The U.S. Small Business Administration (“SBA”) recently issued a notice detailing proposed amendments to the policy directives governing the Small Business Innovation Research (“SBIR”) and Small Business Technology Transfer (“STTR”) programs.  The notice indicates that the SBA intends to implement significant changes to the current data rights provided under SBIR/STTR awards, as well as the method by which program participants—or their successors in interest—receive preferences in the third phase of efforts to develop technologies under either program.

The proposed changes open up new possibilities for a company’s competitors to benefit from its participation in the SBIR/STTR programs. However, the changes also provide additional certainty that may encourage increased participation by small research and development companies and investors that are currently unsure as to whether SBIR/STTR awards can effectively be used to commercialize new technologies.

The SBIR/STTR programs are intended to stimulate small business research and development efforts by providing funding through contracts, grants, or cooperative agreements in three successive phases. The value of Phase I and II awards are respectively capped at $225,000 and $1.5 million, but program participants can receive multiple Phase I and II awards as long as they follow guidelines regarding the rate at which they commercialize new technologies.  In contrast, Phase III awards, which do not use SBIR/STTR funds, are not restricted in either value or number.

Program participants that are eligible to receive Phase III awards can effectively transfer the benefits that they receive under the programs to third parties that would not otherwise be eligible to receive SBIR/STTR awards. These benefits include unique data rights and award preferences that are designed to provide a “first-mover” market advantage in the commercialization of new technologies developed under the programs.

Under the current directives—which SBA now proposes to combine—any data generated in the performance of an SBIR/STTR award is generally protected from disclosure outside the U.S. Government for a period of at least four years measured from the date of submission of the last deliverable under an SBIR/STTR award. This period can be extended by successive awards, and the U.S. Government is prohibited from using, or authorizing others to use, SBIR/STTR data for commercial purposes after this period expires.

The current directives also broadly provide that any work that “derives from, extends, or completes” efforts to develop a technology under a prior SBIR/STTR award, and involves non-SBIR/STTR funds, must to the greatest extent practicable be performed under a Phase III award by the company that developed the technology. This mandate applies at both the prime contract and subcontract level and can extend to successors in interest to the initial SBIR/STTR awardee.  Sole-source Phase III awards are permitted in these circumstances because the prior competition for a Phase I or II award is deemed to satisfy applicable competition requirements.

The SBA now proposes to alter the long-standing data rights regime provided under the SBIR/STTR directives by allowing the U.S. Government to use, or authorize others to use, SBIR/STTR data for any purpose—including commercial purposes or foreign military sales—after the expiration of a minimum, non-extendable twelve-year protection period to be measured from the date of submission of the last deliverable under an initial SBIR/STTR award. The SBA also proposes to “clarify” that the U.S. Government can use SBIR/STTR data during the protection period for internal government purposes, although the SBA admits that the current directives can be read to restrict the U.S. Government from using SBIR/STTR data for any purpose until the protection period expires.

These proposed changes could have a negative impact on an SBIR/STTR awardee by ultimately allowing its competitors to benefit from its participation in the programs or arguably even authorizing the U.S. Government to engage in internal non-manufacturing development efforts independent of the awardee. However, the proposed changes at least offer some additional protection to SBIR/STTR awardees by clearly indicating that agencies should not attempt to circumvent SBIR/STTR data rights by allowing competitors to reverse engineer prototypes developed under the SBIR/STTR programs—an issue that we have previously discussed.

The impact of the SBA’s proposed changes to the current data rights regime may be offset by the increased certainty that the SBA plans to provide with respect to Phase III award preferences. Specifically, the SBA proposes to affirmatively require agencies to engage in a two-step process whenever Phase III work is involved in a particular project:

• First, an agency must make a sole-source award to the qualifying prior SBIR/STTR awardee if the awardee is capable of performing work relating to the SBIR/STTR technology at issue either on an independent basis or with the help of subcontractors.

• Second, if a sole-source award is not practicable, an agency must inform the SBA and consider whether the agency can provide the prior awardee with a different preference, such as by requiring contractors to acquire the prior awardee’s deliverables through a brand-name designation or establishing evaluation factors that promote subcontracting with the prior awardee.

As a result of the increased certainty provided by these proposed changes, small research and development companies and investors will likely be able to establish more concrete expectations regarding the long-term benefits of their participation in the SBIR/STTR programs. Thus, the increased assurance of receiving tangible benefits through Phase III awards may offset any negative impact resulting from the SBA’s proposed changes to SBIR/STTR data rights.

The notice identifies a number of other proposed changes that may be of interest to current program participants, including a limitation on overlapping state funding. Comments on the notice are due on or before June 6, 2016.