive to a named source, the potential competitor must demonstrate either that (i) the technology involved is not exclusive or, if exclusive, (ii) is susceptible to duplication by the potential competitor within the time constraints demanded by the proposed procurement.3
Based on an examination of FNMI's response to the solicitation, the court concluded that the unsolicited proposal that FNMI submitted to the Government … did not supply the information that the Government would need in order to justify a decision abandoning the planned sole-source procurement in favor of a competitive procurement. …
42 Fed. Cl. 87, 89 (1998). Colt's therefore argued that FNMI's failure to submit an adequate proposal meant that it was not an interested party with standing to protest. The Court, however, held that the underlying issue - - the propriety of the M4 Addendum - - remained viable, and the case continued forward.
Round Three: The Technical Data Issues - The true crux of FNMI's argument was that the M4 Addendum was an improper attempt to "evade" the Competition in Contracting Act, 10 U.S.C. § 2304 (CICA). Specifically, FNMI argued that the M4 Addendum represented an improper relinquishment of Government rights. Colt's continuous position was that the M4 Addendum represented an acknowledgment that the Army never had a right to utilize the technical data regarding certain M4 parts. In an effort to streamline the protest, the parties discussed that if, for the sake of argument, the Army relinquished rights in the M4 TDP when it entered into the M4 Addendum, and such was legally valid, then the sole-source award was valid. The Court's summation of this academic argument is thoughtful:
In the interest of seeking an expeditious resolution of this controversy, the parties have asked the court to rule on the following question: whether the Government, in the settlement of a contract dispute, is free to relinquish rights in technical data, if by doing so, it disables itself from competitively conducting future procurements involving the use and application of the relinquished data. Put another way, does a contracting agency have the authority to agree to a contract settlement that establishes a contractor's exclusive ownership of technical data, thereby restricting all future procurements involving the data to sole-source purchases?
42 Fed. Cl. 87, 89 (1998). The Court promptly rejected the argument that the Army had to retain the broadest possible rights to the M4:
[10 U.S.C. § 2320(a)(2)(B)] specifies that "the respective rights of the United States and of the contractor ... shall be based upon negotiations between the United States and the contractor …"
… the negotiation process prescribed for the mixed funding situation imposes no minimum requirement as to the level of rights in technical data that the Government must obtain. Rather, what is called for is an evaluative process in which the Government's interests in securing broad rights in technical data are weighed against the economic incentive to the private sector that the acceptance of more limited Government rights might help secure. … Since 10 U.S.C. § 2320 imposes no minimum requirement on rights the Government must negotiate in the mixed funding context, we see no reason to preclude it from relinquishing rights it had no obligation to obtain in the first instance. …
To the extent, then, that it is correct to view this case as one in which the development of the M4 was achieved through both public and private sources, the Government clearly had the right to relinquish any rights it may otherwise have negotiated.
42 Fed. Cl. 87, 92-93 (1998).
However, the Court did not reach a decision on the merits but pondered whether a settlement that resulted in a license agreement could run afoul of CICA:
Our holding that the Government has the right to relinquish its interest in technical data does not, however, immunize the Addendum from challenge on the grounds that it violated the Competition in Contracting Act's mandate for full and open competition … While … certain relinquishments of technical data rights could in fact represent impermissible violations of CICA, we refuse to go so far as to conclude that any relinquishment of data rights which serves to limit or eliminate competition must necessarily be found unlawful. …
[But] if neither the alleged breach of the M16 Licensing Agreement nor Colt's independent claim that the M4 had been developed at private expense reasonably held out the possibility that the Government's rights in the M4 would be compromised or lost through litigation of those issues, then the terms of the settlement must be deemed illegal. The Government's relinquishment of rights that were not legitimately in dispute would amount to an impermissible give-away … granting the contractor exclusive control over important technical data, thereby subverting the aims of the Competition in Contracting Act. …
42 Fed. Cl. 87, 93 (1998). The Court left the ultimate question to be answered in yet another round of briefing and argument:
We leave open for further inquiry the factual issues this Ruling poses: specifically, whether the M4 rights belonged to the Government in the first instance, and if so, whether the loss of those rights could reasonably be interpreted as within the litigation risks the Government faced.
42 Fed.Cl. 87, 94 (1998).
The Final Decision - At Last! In the final decision issued in August 1999, the Court summarized the key issue as follows:
… the question to be resolved is whether the M4 Addendum meets the standards for acceptable agency action as set forth in section 706 of Title 5 of the United States Code. Put more precisely, this court is obliged to accord finality to the M4 Addendum unless the agency's adoption of that addendum reflects an exercise of administrative judgment that justifiably may be described as "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A).… the judicial review carried out under the arbitrary and capricious standard focuses on the analytical integrity of the decision in question. … Thus, in a case such as this where an agency has decided in favor of settlement rather than litigation, our chief concerns are with the completeness of the factual record on which the settlement decision is based, and the reasonableness of the legal conclusions and risk assessments drawn from those facts. …
44 Fed. Cl. 449, 451 (1999).
There were several hearings and declarations submitted to the Court regarding the "legal conclusions and risk assessments" that went into the Army's decision to enter into the M4 Addendum. Ultimately, at the request of the Court, the Army attorney who conducted the settlement discussions with Colt's provided live testimony, despite concerns that such inquiry went too far into the attorney work product privilege. The attorney's testimony as to the steps that he took regarding the M4 Addendum was absolutely critical to the Court, which noted:
… Mr. Stolarun came to several conclusions in regard to those issues that were ultimately to be reflected in the M4 Addendum. His principal conclusions were these:
First, although the Government had breached the M16 Licensing Agreement by failing adequately to protect Colt's proprietary data against improper disclosure (and therefore faced a potential monetary liability, assuming, of course, damages could be proven), Mr. Stolarun concluded that there was little likelihood that Colt's could also make good on its threat to terminate the agreement. Based on this assessment, a potential loss of data rights under the 1967 Licensing Agreement was not a factor that influenced the Government's decision to recognize Colt's rights in the M4 technical data.
Second, Mr. Stolarun determined that Colt's claim to rights in M4 technical data is traceable to technology that pre-existed the parties' 1967 Licensing Agreement and represents data that was not made part of the technology licensed to the Government under that agreement.
Third, Mr. Stolarun reasoned that Colt's participation, as a contractor, in post-1967 Government-funded developmental efforts involving the M4 carbine did not result in the extinguishment of those unique elements of M4 component design and manufacture that originated with Colt's and that Colt's had thereafter incorporated into the M4 carbine prototype. In this connection, Mr. Stolarun interpreted various actions taken by Colt's in conjunction with its performance of these contracts as attempts to invoke the disclosure restrictions of the 1967 Licensing Agreement rather than as Colt's acquiescence to the inclusion of the M4 technology under the terms of the Licensing Agreement, or Colt's acknowledgment of the Government's right to use the M4 technology in competitive procurements.
Although each of these basic conclusions could be disputed and a different conclusion put in its place, none, however, could be said to rest on a dubious legal analysis or to depend upon a disregard of important facts or implausible inferences. …
44 Fed. Cl. 449, 451-52 (1999). Ultimately, the Court felt comfortable that Mr. Stolarun was both capable and careful in his decision to enter into the M4 Addendum and held:
… Mr. Stolarun's conclusions were informed, well thought-out and honestly arrived at. They are entitled to finality. And so too is the settlement agreement that reflects these conclusions--the M4 Addendum. …
Based on the reasons set forth in this Order, the court finds that the M4 Carbine Addendum to the Technical Data Sales and Patent License Agreement constitutes lawful agency action. The court further finds that the sole-source contract for M4/M4A1 carbines that was awarded to Colt's Manufacturing Company, Inc. on May 5, 1998, represents a lawful exercise of procurement authority.
44 Fed. Cl. 449, 452 (1999).
Conclusion - Our work regarding the Colt's M4 Carbine was definitely a challenge. First, to understand the technical data issues, we had to learn more about how guns work then we thought we ever would. Next, we had to examine the technical data rights over a period of thirty years, which was sometimes like putting the pieces of a jigsaw puzzle together. Where pieces of the puzzle were missing, the historical knowledge of engineers became critical to fully understanding the evolution of a product and the resultant rights thereof.
Colt's negotiations with the Army stand out as an excellent example of civility and professional courtesy to resolve a dispute. Both sides strongly advocated their positions but were open to listening to the other side's position. Moreover, each party recognized that a joint effort to resolve any and all outstanding issues, allowing the parties to move ahead with a clean slate, was clearly beneficial to both Colt's and the Army.
The FNMI bid protest encompassed some very interesting legal issues regarding timeliness, technical data rights, and procurements. Besides grappling with the legal arguments, it was particularly interesting to hear the thought process of the Army counsel who sat down on the other side of the table during the negotiations. Finally, Judge Wiese presided over the case in such a challenging yet affable manner as to make the litigation process -- dare we say it -- enjoyable.
The case, at its very heart, demonstrates the critical need to vigilantly protect technical data rights, since these rights can be the very lifeblood of a company. When dealing with the federal government, a company must carefully and consistently document the development of each component of an item, and intentionally segregate any development involving government funding, or it may face a dispute over data rights. Agreements involving intellectual property should be drafted in a manner that anticipates disputes. If a periodic re-evaluation can be structured in the agreement, assuming that the agreement spans several years, an effort should be made to incorporate such a mechanism. Nonetheless, even where you are working with a thorough and thoughtful data rights agreement, it is perhaps inevitable that, at some point in time, a dispute will erupt. Consequently, a company must draft its data rights agreements as if litigation is just around the corner. In that way the main goal -- protection of the company's intellectual property assets -- should be met.
1The "X" designation indicates that the weapon was experimental and not yet approved by the Government.
2U.S. Army Armament and Chemical Acquisition and Logistics Activity.
3FNMI argued that the Army failed to consider whether the M4 could be procured using performance specifications or reverse engineering, and that the Army should give it an M4 so that it could attempt reverse engineering. The Army argued that it had no duty to provide FNMI with an M4 and that FNMI's ability to manufacture the M4 without Colt's TDP, in the quantity and within the required time frame, was impossible. Furthermore, the Army asserted that FNMI could not, without breaching its non-disclosure agreement with the Army, use M16 technical data (which FNMI had in its possession pursuant to a Government contract) to attempt to manufacture the M4. In addition, Colt's argued that FNMI could not legally produce a critical part of the M4 Carbine without infringing on a patent held by Colt's. The Court found for the Army on this issue.
The authors would like to thank Carlton S. Chen, Vice President, General Counsel, and Secretary, and Kevin J. Brown, Executive Director of Military Programs, both of Colt Defense LLC, for their helpful comments and insights regarding this article.
Copyright © 2003 Michael A. Hordell and Laura L. Hoffman