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Federal Contractors Obtain No Proprietary Rights to Concepts in Value Engineering Change Proposals, Court Holds
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August 17, 2009
By W. Samuel Niece
Howrey LLP
The U.S. Court of Appeals for the Federal Circuit has held that a government contractor obtains no proprietary rights in the “concept” of a Value Engineering Change Proposal (“VECP”) submitted to the U.S. government.
VECPs
Under the VECP clauses incorporated into federal contracts by Federal Acquisition Regulation Clauses 52.248-1 (supply or service) and 52.248-3 (construction),.the contractor can suggest, after contract award, an alternative method of performing the work at a cost lower than the method specified in the contract. The incentive for the contractor is that the cost savings are shared by the owner and the contractor. This is achieved by decreasing the contract price by only a part of the savings, allowing the contractor to retain half or more of the savings from the VECP (the “instant contract savings” referenced in FAR 52.248-1(b)(1) and 52.248-3(b).
In addition, FAR 52.248-1(b)(2) and (3), which apply to supply and service contracts, provide for the contractor to share in savings on other ongoing contracts and future contracts in which the government applies the VECP. The clause applicable to construction contracts contains no such provision.
Applied Companies
Applied Companies had a contract to supply the Army with air conditioners of a specific size (36,000 BTU/hour) and configuration (horizontal) conforming to a military specification (MIL-A-52767) that required controlled source parts. Applied submitted a VECP to replace certain of the controlled source parts with equivalent commercially available parts. The government accepted this VECP under the contract for 36,000 BTU/HR, horizontal air conditioners. The Army calculated Applied’s share of the savings at $1,540,181.
But, Applied sought compensation for application of commercial parts to all sizes (6,000 BTU/hour, 9,000 BTU/hour, 18,000 BTU/hour, 36,000 BTU/hour and 60,000 BTU/hour) of air conditioners and all configurations (horizontal and vertical) covered by the military specification. In all, Applied sought $81 million as its one-half share of the anticipated savings from its concept for 23 models of air conditioners.
The court held that Applied was not entitled to compensation for savings on anything other than the 36,000 BTU/hour horizontal units in its contract. The primary basis for the holding was that in implementing the VECP under the 36,000 BTU/hour contract, Applied and the government had agreed that Applied was not entitled to share in future savings, only savings from Applied’s existing contract. Applied Companies v. Harvey, 456 F.3d 1380 (Fed.Cir. 2006).
An alternative, and more interesting, basis for the court’s holding was its rejection of Applied contention that a contractor may share in cost savings from a proposed concept or idea. “[T]he submission of a VECP does not confer any proprietary right to the ‘concept’ of the proposal,” the court wrote. “[T]he first contractor to propose a change based on a particular idea acquires no proprietary rights in the proposal that would allow him priority over a subsequent proposal based on the same idea.” In so ruling, it cited Kirlin v. United States, 827 F.2d 1538 (Fed.Cir. 1987) and M. Bianchi of California v. Perry, 31 F.3d 1163 (Fed.Cir. 1994).
The Patent Alternative
Applied Companies, Kirlin and Bianchi stand for the proposition that a VECP may not be the appropriate vehicle for obtaining compensation for the government’s use of a contractor’s concept or idea on future contracts. For that, a contractor may need to resort to patent law. See, “How Patent Protection Can Turn Value Engineering Proposals and Other Good Ideas into Profits.”
“Concepts” and “ideas” are species of intellectual property that may qualify for patent protection if they are “new,” “useful” and “unobvious.” 35 USC §§101, 102, 103. If a contactor obtains a patent on its idea or concept, it cannot prevent the government from using it, but the contractor can sue for compensation in the form of a reasonable royalty. 28 USC §1498(a).
Conclusion
Particularly under construction contracts, but even under supply and service contracts, obtaining compensation for the government’s use of a VECP on other or future contracts is an uphill battle. Contractors with truly unique and innovative ideas or concepts can consider patent protection as an alternative to submission of a VECP.
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For more information about the issues covered in this report, please contact W. Samuel Niece in our San Francisco office at 415-848-4979 or at nieces@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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