Presented to the Rhode Island Chapter of NCMAand the

Southeastern New England Defense-Industry AllianceMarch 22, 2012

SBIR For Large and Small: The 2012 Re-Authorization of SBIR andBenefits to Small and Large firms

David P. Metzger, Arnold & Porter LLP Government Contracts Practice Group

Agenda: Here’s What We’ll Talk About

What is SBIR and what is unique about it?

How Does SBIR Benefit Government Contractors – Small and Large?

SBIR Re-Authorization: What’s That all About?

What Developments Are Coming Up?

Conclusion

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What is SBIR?

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SBIR innovative grants and contracts help meet agency R&D needs The Program is competitive, helps create jobs, brings new ideas to market

and into agency missions, and costs the taxpayers no new money SBIR Program is financed from a 2.5% set-aside of external research

budgets of 11 different federal agencies – money to be spent anyway Don’t be misled by the term “Small”

– Last year, the SBIR Program distributed approximately $2.5 billion in funding to small businesses, more than the venture capital industry put into early stage firms – this will rise under the new Act

– Large firms benefit from the program because they can insert these new ideas and technologies into major programs

– The Program has led to advances in the cure for cancer, more lethal military weapons, IED solutions, robotics, energy efficiency breakthroughs

– QualComm, and other firms benefitted from SBIR

The Small Business Innovative Research (SBIR) Program has been referred to as one of the most successful federal programs since the GI Bill

SBIR Process The SBIR Program Is Divided Into 3 Phases:

– Phase I: The small business concern (SBC) competitively offers a conceptual design & feasibility study

– Phase II: SBC provides extended research on its idea - detailed design, simulation, prototyping and evaluation

• Phase II-Plus: SBC demonstrates additional diagnostic and prognostic applications, prepares for production

– Phase III: SBC takes the idea to products, production, manufacturing, commercialization, creation of a commercial item or marketable product

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Who is Eligible to Participate in SBIR? SBC definition (applies only to Phases I and II):

– "Organized for profit"

– Not to exceed 500 employees, including affiliates

– At least 51% of concern is owned and controlled by individuals who are "citizens of or permanent resident aliens in" the U.S.; or is a firm that is itself 51% owned and controlled by such qualified citizens/individuals

– On the date of award of the SBIR funding agreement

Size standards do not apply to Phase III– Thus, large firms can acquire SBIR firms and benefit

from the unique sole-source and technical datarights SBCs enjoy for SBIR-developed technologies

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Who Gets What Under SBIR Awards? The Government Receives:

– A non-exclusive, royalty-free, paid up, world-wide license to use SBIR technical datagenerated under SBIR awards for government purposes

– The “non-exclusive” license means that both the Governmentand the SBIR contractor can use the SBIR Data

– The Government’s use is limited to Government purposes

– “Royalty-free” and “paid-up” both mean the Government does not have to pay for that use

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Who Gets What Under SBIR Awards? Contractors Get:

– Better data rights than any other federal clauses provide to contractors

• Government may not disclose SBIR data outside of Government during the protection period – a huge limitation

• SBIR Data Rights apply to all SBIR awards, including subcontracts to such awards, that fall within the definition of Phases I, II, or III

• Protection period starts on contract start date and lasts for:– 5 years for defense contracts after the end of the project– And 4 years for non-Defense contracts after the end of the contract

– $$$$$• The SBIR preference may lead to increased

sole-source awards• Large firms may pay top-dollar for small firms whose SBIR

technologies are a critical component of their technology road map

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SBIR Firms Must Mark Their SBIR Data

SBIR contractors must mark all SBIR data (generated under an SBIR contract) with the data rights legends contained in:

– DFARS 252.227-7018 for defense agency contracts; and

– FAR 52.227-20 for non-defense (civilian) agencies

– Mark it or lose it – SBIR firms must mark SBIR Data with the SBIR legend or lose their unique rights in the data

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What Are the Benefits of SBIR Awards Sole Source Awards in Phase III

– Phase IIIs are awards that “derive from extend, or complete prior SBIR efforts and are funded with non-SBIR(non Phase I or II funds)

A Preference – head of the line status – for Phase IIIs No size definition for Phase III awards Non-disclosure of Phase III data by government SBIR Data Rights transfer to large firm upon acquisition Sole-source rights transfer to large firm upon acquisition Large firms inherit nondisclosure rights upon acquisition

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What Are the Benefits of SBIR Awards

Subcontracts can be Phase IIIs– The prime contractor must insert the SBIR clause in the subcontract

– The SBIR subcontractor receives SBIR Data Rights

– The SBIR clause is not flowed down but rather inserted because the prime contract does not have the SBIR clause

– SBIR law requires insertion of the SBIR clause

– The prime contractor may not diminish these SBIR rights

– The prime contractor may need to notify the contracting officer that more restricted data than the prime contract requires is being provided – by means of a chart in the prime contract clause

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SBIR – Congressional Re-Authorization 2011 Since 2008, the SBIR/STTR Programs endured a

series of 14 temporary extensions

On December 31, 2011 President Obama signed the National Defense Authorization Act (NDAA) of 2011 (NDAA) HR.1540 – which finally re-authorized the SBIR Program

The Act re-authorized the SBIR and STTR Programs for six years (through Sept 30, 2017)

The relevant SBIR sections are 107 pages detailed within the 1844 page NDAA – The full text is available through the following link:

www.zyn.com/sbir/insider/SBIR_Pages_from-HR1540conf.pdf

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Highlights From SBIR Re-Authorization

Amends Section 9 of the Small Business Act(15 U.S.C. 638) as follows:1. Provides a statutory basis for the “preference” for

Phase III awards, stating that they be made:• To the “greatest” extent practicable

• By Federal agencies “and Federal prime contractors”

• to award recipients that developed “the technology.” (See § 5108)

• This key provision a first time statutory basis for the “preference” – current SBA guidance provides that this preference may include sole source awards

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Highlights From SBIR Re-Authorization(Cont’d)

2. Elevates the Phase III definition to statutory language• Defines an SBIR Phase III as: “work that derives from, extends

or completes efforts made under prior funding agreements under the SBIR Program”

• This express language is now statutory (See § 5125)

3. Increases SBIR/STTR Dollar Thresholds• Increases both Phase I and Phase II award levels:

– Phase I – Increased from $100,000 to $150,000 – Phase II – Increased from $750,000 to $1 million– Phase III ‒ Has no dollar limits– Increased the setaside from 2.5% to 3.2% when fully

phased in by 201713

4. Requires the SECRETARY of DEFENSE to:• Set new SBIR Goals to increase the number of Phase II SBIR/STTR

awards

• Create new incentives to encourage agencies and prime contractorsto meet these goals

• Submit an annual report regarding the number and percentages of Phase II SBIR/STTR contracts into programs of record (See § 5122)

5. Establishes New Intellectual Property Protections• Requires GAO, within 18 months, to study and submit a report

to Congress Federal agency compliance with data rightsprotections for SBIR awardees

• States that law and policy directives intended to clarify the scope of data rights – sufficient to protect SBIR awardees

• References SBIR grievance tracking procedures for SBIR awardees having data rights issues with Federal agencies (not yet in effect)

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Highlights From SBIR Re-Authorization(Cont’d)

6. Increases Participation for Venture Capital Firms (§ 5107)

• Allows small businesses majority-owned by multiple venture capital operating companies, hedge funds or private equity firmsto compete for up to 25% of SBIR funds of the National Institute of Health, the Department of Energy and the National Science Foundation,

• Permits these venture capital, hedge funds, or private equity firms to compete for up to 15% of SBIR funds distributed by other participating federal agencies, including DOD

• This was the “great compromise” that finally helped pass the Act

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Highlights From SBIR Re-Authorization(Cont’d)

Highlights From SBIR Re-Authorization(Cont’d)

Phase Flexibility– An SBC that received an SBIR Phase I award from

an agency is eligible to receive a subsequent SBIRPhase II award from a different federal agency, if the topics are the same (§ 5104)

– An SBC that received an SBIR Phase I award from an agency is eligible to receive an STTR Phase II award from the same or different agency (§ 5104)

– Agencies can by-pass the invitation, pre-screening, or pre-selection process for Phase II (§ 5105)

– NIH, DOEd and DOD can by-pass Phase I (§ 5106)

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When Will This Happen? The Act requires SBA to re-issue the SBIR Directive

within 180 days. – Public Comments will be solicited

– These comments will be critical because they will allow agencies that have opposed SBIR technical date rights an opportunity to undermine them

• Now that the future of the Act is assured, the focus will shift to SBA and its efforts to implement the new law, and hopefully keep technical data rights provisions in favor of small businesses

• Current guidance provides that small business size standards do not apply to Phase III, allowing large firms to acquire SBIR firms and benefit from Phase III sole source and technical data rights protections – which hopefully the revised Directive will not disturb

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Conclusion SBIR is the “Little Engine That Could” in

federal contracting It faced a huge uphill re-authorization battle,

and conquered it

Now it must not go off the tracks as it coasts downhill into the implementation stage

This is a program that has large firms, small firms, agencies and the public as stakeholders

We’ll all see where this “Little Engine” goes from here

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Thank you

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David P. MetzgerPartner

David.Metzger@aporter.com

Northern VirginiaSuite 9001600 Tysons BoulevardMcLean, VA  22102-4865

+1 703.720.7017 +1 703.720.7399 (fax)