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In two recent cases, contractors lost claims where they were requesting payment for the government's unauthorized use of their proprietary information because they did not strictly comply with the regulations and the contract's restrictive marking requirements. These cases demonstrate the absolute necessity to mark any information a contractor wishes to protect and to mark it properly before it is submitted to the government. As these cases also demonstrate, the requirement to mark proprietary information applies regardless of the medium -- even software embedded in hardware must be marked properly or a contractor's intellectual property may be in jeopardy.

In The Xerxe Group, Inc. v. United States, 278 F.3d 1357 (Fed. Cir. 2002), the United States Court of Appeals for the Federal Circuit affirmed the decision of the United States Court of Federal Claims which denied the claim of Xerxe Group when it marked only the cover letter and company profile portions of its unsolicited proposal. Xerxe alleged that the Air Force rejected its unsolicited proposal for electrical energy and services and then released to the public the proprietary information from the unsolicited proposal in a Request for Information shortly thereafter. Xerxe argued that its proposal contained its business plan, which is a trade secret, and claimed $72 million for the government's failure to award it a contract based on the unsolicited proposal and for improper use of proprietary information. The court did not attempt to determine whether the business plan was indeed a trade secret and instead gave short shrift to Xerxe's argument. The court found that Federal Acquisition Regulation ("FAR") 15.609 "addresses situations where an offeror wishes to restrict specific sheets of data from disclosure and further admonishes the offeror to include a restrictive legend on each individual sheet it desires to be restricted in accordance with the 'Use and Disclosure of Data' legend." Without elaboration, the court concluded that "[i]ts failure to identify and clearly demarcate what it considered restricted is fatal to its claim."

Similarly, in General Atronics Corp., ASBCA No. 49196, March 19, 2002, the Armed Services Board of Contract Appeals denied the claim of General Atronics when it delivered software embedded in hardware without proprietary markings to the Navy. General Atronics had originally identified the "software packages" associated with the hardware as separate options in its proposal, which was appropriately marked with restrictive legends. The software packages were not, however, included as items purchased by the Navy in the awarded contract. After award, the Navy demanded that General Atronics deliver the software, which General Atronics did, under protest. The Board sustained General Atronics' appeal when the Navy denied its claim for $203,684 to compensate for the Navy's demand for delivery of the software itself.

General Atronics then filed a claim for $327,000 as compensation for the Navy treating the software as though the Navy had unlimited license rights in the software when General Atronics argued that the software was delivered with restricted rights. General Atronics argued that it provided the following notice that the software was proprietary: (i) the first page of a firmware update procedure delivered to the Navy contained a proprietary legend, although it did not specifically reference the embedded software and (ii) the display screen identified the software as "AN/USQ-125 Version 1.11, General Atronics Corporation 1995." General Atronics went on to argue that the software itself did not need to be marked since the software was not on a diskette. The Board, however, pointed out that the definition of "computer software" in the applicable clause, DFARS 252.227-7013, also includes machine-dependent programs, so the restrictive legend marking requirements apply to embedded software as well. In conclusion, the Board held that because there was no separate licensing agreement governing the embedded software and the restrictive legends General Atronics used did not comply with the applicable clause, the Navy acquired unlimited rights in the software.

Lessons from Xerxe Group and General Atronics

• Mark the title page and any subsequent pages of every proposal that contains proprietary information with the appropriate restrictive legend. See FAR 15.609 or 3.104-5. Copy it verbatim, do not be creative.
• Read all the technical data clauses incorporated in every government contract. Do not assume which clauses will be there.
• Understand the appropriate restrictive legend that must be affixed on data, technical data, or computer software that is delivered to the federal government in accordance with the contract's incorporated clauses. If you are not sure, consult counsel. If you still are not sure, document an understanding with the federal government agency regarding the rationale for your markings.
• Ensure all employees understand how to use headers, footers, comment lines, extra fields or other technological means to place legends in code or electronic copies of information before they are permitted to send proprietary or trade secret information outside the organization.
• These contractors had a reasonable chance of prevailing in a commercial context, where marking is only one element in proving a trade secret, albeit an important one. When submitting information to the government, however, commercial rules do not apply, so contractors must become familiar with and comply strictly with, the government's rules.