United States: New SBIR Opportunities: Why Phase III Contractors And Venture Capital Companies Should Consider Possible Changes To The SBIR And STTR Programs

Last Updated: November 25 2014
Article by Keir X. Bancroft and Anna E. Pulliam

Any small business or venture capital company interested in Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) funding opportunities should pay close attention to the Small Business Administration's (SBA) recent request for public comments, by January 6, 2015, on data rights and Phase III funding, and a recent Government Accountability Office (GAO) report identifying the National Institutes of Health (NIH) and Department of Energy's Advanced Research Projects Agency-Energy (ARPA-E) as the two agencies presently accepting applications from majority-owned portfolio companies.

  • SBA has learned that data rights under the SBIR and STTR programs, which are customarily protected for a 4-year period, are not being honored in some circumstances, and is seeking public comment on how to better protect those rights.
  • The SBIR and STTR Policy Directives encourage federal agencies to make Phase III awards "to the greatest extent practicable" to small businesses that developed the underlying technology under Phase I and Phase II funding. Agencies are grappling with Phase III preferences and SBA is seeking public input on this issue.
  • The GAO has recently reported that only two of the agencies in the SBIR program, specifically the Department of Health and Human Services' (HHS) NIH and the Department of Energy's ARPA-E, have submitted the written determination necessary to allow small businesses that are majority-owned by multiple venture-capital firms to receive SBIR awards. Interested small businesses and their investors may want to consider NIH and ARPA-E SBIR funding opportunities, or inquire why the other SBIR agencies have not executed a written determination to allow similar participation in their SBIR programs.

SBA's Request for Public Comment

The SBA recently announced its intent to amend and clarify the Policy Directives governing its SBIR and STTR programs to clarify data rights and the government's duties regarding Phase III awards.

General SBIR and STTR Program Overview

The SBIR program was adopted in 1982 with the goal of "enabl[ing] small businesses to explore their technological potential and provide the incentive to profit from commercialization." Likewise, the STTR program "expands funding opportunities in the federal innovation research and development (R&D) arena" by promoting partnerships between small businesses and research institutions. More than 10 federal agencies with R&D budgets exceeding $100 million and $1 billion, respectively, must set aside a percentage of these funds for the SBIR and STTR programs, resulting in a large pool of available funding for qualifying small business enterprises.

Generally speaking, the SBIR and STTR programs are organized into three phases. The objective of Phase I is to determine the "scientific, technical, and commercial merit and feasibility of ideas" submitted pursuant to SBIR and STTR solicitations. 15 U.S.C. § 638(e)(6)(A). Phase II, "in which award shall be made based on the scientific and technical merit and feasibility of the proposals, as evidenced by the first phase," further develops successful Phase I projects. 15 U.S.C. § 638(e)(6)(B). Finally, the object of Phase III is to encourage contractors to commercialize the results of Phase I and II projects. The Government makes awards under Phases I and II. Though Phase III work may be commercially funded, federal agencies and prime contractors are encouraged, "[t]o the greatest extent practicable" to make sole source awards for Phase III work to the small business that first developed the technology.

A key tenet of the SBIR and STTR programs is the protection of data rights. A SBIR awardee owns the full right to any data developed in performance of the contract. Similarly, an STTR contractor must agree on an allocation of rights with its research institution partner before executing an STTR agreement. Further, the Government must protect from disclosure and non-governmental use any data delivered under a Phase I, II, or federally funded Phase III award for 4 years after delivery of the data. This 4-year period provides small businesses the time necessary to develop and commercialize SBIR or STTR-funded products.

Public Comment on SBIR/STTR Data Rights

Notwithstanding the protections of SBIR and STTR data rights, the SBA is responding to concerns about small business data rights. SBIR and STTR awardees have complained about improper disclosure of data developed through SBIR and STTR awards to large businesses, as well as concerns regarding a lack of contractor awareness of the special data protections conferred on SBIR/STTR awardees. One prominent example of such concerns was revealed in the 2006 Night Vision Corp. v. United States (469 F.3d 1369) case from the Federal Circuit, in which a small business contractor that developed night vision goggles under the SBIR program lost a follow-on contract to a large-business competitor that had served as the SBIR's subcontractor during Phase I. In light of the issues highlighted by the Night Vision case, the SBA will seek to "provide greater clarity and detail" on these issues. The specific issues on which the SBA requests public comment include:

  • "The extent to which the awardee owns the data it generates in performance of an award.
  • The Government's obligations to protect SBIR/STTR data from disclosure for at least four years following the delivery of the last deliverable in a SBIR/STTR award.
  • During the protection period, the Government's right to access, review and evaluate SBIR/STTR data, but not to modify the data.
  • After the protection period expires, the Government's right to use and disclose the data solely on behalf of the government, which means that the government may use and disclose data for competitive procurements (with non-disclosure agreements) but cannot use the data for commercial (non-governmental) purposes.
  • Possible discrepancies between current FAR and agency supplemental regulations and SBA's SBIR/STTR Policy Directives.
  • The feasibility and helpfulness of a short form data rights option (especially for grant agencies). Such a short form would be a simple agreement stating that the Government receives essentially no rights to SBIR/STTR technical data. The simplified data rights option would be for any agency or specified award."

Public Comment on SBIR/STTR Phase III Policy

The SBA is also seeking comment on how to clarify how agencies can "to the greatest extent practicable" make Phase III awards to the small businesses that initially developed the subject technology, and avoid inadvertently making Phase III awards to other business concerns. Specifically, the SBA's Request for Comments seeks input from the public on the following issues related to Phase III:

  • "Whether SBA should define 'to the greatest extent practicable' with respect to when agencies shall issue these Phase III awards; and if so, how the phrase should be defined.
  • Whether, if the agency elects not to issue a Phase III sole source award to the SBIR or STTR Phase II awardee for follow-on Phase III work, there are other ways the agency could meet this statutory requirement.
  • Whether an SBIR or STTR awardee can receive the required Phase III preference within a full and open competition.
  • Whether the policy directive should outline the steps an agency must take in deciding or understanding when the Phase III preference applies."

As noted above, comments on the data rights and Phase III-related questions must be submitted to the SBA by January 6, 2015.

GAO's Review of SBIR Awards to Small Businesses Majority-Owned By Venture Capital Firms

Around the same time the SBA issued its request for comments, the GAO issued a report titled Small Business Innovation Research: Change in Program Eligibility Has Had Little Impact. The report addresses January 2013 changes to SBIR program policy allowing agencies to make awards to small businesses majority-owned by multiple venture capital or similar firms (majority-owned portfolio companies). Though arguably opening up the field of potential competitors, these changes mandated that before an agency could award SBIR contracts to majority-owned portfolio companies, it had to submit a written determination to the SBA and Congress explaining how the awards would significantly contribute to the agency's mission.

The GAO's report states that of the 11 agencies that participate in the SBIR program, only two, the NIH and ARPA-E, have submitted written determinations and commenced with soliciting SBIR opportunities to majority-owned portfolio companies. Specifically, NIH opened 55 solicitations to these companies, and ARPA-E opened one solicitation to these companies. In total, NIH and ARPA-E received 20 applications from and made 12 awards to majority-owned portfolio companies. This represents a large amount of solicitations: 82.35% of the combined SBIR solicitations issued by NIH and ARPA-E in 2013 and 2014. However, it represents a very small percentage of the competition. The 20 applications submitted represented 0.17% of the 11,926 total applications submitted to NIH and ARPA-E; the 12 awards equate to 0.62% of the 1,929 total awards; and the $7.9 million equates to 1.08% of the total $732.6 million dollar value of SBIR awards by NIH and ARPA-E in 2013 and 2014.

The GAO determined that the nine agencies that declined to execute written determinations for awards to majority-owned portfolio companies came to their decisions based largely on internal discussions among staff, and without any formal analysis. Most agencies indicate they might reevaluate their decisions moving forward, but did not have any specific plans for doing so. The GAO also reported that in discussions with industry representatives, venture capital companies may still not be aware of the program change and could be interested in the program. The GAO recommended that the SBA Administrator discuss with agencies the evidence required for a written determination with SBIR-participating agencies and, if needed, amend its SBIR Policy Directive to provide additional guidance.

Small businesses and interested venture capital firms may consider reaching out to the other agencies that make SBIR awards and encourage renewed attention to the potential for SBIR awards to majority-owned portfolio companies. Such efforts could open up the field of competition for small businesses, and any venture capital firms with majority interests in those small businesses.

The agencies participating in the SBIR program include:

  • The Department of Agriculture,
  • The Department of Commerce,
  • The Department of Defense,
  • The Department of Education,
  • The Department of Energy,
  • The Department of Health and Human Services,
  • The Department of Homeland Security,
  • The Department of Transportation,
  • The Environmental Protection Agency,
  • The National Aeronautics and Space Administration, and
  • The National Science Foundation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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