A Double-Edged Sword: IP DEFCON 707: How Broader Licensing Threatens Defence SMEs

Attending the Ministry of Defence Innovation Event last week gave me several article ideas. But the one that struck me as being particularly acute for SMEs was discussion around DEFCON 707. At first glance that’s not something likely to get the pulse racing but having spoken to both representatives of primes and SMEs, I think it’s something that requires a broader discussion.

Navigating the labyrinthine world of defence contracts has always been a challenge for SMEs, but the introduction of the new Intellectual Property Defence Condition 707 (IP DEFCON 707) could be a game-changer—and not necessarily for the better. Published on 1 April 2022, it broadens the MoDs license rights over technical data generated or delivered under a contract. While this might appear to be a simple bureaucratic tweak, the implications for defence SMEs are far-reaching and potentially detrimental.

Drawbacks for Defence SMEs

Loss of Competitive Advantage: The central asset of any SME is its unique know-how and technical expertise. With the MoD having broader license rights to disseminate this technical data, the SME could lose its unique selling proposition. Larger firms with more substantial resources could easily take this data and provide similar services or products at a reduced cost.

Revenue Dilution: When the MoD has the liberty to share an SME's technical data, the chances of the SME being the sole provider for upgrades and future contracts significantly diminish. This could lead to a loss of potential revenue—let's hypothetically say a 20-30% reduction in project extensions and maintenance contracts.

Intellectual Property Devaluation: If broader license rights allow the MoD to share technical data, the exclusivity—and therefore the value—of an SME's intellectual property could be compromised. Such devaluation could significantly affect the company’s valuation, and potentially its ability to attract investment.

Unfair Competition: Larger firms often have more significant resources, including teams of legal experts, to exploit technical data for competitive advantage. By having access to SMEs' technical data, they could undercut SMEs in competitive tenders, making it difficult for SMEs to win future contracts.

Reduced Incentive for Innovation: Knowing that their technical data could be shared more broadly may discourage SMEs from investing in research and development. This reduced incentive for innovation could affect the competitiveness of the national defence industry in the long term.

Operational Costs: Implementing and adhering to the new IP DEFCON 707 could mean that SMEs will have to allocate more resources to contract management and legal consultations, which are already a burden.

Potential for Conflicts: A broader license could lead to disagreements between the SMEs and the MoD over how the technical data and intellectual property are used or shared, possibly leading to legal disputes.

So those are all the challenges that I think the new regulations brings, I’m sure that not only SMEs are challenged by these, but they are also potentially detrimental across the entire industrial eco-system. Let me suggest some possible solutions and the creation of a better standard.

Possible Solutions

Limited Licensing: One potential solution could be to limit the licensing rights granted to the MoD based on the nature and sensitivity of the project. The more critical the project is to national security, the more stringent the licensing should be.

Tiered Licensing Approach: Establish a tiered licensing system where the MoD has to pay additional fees for broader usage, providing SMEs with a new revenue stream and more control over their IP.

Third-party Mediation: Create a neutral body to oversee the sharing of technical data, ensuring that it is done in a manner fair to all parties involved.

Collaboration Models: Promote joint ventures or partnerships between SMEs and larger enterprises to share the risks and benefits, thus preserving the competitive advantage of SMEs.

Regular Audits: Conduct periodic audits to ensure that the MoD is adhering to the terms of the licensing agreement and not misusing the intellectual property.

By revisiting the IP DEFCON 707 standard and considering the unique challenges faced by defence SMEs, it's possible to strike a balance that protects both the interests of the MoD and the viability of SMEs in the defence sector. As always I welcome your thoughts.