Saving Other Transaction Agreements from Bid Protest Review: How to Keep OTs as Innovative and Flexible Tools for Research and Development

III. The Government Should Challenge the Reasoning of Hydraulics International in Future Cases.

As discussed above, the COFC’s decision in Hydraulics International undermines the value of OTs in the speedy development of new technology because the decision potentially subjects them to lengthy litigation at their inception. If protests of OT formation become as common as protests of FAR-based acquisitions, the appeal of OTs could be diminished by the perception that they are little different from traditional government contracts. That perception would likely diminish the enthusiasm of small businesses and nontraditional defense contractors to participate in OTs. Without the participation of small businesses and nontraditional defense contractors, OTs’ luster as a magnet for innovation would likely dim.

The government’s most direct option to pursue the issue was probably an appeal of Hydraulics International itself. But Hydraulics International was not a good candidate for government appeal. The government prevailed on the merits of the case, and the COFC decision did not constitute binding precedent for future cases. The government appeared to consider appeal of Hydraulics International but ultimately decided against it.

Still, the facts of Hydraulics International provide a useful framework on which likely future arguments against the COFC’s reasoning in that case can be based. For that reason, the balance of this Part will address how to challenge the COFC’s reasoning in Hydraulics International to help dissuade the COFC in future cases.

Superficially, the COFC’s decision in Hydraulics International turns entirely on the question of whether an OT is “‘in connection with a procurement or a proposed procurement,’ as required” by the Tucker Act. But the Tucker Act’s grant of jurisdiction is narrower than the COFC’s opinion suggested. The Tucker act grants the COFC jurisdiction as follows:

The Unite[d] States Court of Federal Claims . . . shall have jurisdiction to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.

While the COFC’s decision in Hydraulics International focused on the question of whether the OT was “in connection with” a proposed procurement, that is not the full jurisdictional test from the Tucker Act. There are not one, but three requirements for the COFC to exercise jurisdiction over an action under the “in connection with” clause. First, the action must be brought by an “interested party.” Second, the action must object to a “solicitation,” “award,” or “proposed award,” or allege a “violation of statute or regulation,” as required by the Tucker Act. Third, the solicitation, award, proposed award, or violation of statute or regulation must itself be “in connection with” a proposed procurement. An action must pass each threshold for the COFC to exercise Tucker Act jurisdiction over it.

By focusing on the question of whether the OT in general was in connection with a proposed procurement, the COFC essentially ignored the first two jurisdictional thresholds. That was an error. None of the jurisdictional elements should be taken for granted, especially in the unusual circumstance of the protest of an OT. This article will address each of the three threshold questions in turn.

A. The Protester Was Not an “Interested Party.”

The Tucker Act does not define “interested party.” The COFC has previously defined “interested party” by reference to CICA. Within CICA, “interested party” is defined, “with respect to a contract or a solicitation or other request for offers described in paragraph (1), [to mean] an actual or prospective bidder or offeror whose direct economic interest would be affected by the award of the contract or by failure to award the contract.” The CICA’s reference to “paragraph (1)” refers to a “solicitation or other request by a Federal agency for offers for a contract for the procurement of property or services.” As discussed earlier, CICA does not apply to OTs, and an OT is not “a contract for the procurement of property or services.” Indeed, OTs are explicitly defined in the negative as something “other than” a procurement contract.

If the term “interested party” as used in the Tucker Act is synonymous with the same term as used in CICA, then the COFC’s jurisdictional analysis should end at the first threshold. An “interested party” is defined in terms of a procurement contract, and OTs are explicitly not procurement contracts. Some may argue that an OT like that in Hydraulics International is sufficient to confer “interested party” status because the follow-on production clause in the OT makes the entire OT “in connection with a procurement.” That argument might claim the follow-on production award is a form of procurement, although the original OT was not. If the COFC adopted that approach, there would be a second problem with finding “interested party” status for an OT based on the follow-on production clause: the promise of any follow-on production award is illusory. To the extent “interested party” status is defined relative to “a contract for the procurement of property or services,” the illusory nature of the follow-on production clause means that it is not a contract at all.

As the COFC’s predecessor discussed in the context of indefinite quantity contracts, “[w]ithout an obligatory minimum quantity, the buyer would be allowed to order nothing, rendering its obligations illusory and, therefore, unenforceable.” In FAR-based procurements, the COFC will sometimes interpret a contract without a minimum quantity as a requirements contract to avoid finding the agreement unenforceable. “Requirements contracts also lack a promise from the buyer to order a specific amount, but consideration is furnished, nevertheless, by the buyer’s promise to turn to the seller for all such requirements as do develop.”

The provision for follow-on production need not guarantee production, if any, will flow to the OT partner. It merely allows for the award of production to the original OT partner without further competition. Neither party to the OT needs to have any affirmative obligations relating to follow-on production. The government “may” award it. The provision for follow-on production does not create a second agreement; it merely meets the statutory requirement to award a production contract or transaction without further competition.

A disappointed competitor for an OT is not an “interested party” because its alleged interest in any follow-on production contract is illusory. Because the follow-on production clause places no obligation on either party, it is not contractual. Where there is no procurement contract or solicitation for bids on a procurement contract, there can be no “interested party.”

B. The Protest Did Not Object to a Solicitation or Award of a Procurement Contract and the Alleged Violation of Law Was Mere Disagreement with the DoD’s Assessment of Practicability.

Under the Tucker Act, the COFC has jurisdiction over protests of a solicitation, award, or proposed award of a contract, or an “alleged violation of a statute or regulation in connection with a procurement or a proposed procurement.” In that context, the term “contract” is synonymous with a procurement contract. As OTs are not procurement contracts, the narrow space left to argue the Tucker Act confers the COFC jurisdiction over OT awards like that in Hydraulics International seems limited to the third jurisdictional clause, that there was a violation of a statute or regulation in connection with a procurement or a proposed procurement.

Because OTs are subject to neither CICA nor the FAR, there are limited ways an OT can violate a statute or regulation other than its own underlying authorizing statute. Even then, such a violation would not give the COFC jurisdiction under the Tucker Act unless the violation was also in connection with “a procurement”—and OTs are not procurement.

In Hydraulics International, the plaintiff alleged a violation of the underlying statute granting the DoD prototype OT Authority. The plaintiff’s argument ran something like this: OTs shall use competitive procedures to “the maximum extent practicable.” Competitive procedures are “an analog” for CICA procedures. CICA procedures require that agencies apply the evaluation criteria listed in solicitations fairly and consistently. A fair and consistent application of the terms listed in the OT’s request for whitepapers would have resulted in an award to the plaintiff. The defendant did not grant the plaintiff an award. Therefore, the defendant must not have used competitive procedures “to the maximum extent practicable.”

The problem with the plaintiff’s argument was two-fold. First, it conflated results with processes. Second, its substantive claim is that the agency failed to apply “an analog” to CICA procedures to “the maximum extent practicable.” Thus, the protester invited the COFC to interpose its discretion for that of the agency over the practicability of an analog.

The focus on practicability distinguishes the sort of review appropriate to cases like Hydraulics International from true bid protests of procurement contracts subject to CICA and the FAR. Alleged violations of CICA or the FAR lend themselves to relatively expansive review under the COFC’s Tucker Act jurisdiction. By contrast, the DoD’s alleged failure to use a CICA analog to the extent practicable is an issue of agency discretion properly reviewed under the Administrative Procedures Act without an overlay of CICA and FAR requirements. As discussed earlier, district courts, not the COFC, have jurisdiction over alleged APA violations.

It is fair to contrast the “practicable” language found in Section 4022(b)(2), with the reference to competitive procedures found in Section 4022(f), which may point toward a different situation in which COFC review of an OT might be appropriate. Importantly, Section 4022 references competitive procedures in two different subsections. First, Section 4022(b)(2) states, “[t]o the maximum extent practicable, competitive procedures shall be used when entering into agreements to carry out the prototype projects.” Later, in Section 4022(f)(2), the statute authorizes the award of follow-on production without the use of further competitive procedures if “competitive procedures were used for the selection of parties for participation in the transaction.”

The way Congress split its attention on competitive procedures in the OT prototype statute suggests Congress anticipated full competitive procedures would not always be practicable in the OT prototype context. It also suggests that Congresses’ primary concern with competitive procedures was preserving the requirement that the DoD should use competitive procedures for its production needs, not prototyping. Congress’s contrasting attention to competitive procedures also suggests the COFC’s authority to review competitive procedures should similarly focus on actual production, not prototyping. After all, the requirement for competition prior to a follow-on production award is a bright-line rule and not a matter of agency discretion over “the maximum extent practicable.”

Limiting COFC review of OTs to the actual award of follow-on production also makes good policy sense. It would allow the review of processes leading to potentially high-dollar production awards, while preserving agencies’ ability to work with private industry for the rapid development of prototypes needed to maintain cutting-edge capabilities. Limiting COFC review in that way would also dovetail well with GAO’s review of OTs for subterfuge when the law prohibits the use of an OT and requires the use of a procurement contract instead.

C. The Alleged Violation of Law Was Not in Connection with a “Procurement” or a Proposed “Procurement” as Congress Defined That Term.

Next is the issue of whether a violation of statute or regulation in the award of an OT with the possibility of follow-on production is “in connection with” a proposed procurement. As discussed earlier, it appears settled that an OT itself is not a procurement. Also discussed earlier, the possibility of any follow-on production is entirely speculative, and the typical OT obligates neither party to any such follow-on production. But is the possibility of follow-on production even “procurement” within the meaning of the Tucker Act?

“The Tucker Act does not define ‘procurement.’” To interpret the scope of its jurisdiction, the COFC imported the definition of procurement found in 41 U.S.C. § 111, which states in full: “In this subtitle, the term ‘procurement’ includes all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” Based on that definition, the COFC determined that the possibility of follow-on production qualified as “procurement” because the OT “initiated the process for determining a need for acquisition.” The COFC concluded that “[s]uch activity fits squarely within the first ‘stage of the federal contracting acquisition process.’”

The COFC’s reliance on Title 41’s “procurement” definition essentially begged the question of whether follow-on production under 10 U.S.C. § 4022(f) was “procurement” within the meaning of the Tucker Act. The definition in Title 41 is explicitly limited to Title 41 and those other sections of the U.S. Code that adopt it. Taken out of context, that definition is so broad, it encompasses almost any action in the chain of events leading to the government obtaining any property or services. That definition is too expansive unless it is tethered to the federal acquisition system that explicitly adopts it.

Congress did not intend the definition of “procurement” found in Title 41 to apply to OTs under Sections 4021 or 4022 of Title 10. This limitation is underscored by the narrow scope Congress allotted to the definition of “procurement” in Title 10 in contrast to the broad scope it allotted to the definition of “competitive procedures” in Title 10. Congress limited the definition of “procurement” in Title 10 to “Chapter 137 legacy provisions,” while Congress simultaneously extended the Title 10 definition of “competitive procedures to all of Part V of Title 10, which includes 10 U.S.C. § 4021–4022. As noted earlier, Congress defined “competitive procedures” differently for the DoD than it did for most other agencies. In fact, when Congress consolidated the DoD’s spending laws, it moved the DoD’s definition of competitive procedures under its own section, 10 U.S.C. § 3012. The definition of competitive procedures in Section 3012 expressly applies to all of Title 10, Subtitle A, Part V, which contains essentially all the DoD-specific spending laws including the sections on OTs, 10 U.S.C. § 4021–4022.

By making the definition of competitive procedures apply to OTs in addition to procurement contracts, Congress set that definition in contrast to most other definitions applicable to the DoD’s spending laws. Most of the DoD’s spending definitions are found in 10 U.S.C. § 3011, which incorporated Title 41’s definitions of several key terms including “procurement.” Section 3011, however, only applies to “chapter 137 legacy provision[s].” “Chapter 137 legacy provisions” refers to those provisions that Congress moved, in 2021, from Title 10, Subtitle A, Part IV, Chapter 137, to various locations in Title 10, Subtitle A, Part V. Chapter 137 included 10 U.S.C. §§ 2301–2339c. The legacy provisions do not include the former location of the DoD’s OT authority, 10 U.S.C. §§ 2371–2371b. To remove any doubt or confusion, Congress even included a comprehensive list of the current sections of the Code that contain Chapter 137 Legacy provisions. Sections 4021 and 4022 are not among them. Thus, Congress expressly declined to extend the definition of “procurement” found in Title 41 to the OT authorities found in Sections 4021 and 4022.

The Hydraulics International decision cited three opinions by the CAFC to support applying the definition of procurement found in Title 41 to some OTs. Though the COFC must follow the precedent of its superior court, careful application of the CAFC’s guidance should have yielded a different outcome in Hydraulics International. The CAFC has explained why the definition of “procurement” found in Title 41 is applicable to the Tucker Act as follows: The definition is “a subsection of the statutory provisions related to the establishment of the Office of Federal Procurement Policy . . . . [Those] provisions give overall direction for federal procurement policies, regulations, procedures, and forms.”

To put a finer point on the CAFC’s overview, The Office of Federal Procurement Policy Act Amendments of 1979 added the definition of “procurement” to 41 U.S.C. § 403. That definition was limited to the term “procurement,” “as used in this Act.” The word “act” became “chapter” in the next printed version of the U.S. Code. Later, Congress moved the definitions section to Chapter 1 of Title 41, and the word “chapter” became “subtitle.” At all times, Congress has expressly limited Title 41’s definition of “procurement” to a subset of Title 41.

In Distributed Solutions, the CAFC considered the definition of “procurement” in the context of the government essentially using one FAR-based contract to circumvent the usual acquisition process for other FAR-based contracts. The protesters in Distributed Solutions alleged the government’s actions had violated CICA. In that context, the CAFC’s reference to how Title 41’s definition of “procurement” was found within the OFPP’s authorizing statutes made sense because the OFPP implemented its authority through the FAR. Congress also required the OFPP to implement CICA through the FAR. Therefore, in Distributed Solutions, it was reasonable to apply Title 41’s definition of “procurement” to actions using FAR-based contracts allegedly in violation of CICA. The same reasoning does not necessarily extend beyond procurement actions under the FAR and CICA.

The CAFC has cautioned that the jurisdictional reach of the Tucker Act under 28 U.S.C. § 1491(b)(1) “is exclusively concerned with procurement solicitations and contracts.” That guidance is consistent with limiting the scope of Tucker Act jurisdiction to FAR-based procurements subject to CICA. The CAFC elaborated that “[t]he definition of ‘procurement’ in 41 U.S.C. § 111 is not the only provision relevant to our inquiry. . . .” The definitions of other spending vehicles, such as cooperative agreements and grants, are also relevant. Thus, the CAFC has held that cooperative agreements are not subject to Tucker Act jurisdiction and has stated in dicta that grants are beyond that jurisdiction too. The same principle should apply to OTs.

Hydraulics International was not the first time the COFC asserted jurisdiction based on an out-of-context reading of “procurement.” In Hymas v. United States, the COFC asserted jurisdiction over the Fish and Wildlife Service’s award of cooperative farming agreements (CFAs) to individual farmers. The COFC reasoned that the CFAs constituted procurement contracts despite being framed as cooperative agreements based on 41 U.S.C. § 111 and noted that “the [FWS] contracted with farmer-cooperators, not to benefit them financially, but to obtain their services to provide food for migratory birds and wildlife.” Despite the fact the cooperative agreements were authorized by a separate statute outside Title 41, the COFC decided its “jurisdictional inquiry should focus on the definition of procurement in the CICA, 41 U.S.C. § 111.” The COFC was wrong, as the CAFC soon explained.

On the FWS’s appeal to the Federal Circuit, the appellate court cautioned that 41 U.S.C. § 111 should not be used “without regard to other relevant statutes,” as the sole source for determining whether a particular transaction qualifies as a “procurement” for Tucker Act purposes. The appeals court noted that sort of expansive reading of Section 111 would be akin to “hiding an ‘elephant[] in [a] mousehole[].’”

Ultimately, the appeals court held the CFAs were proper cooperative agreements under the Federal Grants and Cooperative Agreements Act (FGCAA), 31 U.S.C. § 6301 et seq. It further held that cooperative agreements were not procurement contracts and noted that the COFC’s jurisdiction under 28 U.S.C. § 1491(b) “exclusively concerns procurement solicitations and contracts.” Because cooperative agreements—similar to OTs—are defined in juxtaposition to contracts, the appeals court held cooperative agreements were not procurement contracts, and the COFC had no jurisdiction over protests of their formation.

The Federal Circuit’s conclusion that the COFC’s jurisdiction under the Tucker Act “exclusively concerns procurement solicitations and contracts” is consistent with the definition of an interested party, discussed above. Because an “interested party” is defined relative to procurement solicitations and contracts, it makes sense that the jurisdictional requirement of an action by an “interested party” align with the jurisdictional limitation to procurement solicitations and contracts. Although Hymas involved cooperative agreements rather than OTs, it is highly instructive on the Federal Circuit’s view of Tucker Act jurisdiction.

Cooperative agreements share several traits with OTs that are relevant to the question of the COFC’s jurisdiction. Originally, Congress codified the DoD’s authority for OTs and cooperative agreements in the same sentence of NDAA FY1990. Specifically, Congress granted the DoD authority to “enter into cooperative agreements and other transactions” for research projects. That original grant of authority points to the second major similarity. The primary purpose of both OTs and cooperative agreements is research and development, not procurement. Though some OTs include the possibility of a follow-on production award, only a tiny portion of OT spending actually goes to follow-on production. Similarly, because they are primarily research vehicles, both OTs and cooperative agreements are eligible for the alternate forms of “competitive procedures” defined by 10 U.S.C. § 3012. Perhaps most importantly, both OTs and cooperative agreements are defined in juxtaposition to procurement contracts.

With so many similarities between cooperative agreements and OTs, a reader might expect the COFC would have spent significant time distinguishing the agreement in Hymas from that in Hydraulics International. It did not. In Hydraulics International, the COFC analyzed Hymas as follows: “[T]he Federal Circuit . . . found cooperative agreements do not fall under the Tucker Act but said nothing of OTAs . . . .” Put mildly, the COFC’s distinction lacked depth.

The COFC’s failure to engage its superior court’s opinion in Hymas is unfortunate because Hymas also suggests the answer as to when the COFC has jurisdiction over an OT. In Hymas, the appeals court confirmed the COFC will have jurisdiction over transactions where an agency obtains goods or services through the misuse of a non-procurement authority.

In essence, the Federal Circuit’s opinion in Hymas mirrors GAO’s treatment of OTs. Under the framework of Hymas, the COFC would have jurisdiction if an OT or cooperative agreement were improperly used when the law required the use of a procurement contract instead. That interpretation is also consistent with the Tucker Act’s second jurisdictional threshold, discussed above, that there must be a violation of statute or regulation in connection with a procurement. If an agency erroneously uses an OT when the law requires it use a FAR-based procurement, then it has violated a statute in connection with a procurement.

For example, if the Army attempted to award a “prototype” OT that was for the purchase of dozens of preexisting products for the common use of those products, it would be acting outside the OT authority of 10 U.S.C. §§ 4021–4022. If the transaction was outside its OT authority, then the Army was required to use the federal acquisition system for the transaction. If the Army was required to use the federal acquisition system, then the COFC would have Tucker Act jurisdiction to review the transaction award.

Similarly, if the Army awarded follow-on production after the successful completion of an OT but had not used competitive procedures to select the original OT awardee, then the follow-on production would exceed the grant of authority in § 4022(f). In that situation, the Army could lawfully accomplish follow-on production only through a FAR-based contract. Again, the COFC would have jurisdiction to review the solicitation and award of a FAR-based contract for mass production of the technology prototyped in the OT.

Distinguishing between prototype projects and follow-on production projects is also consistent with the history of Congress’s incremental grants of OT authority to the DoD. As discussed above, DoD’s authority to award OTs for prototypes is a special subset of its older research and development authority now found in § 4021. Section 4022(a) is functionally Congress’s recognition that prototypes are a form of research and development.

Another way of examining the COFC’s Tucker Act jurisdiction is to seek evidence of Congress’s intent. Did Congress intend the COFC to have jurisdiction over the formation of any OT prototype agreements awarded under § 4022? To answer that question, consider that the DoD’s authority to enter into OT prototype agreements is derivative of its older authority to enter into research and development agreements under § 4021.

As discussed above, the COFC has already found it does not have authority over OTs without a follow-on production clause. As OTs awarded directly under § 4021 cannot include follow-on production clauses, it seems reasonably safe to say there is no serious argument the COFC has Tucker Act jurisdiction over § 4021 OTs. Nor does it have authority to review OTs awarded under any of the other research and development OT authorities scattered about the U.S. Code.

Section 4022 is explicitly derivative of the authority found in § 4021. Section 4022 does not purport to create a stand-alone OT authority for prototype projects. Rather, it states an authorized official “may, under the authority of section 4021 of this title, carry out prototype projects that are directly relevant to enhancing the effectiveness of [the armed forces].” The derivative nature of the authority in § 4022 raises an interesting question: Did Congress intend to subject § 4022 OTs to COFC review when § 4022 authority is a subset of an authority beyond COFC review? It seems unlikely.

If the COFC does not have jurisdiction over the formation of properly used OTs, are they unreviewable? No. Contrary to the government’s suggestion in the Hydraulics International oral argument, the process of awarding OTs is not exempt from judicial review. They are reviewable under the APA in federal district courts.

As discussed earlier, the logical underpinning of district courts’ Scanwell jurisdiction also applies to the review of OTs. While Congress legislatively repealed Scanwell jurisdiction for procurement contracts reviewable by the COFC, that repeal was tied to the limits of the COFC’s jurisdiction under 28 U.S.C. § 1491(b)(1). For agency actions beyond the scope of § 1491(b)(1), district courts may still exercise jurisdiction over APA suits. SpaceX II was exactly such a case.

In summary, in some situations the COFC properly has jurisdiction to review whether an agency wrongly used an OT when the transaction required a procurement contract instead. Similarly, it would be proper for the COFC to review a follow-on production award if the underlying prototype OT was not awarded through competitive procedures. In both situations, the COFC would review whether an agency exceeded the scope of its OT authority and therefore engaged in spending that required a procurement contract instead.

By contrast, properly used OTs should not be subject to bid protest jurisdiction of the COFC. Subjecting all OTs with the potential for follow-on production to such review would erode the value of OTs for speedy innovation and it would exceed the limited jurisdiction Congress granted the COFC. Even if the COFC lacks jurisdiction, agencies’ use of OTs is still subject to judicial review. An agency’s discretion in awarding an OT may be challenged in federal district court under the APA, just as cooperative agreements are.

The foregoing Part presents several arguments that cut against the COFC’s reading of its own jurisdiction in Hydraulics International. Because of the decision in Hydraulics International, however, the DoD should consider insulating its prototype OTs from potential protests unless and until the issue of the COFC’s jurisdiction is favorably resolved. The next Part discusses steps that the DoD can take to make prototype OTs less vulnerable to protest.

IV. The DoD Should Use Strategies to Insulate Prototype OT Awards from Protests.

Even if some DoD OT awards are subject to bid protest review at the COFC, the DoD can preemptively insulate its OT awards from such challenges. Some methods of insulating OT awards from bid protest challenge may even have collateral benefits regardless of the prospect for COFC review. This article proposes two methods.

The first method of insulating prototype OT awards from protest is for the DoD to forgo follow-on production clauses and rely on traditional FAR-based procurement for later production of successful prototypes. To incentivize innovation without the possibility of a competition-free follow-on production award, the DoD can use carefully crafted data rights and royalty agreements in its OTs. Such data rights and royalty agreements should provide a sufficient incentive for innovative partners to participate in OTs despite potentially needing to compete for any later production contracts.

The second method of insulating OT awards from protest is for the DoD to leverage its ability to award science and technology projects based on peer review or scientific review rather than full and open competition. That would likely decrease the chances of a protester succeeding on the merits of a protest. With a reduced chance of success, potential protesters will be less likely to protest OT awards.

A. The DoD Can Forego the Use of Follow-On Production Clauses and Instead Use Data Rights Agreements in OTs to Incentivize Participants.

The DoD can decouple its award of OTs from follow-on production under § 4022(f). The DoD can use a project development model like that used by the Air Force in the launch programs at issue in SpaceX. Under the SpaceX model, the government will need to navigate the divergent interests of giving private industry incentives to participate in prototype programs and maintaining the DoD’s access to the resulting technology.

Under its follow-on production authority, the DoD can provide OT partners incentives to develop prototypes by offering successful partners the potential for follow-on production contracts without further competition. Such locked-in production is a major incentive for OT partners to work with the DoD and develop products that meet the DoD’s needs. When any follow-on production is likely to flow to the OT partner under § 4022(f), an OT partner can grant the government greater data rights than might otherwise be prudent. The follow-on production option decreases any risk the OT partner will lose a follow-on production competition to a less-innovate but more production-oriented competitor. If the DoD removes the follow-on production clause from OTs to insulate them from litigation delays at the COFC, it will need to find another incentive for innovative partners to participate in OT projects.

To maintain a high probability of recruiting innovative partners without a follow-on production clause, the DoD can leverage the flexibility of OTs to increase its OT partners’ competitiveness for future contracts under traditional competitive solicitations. To understand how that method of incentivizing private innovators would work, it is useful to understand how data rights acquisition works under traditional procurement contracts.

In traditional acquisitions under the Defense Federal Acquisition Regulation Supplement (DFARS), there are three main levels of data rights that the government can acquire under a contract: “limited,” “government purpose,” and “unlimited.” Limited rights give the government a license “to use, modify, reproduce, release, perform, display, or disclose technical data, in whole or in part, within the Government.” With limited rights, the government may not disclose the data outside the government or use it for commercial purposes except in extraordinary circumstances. Government purpose rights are unique to the DoD. They give the government a license to “[u]se, modify, reproduce, release, perform, display, or disclose technical data within the Government without restriction.” Government purpose rights also allow the government to do essentially anything it wants with technical data or computer software “within the Government” or for “United States government purposes.” “United States government purposes” includes allowing third parties to produce an item under a government production contract. Unlimited rights, as the name implies, gives the government the right “to use, disclose, reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, in any manner and for any purpose, and to have or permit others to do so.” Granting the government unlimited rights in technical data or computer software critically erodes the value of intellectual property because it represents a potential total loss of control over technical data or computer software—subject only to the government’s discretion.

In traditional procurements, the DoD will acquire limited rights in any technical data of items delivered under a government contract that were developed with exclusively private funding. It will acquire government purpose rights in any technical data or computer software that was developed with mixed private and government contract funds. It will acquire unlimited rights in any technical data or computer software that was developed with exclusively government procurement contract funds.

Computer software delivered under a DoD contract that was developed with exclusively private funds is treated a little differently. For commercial computer software, the government will usually acquire a modified commercial license. For non-commercial computer software developed with exclusively private funds, the government will usually acquire a “restricted” license. Restricted rights essentially mean that the software may only be used on the computers for which it was acquired and any backups and replacements thereof. Otherwise, it may not be used, copied, or disclosed.

Table 1 shows (1) the types of data in which a contractor will typically grant a government agency rights under a procurement contract; and (2) the types of data rights conferred based on how much government funding is at play.

Table 1– Matrix of Data Rights by Data and Funding Type

Other transaction agreements are not “contracts” for the purposes of determining the funding source under which technical data or computer software was developed. For that reason, the government will ordinarily acquire only limited or restricted rights if it acquires a product developed through an OT in a later FAR-based procurement, unless the terms of the OT already gave the government greater rights.

The government’s license rights in patentable inventions—such as prototypes—shares some features of its rights in technical data and computer software. Under the Bayh-Dole Act, the government will ordinarily acquire a limited license in patented inventions developed under a procurement contract or government grant. With such rights, the government may contract with a third party to produce copies of the patented inventions, while the patent holder retains the rights to commercial use of the patents. That arrangement works well for inventions that have a large commercial market because the patent retains substantial value even though it does not guarantee continued government business for the patent holder.

For inventions with a large government market but a limited commercial market, the government’s right to copy an invention for government use may discourage private innovators from working with the government under grants or traditional procurement contracts. If the primary value of an invention is future government sales, then it benefits innovators little to develop such inventions only to have the government license production of future sales to a third party. By using OTs instead of grants or procurement contracts, the government can incentivize innovators in at least two ways. First, it can offer follow-on production contracts under § 4022(f). Second, it can structure the data rights clauses of its OTs to ensure that OT partners will reap the rewards of their innovation even if a third-party manufacturer produces the end-product for the government.

If Hydraulics International poses too great a disincentive to future use of § 4022(f) follow-on authority, the DoD’s best option may be to restructure the data rights clauses of its OTs. The DoD can structure the data rights resulting from OTs in a way that provides innovative partners the incentives that they need to participate in future OT prototype projects.

Because there are so few restrictions on the terms of OTs, there are many potential ways the government can write in incentives other than follow-on production contracts. This article will focus on one: structuring the government’s license rights to guarantee OT partners royalties from the subsequent production of any products based on the OT partner’s prototypes.

The DoD can take advantage of the flexible nature of OTs to grant the government control of the relevant intellectual property while creating an adequate profit incentive for potential OT partners. To do that, the OT could grant the government a transferrable license to produce the relevant technology subject to a royalty fee payable to the original OT partner. The royalty fee could be based on the quantity of items produced, the time during which items will be produced, or some other metric appropriate the technology and its use. Under such a license, the government could use third-party manufacturers, and the original OT partner would receive royalties commensurate with the scale of the production.

The royalty system would preserve the government’s ability to contract freely for the mass production of technology developed under an OT. At the same time, it would preserve the OT partner’s incentive to work with the government to develop innovative prototypes. It would not require a follow-on production clause as an incentive to OT participation. The royalty-based model would also dovetail with the general policy expressed in 10 U.S.C. § 3771 for the DoD to not impair the rights of businesses to receive royalties from third parties. It would also leverage the existing provisions of FAR 27.202-2, which relate to passing on fees of preexisting licenses.

Some potential OT partners may even find the royalty-based model preferable to the possibility of follow-on production orders under § 4022(f). For example, some OT partners may have expertise in product development and innovation, but not necessarily in production at scale. Such innovation specialists may prefer a system where their largest financial incentive is tied to their success in innovating, and not their success at mass-production.

In particular, some small businesses may find the follow-on production volume daunting. Section 4022 defines “small business” based on the standards set by the Small Business Administration (SBA). The SBA publishes size standards that define what qualifies as a “small business” for various industries. The SBA’s size standards for some industries are based on average annual receipts and the standards for other industries are based on the business’s number of employees. The military and aerospace equipment and military weapons industries enjoy the highest current dollar-value cap to qualify as a small business—$47 million. But even that relatively high cap is far surpassed by the potential size of § 4022 follow-on production awards.

Section 4022 allows follow-on production awards up to $100 million without any special authorizations other than the basic criteria outlined in § 4022(f). With the written authorization of an agency’s senior procurement official, a § 4022 follow-on award can run up to $500 million. Under certain conditions, the Under Secretary of Defense for Research and Engineering or the Under Secretary of Defense for Acquisition and Sustainment can authorize follow-on production awards in excess of $500 million.

Even the comparatively low-level follow-on awards that are capped at $100 could easily surpass the capacity of a small business that has average annual receipts of no more than $47 million. Based on the SBA’s size standards, a $90 million follow-on production award would be almost double the total annual average receipts of even comparatively “large” small businesses in the military and aerospace industries. Such a jump in volume could easily outpace a small business’s experience and capacity.

In OTs with follow-on production awards under § 4022(f), OT partners without large-scale production capacity may need to partner with established manufacturers to meet the government’s ultimate production goals. That may be a factor in the rise of the consortium model of OTs noted in Hydraulics International. The royalty approach would avoid the need for smaller OT participants to partner with large firms to reap the benefits of their innovation. That arrangement could be a major boon for the small businesses and nontraditional defense contractors Congress sought to preference in § 4022.

What about established manufacturers who offer innovation and production under one roof? Major manufacturers may be well situated to take OTs from prototype to production, and follow-on awards may be a big incentive to their participation in OTs. It is a fair question whether the royalty approach would be a step backward for such established businesses.

Major manufacturers would likely still benefit from the royalty approach. If a major manufacturer received an OT award that used the royalty approach, it would still need to compete for the eventual production contract under the FAR. It would, however, enjoy three big advantages over its competition. First, it would be intimately familiar with the product and better able to assess its likely production costs. Second, its mastery of the product itself would likely improve its technical approach to production. Third, it would not need to pay royalties to produce the product while its competition would. It would therefore enjoy a head start on offering the government the lowest price for production.

At the same time, the government would benefit from competitive bidding on the production contract and would be free to contract for multiple or alternate suppliers if it needed to quickly increase its supply of the new product. The ability to work with third-party manufacturers is particularly important for the DoD because national security exigencies might cause an unexpected jump in the government’s need for certain products. In such situations, the government needs the flexibility to contract with a wide spectrum of potential producers to ensure its requirements are met.

Thanks to the flexibility of OTs, the government could also structure such agreements to gradually phase out the relevant royalties with the lapse of time or the rate of production. In that way, OT partners could expect a reasonable return on their innovative efforts while the government could retain the long-term flexibility to continue servicing and upgrading the products. Such service requirements include acquiring replacement parts and similar as-needed maintenance products. By phasing out the royalties over time, the government could preserve the OT partner’s reasonable return on its efforts while not unduly inflating the total lifecycle costs of the products.

A full license agreement would be too long and technology-specific to include in this article. But the basic features of such an agreement can be summarized as follows:

(1) The government should receive the functional equivalent of government purpose rights in the prototyped technology and its technical data subject to item (2), below.

(2) The rights in item (1), above, should be subject to the following caveat: The government’s license to manufacture or produce the prototyped technology is subject to the payment of royalties to the prototype’s developer pursuant to a schedule of royalties. The agreement should include the schedule of royalties.

(3) The government should also receive the right to sub-license the production or manufacture of the prototyped technology to a third party subject to items (1) and (2), above. Thus, the data rights conferred by the agreement would only allow third-party manufacturing for government purposes and would require the third-party manufacturer to pay the prototype’s developer royalties.

(4) The government should receive sufficiently detailed manufacturing and process data to provide a third-party manufacturer all the data needed to produce the product subject to the schedule of royalties.

(5) Depending on the nature of the prototype, the government should consider including a phased sunset provision for the royalties. Under such a provision, the royalties due to the original prototype developer would gradually decrease. The agreement could link the decrease to either the lapse of time or the cumulative volume of government-purpose production of the prototype.

The full details of any royalty agreement for a prototype OT would necessarily vary based on the kind of technology contemplated by the agreement. Depending on those details, it is important to acknowledge there is some risk that the COFC would view the royalty agreement as bringing the OT under its bid-protest jurisdiction. Because the potential royalties would be based on the possibility of future competitive procurements of the prototyped technology, the COFC could conceivably conclude the OT was “in connection with” a procurement. That would be too broad a reading of the language “in connection with” as the royalty model could be used regardless of whether § 4022(f) production authority ever existed.

Indeed, the royalty model would have far more in common with the facts of SpaceX than with the facts of Kinemetrics and Hydraulics International. Like SpaceX and unlike Hydraulics International, the royalty model would omit any § 4022(f) follow-on-production clause. Also, like SpaceX and unlike Hydraulics International, a royalty-based OT could explicitly state any production of the prototyped technology would be subject to full and open competition under the FAR. In Kinemetrics, the COFC appeared to draw its jurisdictional line at the point where an OT had a “direct effect” on a subsequent procurement. Under the royalty model, the OT would have, at most, an indirect effect on any future procurement. So too did the OT in SpaceX, and the COFC found that it lacked jurisdiction to review the substance of that protest.

Moreover, the royalty model would have advantages over the use of § 4022(f) follow-on awards. From the government perspective, the royalty model would allow the government significant flexibility to open competition for production contracts to established manufacturers. That flexibility could ultimately yield lower costs for the government and greater resilience in its production base. From the perspective of innovators, decoupling the innovation and prototyping process from the production process opens the field to new entrants who lack the capacity for production at scale but who can prototype new and innovative solutions to the government’s emerging needs. Put simply, not all inventors want to be manufacturers. While both skills are needed to maintain the United States’ competitive edge, smaller businesses tend to be better suited to the former than the latter.

While large defense contractors often provide both innovation and production, Congress expressed a preference for encouraging small businesses and nontraditional defense contractors to participate in OTs. That preference reflects the general sentiment that small-scale innovators often operate with greater agility than large-scale manufactures. It also recognizes the general sentiment that outside thinking can help find new solutions.

These same small-scale innovators may be hesitant to work too closely with large businesses in the same field. Several reasons exist for small businesses to hesitate before entering partnership with a large business. Simple size disparity can cause unequal bargaining positions. Small businesses may be concerned that a large partner will poach their top talent or ideas. Specific to the government procurement realm, nontraditional defense contractors will usually operate with less sophistication toward government procurement contracts than traditional defense contractors. For these reasons, many small innovators may prefer an OT model where the government finds the third-party manufacturer, and the original OT partner reaps the benefits of their innovation through royalties. After all, the royalty model is a common mechanism for inventors to capitalize on their inventions in private business.

To be sure, the royalty model might slow down the process of taking a prototype to production because it would inject the full FAR-based acquisition process between the end of prototype development and the beginning of production at scale. By contrast, a follow-on production award pursuant to § 4022(f) would bypass competition immediately before production, but it would front-load that competition into the OT itself.

If delays from competition and potential litigation are inevitable, it is more practical to place those delays after research and prototyping and not before. That is true for at least two reasons. First, not all research or prototyping efforts produce results fit for production. Front- loading delays will slow down the government’s product development schedule even for products that never achieve full development. It makes sense to consolidate the bulk of the delays after a viable product has been prototyped. Second, small businesses and nontraditional defense contractors may not be well-positioned to absorb undue delays. Those groups are a large part of the innovation framework for which Congress has shown its preference in § 4022. It makes sense to limit the impact of delays on those businesses that may be less equipped to absorb them.

Hydraulics International both poses a challenge and presents an opportunity for the DoD. The challenge is to prevent the OT process from being mired in bid-protest litigation. The opportunity is to revise the structure of OTs to avoid litigation and inspire innovation. Doing so, the DoD can better implement Congress’s intent for incorporating nontraditional defense contractors into the OT process. The royalty-based model brings at least four benefits. First, it accelerates the OT process by reducing potential bid-protest litigation pursuant to the SpaceX decision. Second, it streamlines the OT formation process by allowing the DoD to leverage the use of competition only “[t]o the [maximum] extent practicable” pursuant to § 4022(b)(2). Third, it incentivizes OT participation by small innovators that may not want to navigate the production process. Fourth, it allows the government greater flexibility to contract for production at scale through competitive procedures after the OT prototype is complete.

B. The DoD Can Also Leverage Its Ability to Award Science and Technology Projects Through Peer Review or Scientific Review Rather Than Full and Open Competition to Streamline OT Awards.

The DoD’s other main option for insulating OT awards from bid protests is to use its unique definition of “competitive procedures” to streamline OT awards and bypass the typical standards of full and open competition. While that adjustment would not foreclose COFC review of OT awards with follow-on production transactions, it would place any such review at the apex of courts’ deference to an agency’s technical judgments.

As discussed earlier, Congress gave the DoD a unique definition of competitive procedures. Other federal agencies’ parallel authority to use peer review or scientific review as competitive procedures is limited to “basic research.” In contrast, the DoD may use peer review or scientific review in lieu of full and open competition for any “science and technology proposals” so long as it is a competitive award following a general solicitation.

To the extent the COFC appeared to graft the full panoply of FAR-based procurement standards into its review of the OT awards in Hydraulics International, those standards should not apply to an award using a competitive peer review or scientific review in lieu of full and open competition. Further, as the district court observed in SpaceX II, judicial deference to an agency’s action is “at its highest where a court is reviewing an agency action that required a high level of technical expertise.” The scientific review of prototype technology proposals is an excellent example of agency action requiring “a high level of technical expertise.”

The DoD could use its unique version of competitive procedures in conjunction with any of the other strategies outlined in this article. In fact, it appears the DoD used the pilot version of that same authority in the OT at issue in Kinemetrics. The OT award in Kinemetrics was based on peer review of the technical proposals and a separate review of the prices. The COFC explicitly noted that it treated peer review conclusions with special deference.

While litigation of any type risks complicating OT projects, highly deferential review reduces the chance of a judgment adverse to the DoD that might further mire an OT in re-competition. Highly deferential review also discourages challenges because it reduces the chances of a protester prevailing on the merits of the challenge.

Overall, the DoD’s ability to substitute peer review or scientific review for the rigid requirements of full and open competition is a potentially powerful tool to streamline OT awards and reduce litigation challenges. Congress gave the DoD that unique ability for a good reason and the DoD should use it.

V. The DoD Should Ask Congress to Save OTs from Bid Protest Review.

Congress should clarify the COFC’s jurisdiction over grants, cooperative agreements, and OTs. The uncertainty caused by Hydraulics International is a good reason for the DoD to request Congress step in. The most elegant means of clarifying the COFC’s jurisdiction over OTs may be for Congress to explicitly define the term “procurement” as used in the Tucker Act.

Much of the disagreement in SpaceX, Kinemetrics, and Hydraulics International hinged on the fact that “procurement” is not defined in the Tucker Act. Lacking an on-point definition, the COFC has imported the CICA’s definition of “procurement,” which is intentionally expansive, as it is meant to encompass all stages of the federal government’s usual process of acquiring goods and services. As discussed in Part III, above, transplanting the CICA’s definition of “procurement” into the Tucker Act wreaks havoc on the statutory scheme. To remedy that problem, Congress can add a definition of “procurement” specific to the Tucker Act. Congress could easily insert such a definition as a new subsection “(d)” at the end of 28 U.S.C. § 1491. That new subsection could be as simple as the following: “As used in this chapter, the term “procurement” has the same meaning given in 41 U.S.C. § 111 and does not include a transaction authorized by statute as a transaction other than a contract.”

That definition would have the advantage of importing the CICA’s broad definition of procurement, while exempting grants, cooperative agreements, and OTs. The final clause “but does not include a transaction authorized by statute as a transaction other than a contract” mirrors the language of OT authorizing statutes that grant authority to enter transactions “other than contracts, cooperative agreements, and grants.” It conspicuously omits the words “cooperative agreements, and grants” to make clear that the COFC’s jurisdiction does not extend to the review of properly authorized cooperative agreements and grants.

That relatively simple definition also preserves the COFC’s authority to review unauthorized use of OT authorities as a subterfuge to avoid CICA requirements. Because that definition of procurement “does not include a transaction authorized by statute as a transaction other than a contract,” the definition does include transactions not authorized by such a statute. Hence, that definition of procurement would preserve the COFC’s ability to review the improper use of OT authorities. Conversely, it would preclude the COFC second-guessing the wisdom of an agency’s otherwise proper use of an OT authority. That proposed definition makes explicit what this article argues is otherwise implicit in the interplay between the Tucker Act, CICA, and the OT authorizing statutes. Namely, Congress did not intend for the COFC to have jurisdiction to review protests of OT awards within the scope of an agency’s OT authority.

VI. Conclusion

Other transaction agreements are important tools that allow federal agencies to invest in research, development, prototyping, and building the capacity to respond to future challenges. Their key features include flexibility and speed. Within the DoD, they also are designed to appeal to small businesses and nontraditional defense contractors.

Other transaction agreements are fundamentally unlike procurement contracts in that they are not intended to acquire mature technologies for ongoing use. Instead, they share more characteristics with grants and cooperative agreements, which allow agencies flexibility in bringing future and indirect benefits to the agency’s missions.

Like grants and cooperative agreements, OTs are exempt from CICA and the FAR. Instead, they are subject to highly deferential review under the APA. Burdening OTs with bid protest-style review at the COFC risks miring them in litigation. Such litigation would degrade OTs’ usefulness. It risks turning the next “Operation Warp Speed” into an “Operation Slow Crawl.” The COFC’s decision in Hydraulics International risks exactly that result. The DoD should respond to Hydraulics International in three ways.

First, the government should challenge the COFC’s reasoning from Hydraulics International in any future cases that present the issue of the COFC’s jurisdiction to review an OT award. The government should pursue the argument at the COFC and, if necessary, appeal an adverse decision to the Court of Appeals for the Federal Circuit.

Second, the DoD should consider restructuring its OTs to bifurcate the underlying OT award from the eventual production contract award like the process used in SpaceX. Instead of incentivizing OT partners with follow-on production awards, the DoD can incentivize partners with royalty and licensing agreements. Carefully structured royalty and licensing agreements will allow OT partners to receive future income for third-party production of the systems the OT partners prototyped. The royalty-based approach will also give the government more flexibility than just using follow-on production clauses. It will allow the government to partner with nontraditional defense contractors for prototyping while still holding full and open competitions for production contracts. The DoD should also consider making more use of its unique definition of “competitive procedures” to streamline the competitive process for prototypes.

Third, the DoD should ask Congress to clarify the scope of the COFC’s jurisdiction over OTs under the Tucker Act. The COFC should retain jurisdiction to review OTs and other non-procurement spending for compliance with its authorizing statutes, but not for the wisdom of the underlying award decisions. That balance will provide sufficient oversight of OT use and ensure that agencies do not dress up procurement contracts in OT clothing. At the same time, the COFC should not have bid protest jurisdiction to review an agency’s substantive judgment on the award of a valid OT.

The DoD can use these three responses together or separately to preserve OTs usefulness for maintaining the United States’ competitive edge through research, development, and prototyping. It is hoped that these potential responses will find their way to the appropriate decision-makers to help ensure a vibrant future for innovation in support of our national defense.