Hill+Knowlton’s Chairman, Brian Mersereau, participated in the Deliverology and Defence Procurement conference hosted in Ottawa on October 26, 2016. The conference was the 4th annual defence policy symposium, hosted annually by the Canadian Global Affairs Institute and the University of Calgary’s School of Public Policy.
Brian participated in a panel discussion focused on examining the rules surrounding Intellectual Property (IP) for Procurement by providing lessons learned from the acquisition of the Canadian Patrol Frigates (CPF).
Background
I have been involved with Intellectual Property from a procurement perspective for 40 plus years, from nearly every point on the spectrum. While the focus of my presentation is how we managed IP on the Canadian Patrol Frigate Project, for which I was the Chief Negotiator, my subsequent time in the private sector has given me a line of sight into the thinking of large multi-nationals – foreign and domestic – as well as the SME community in Canada on the issue. In my experience, the owners, and those desirous of acquiring IP, have very different views in nearly all instances.
Context
IP Policy
On CPF, the focus was on the control of IP required to efficiently manage the Frigates over their lifetime. This type of IP focus is very different than managing/controlling IP for Industrial Development purposes. E.g. IP being developed through funding provided by grant and aid programs, sponsored largely by the public sector.
Contract
The hardcore negotiations on CPF were undertaken in the shadows of the then recently concluded CF 18 negotiations with MacDonnell Douglas which, from an IP and technical data perspective, was deemed to be significantly wanting. As the initial contract with MacDonnell Douglas did not give Canada sufficient data to, by way of example, develop the sims and training capability that CAE now has, Canada had to go back to MacDonnell Douglas to secure additional data rights. The price was a long way away from zero! Our ability on CPF to address the IP issue was aided by the fact that the Terms and Conditions were negotiated on a “clean sheet” basis. By that I mean, unless something was embedded in an Act or Regulation, we were free to negotiate whatever the most appropriate position was for Canada. Thus all procurement policies and associated administrative practices were up for discussion. This obviously included IP and, by way of interest, everyone’s favorite costing document – DSS 1031.
Ships built in Canada
As is the case today, it was mandatory that the CPF ships be constructed in Canada. With ISS not being included as part of the acquisition contract, the ship systems and attendant kit were the focus of the IRB effort. However, IP with respect to the industrial development aspects of CPF, was not something we considered. In addition to the ship build in Canada, the two major IRB initiatives were as follows:
- Canadian capacity to manage major warship projects, including design and electronic systems integration,
- To have at least two major electronic subsystems integrated by Canadian firms (CMS, Machinery Control, Internal Comms, etc.)
The foregoing objectives meant Canadian technology would be developed and pushed forward with the related foreground IP. This clearly did happen, and in the end, a number of Canadian electronic subsystems were brought on board and the technology developers have, in nearly all instances, flourished.
CPF
In the case of CPF, Canada was acquiring an asset that would be in inventory for at least 30 years, as is the case today with the major acquisitions underway. During such a length of time, technology will change many times, which means the owner of the asset (the Crown, through the RCN) must secure all the data rights in order to be able to effectively and efficiently support the asset over the course of its life. With respect to foreground data for CPF, this meant that Canada would own the data rights. The party who developed the technology was given a royalty-free right to use such data so that they might exploit it beyond CPF; presumably in the export market without further negotiations with Canada. Aside from the benefits this provided to Canada with respect to supporting the City Class, it gave Canada the option to license others to use the technology, should the developer show no interest in pushing the technology forward or developing markets for same. From the RCN’s perspective, as the fleet operator, owning the foreground data provided two distinct advantages:
- Should Canada ever encounter difficulty, for any reason whatsoever, in securing support from the party who developed the technology, it had the unfettered right to go to another third party for assistance. This clearly only works if Canada has the appropriate data rights. This makes it much easier to manage fleet support. Over 30 some years such circumstances will occur as companies change their market focus, are acquired by a third party or simply cease to do business.
- When Canada owns the foreground data, it is obviously much easier for Canada to attract other parties who might be interested in playing a role in the ‘In Service Support’ (ISS) portion of the fleet. As such, it is in Canada’s interest to create price competition for ISS to effectively manage the costs of ownership, where feasible. On the other hand, if the foreground data is owned by the third party developer, the developer’s commercial motivation will be to ensure that no other entity has access to the technology. This is clearly a critical factor in the total ownership costs of the asset.
Canada needs to be equally cautious in how it deals with background data (all relevant pre-existing IP owned by the Crown or contractor that is not created through the Crown procurement contract). This is nearly always a much more difficult issue than foreground data. Again, because of the expected extended period of ownership for the City Class, Canada had to ensure it had sufficient access to background data in order to support the fleet. In practical terms, this meant that if the owner of the background data could not or would not support the fleet, Canada would have limited rights to use the data itself – including the rights to give the background data to another third party who might have the requisite skills to support the RCN. However this was clearly on the condition that any third party would be restricted to using the data to support the Canadian fleet only.
On CPF, it was an expressed condition from the get-go that such background data could be used by Canada for no purpose other than supporting its own fleet. In other words, it could not be used for other commercial opportunities by either Canada or any entity it might give a limited sub-license to. There were no royalties charged to Canada for such limited use of background data, as such rights would only be activated if the owner of the data was unable or unwilling to perform. The arguments presented above are all based on the notion that Canada needed to secure appropriate data rights – foreground or background – to support the City Class Frigates on a long term basis. We did not give any consideration to trying to secure background data rights for any purposes other than making sure the RCN had the data necessary to support the fleet. While CPF was a custom solution which produced significant foreground data, there were still lots of off the shelf kit such as: radars, weapons and propulsion, that were supported by background data which was the property of the developers/suppliers. No attempt was made to secure rights to that data beyond the conditions outlined earlier in my speech. If we had tried to secure the rights to that background data, along with the necessary market access rights to compete with the owner in foreign markets, any royalties would probably have been beyond our ability to pay, assuming those who held the rights were willing to sell under any circumstances. After all, background data was and remains the lifeblood of companies, and most are not in the business of setting up competitors with leading/bleeding edge technology. My takeaway from CPF was that IP is critical to the long term support of any fleet the military might acquire. This must be the focus of the IP provisions in any large acquisition contract.