7 SBIR Policy Directive Update Preserves Government Contracting Benefits in Acquisition
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SBIR Policy Directive Update Preserves Government Contracting Benefits in Acquisition

Authored by Eric D. Blatt

September 29, 2020

The policy directive for the Small Business Innovation Research and Small Business Technology Transfer programs (collectively, “SBIR”) will be updated, effective October 1, 2020, to ensure that SBIR contracting benefits for participating firms are preserved, even if the participating entity pursues a merger or acquisition. This policy clarification is beneficial to SBIR firms who are considering or may in the future consider being acquired.

One of the benefits of winning an SBIR contract is the opportunity to obtain follow-on government contracts at a competitive advantage. The SBIR program provides a three-phase structure in which Phase I and Phase II awards are typically directed to research and development, while Phase III awards are typically larger contracts directed to commercialization. SBIR firms may be eligible for Phase III contracts, provided that the Phase III contract “derives from, extends, or completes” work performed under an earlier SBIR contract. 15 U.S.C. § 638(e)(4)(C). Phase III contracts may be sole sourced, and there is no limitation on the amount that may be awarded. SBIR firms also receive preferential data rights for information developed under SBIR contracts of any phase.

Prior to the October 1, 2020 update, these contracting benefits could be unintentionally forfeited if the SBIR firm was involved in a corporate acquisition. This presented an obstacle to acquisition, as it was possible that transferring the assets of the SBIR firm could materially diminish their value.

An example of this unintentional forfeiture played out in Matter of: ARSC Fed. Data Network Techs., LLC, B-418028 (Dec. 26, 2019). There, American Systems Corp. (“American Systems”) had acquired an SBIR firm called DDL Omni Engineering LLC (“DDL Omni”). The acquiror, American Systems, then attempted to obtain a Phase III award that derived from work performed under the acquiree’s earlier Phase I and Phase II contracts. Although the Phase III contract was initially awarded to American Systems, a competitor protested the award, and American Systems was ultimately found to be ineligible because it had not received or been novated the Phase I or Phase II contracts on which the Phase III award was based.

Importantly, there was no dispute that the acquiree, DDL Omni, would have been eligible to receive a Phase III award. But, because its assets had been assigned to American Systems, its right to receive the Phase III award was forfeited.

The October 1, 2020 policy update fixes this loophole so that SBIR firms will no longer unintentionally forfeit their contracting benefits when they are acquired. As the Small Business Administration explains in its notice announcing the update, the SBIR program is “intended to economically assist” participating firms “by creating an advantage for those firms to receive Government funding at the early often riskiest stage, from an investment perspective, through commercialization.” 85 Fed. Reg. 50,062. SBIR firms should not be prevented from assigning their rights “through a merger or sale with another business concern” because “[s]uch a policy interpretation would create inefficiencies in the marketplace and discourage valuations and transactions among businesses that may otherwise allow for greater investment in new ideas and products.” Id.

The revised policy directive provides that “a phase III Awardee may have either received a prior Phase I or Phase II award or been novated a Phase I or Phase II award (or received a revised Phase I or Phase II award if a grant or cooperative grant) or be a successor-in-interest entity.” 85 Fed. Reg. 50,063 (emphasis added). It further specifies that an entity “may be considered a successor-in-interest, if it has secured the transfer of: (1) All the [SBIR firm’s] assets; or (2) the entire portion of the assets involved in performing the award” on which the subsequent Phase III award is based. Id.