Interview transcript:
Terry Gerton So the Trump administration has been really clear about its intent to make government procurement move faster, be simpler, and bring more commercial-ready products into the government. You’ve got a story here about a protest that seems to add some clarity and maybe some caution about that process. Tell us about what you brought.
Zach Prince Sure, so as some background, this is about the Small Business Innovation Research Program or SBIR. Everyone likes to pronounce their acronyms in government. The SBIR program is a great way for the government to do innovative research and development through small businesses and there are three phases. The first is for feasibility, second is for prototyping, and the third is for commercializing the technology. It has to be some sort of outgrowth of what’s been done under a prior phase, but Phase 3 is very attractive for businesses because the government can award it on a sole source basis, which the government loves because they get to do things quickly and, in their view, efficiently. Business loves because now they have, arguably, a captive customer. And, importantly, Phase 3 awards do not have to be to small businesses. They have to be to the entity that received the Phase 1 and Phase 2, so it had to be small at that time, but not necessarily at Phase 3. And that makes them attractive targets, companies that have Phase 1 or Phase 2, for acquisitions. This I see all the time. If you’ve got a really interesting Phase 2 project that you did, larger businesses might look at you and say, well, now we have a great opportunity to invest in this company and get all this Phase 3 work. I do a lot of acquisition work; this comes up constantly.
Terry Gerton That makes a lot of sense, but it also seems like it’s open to interpretation and potentially protest.
Zach Prince This is the tricky part. There’s not a lot of guidance — well, there really aren’t any regulations. There is the statute that authorizes the SBIR program, and then there’s the SBA’s directives that give some color and flesh out some of the definitions, but there’s still a lot gaps. So it becomes this big open question. What really, in fact, extends from, derives from, or completes an effort under a prior SBIR funding agreement? That’s what was at issue in this protest. And it was a fairly convoluted protest with some really interesting wrinkles, and I think some clear takeaways.
Terry Gerton Well, set the stage a little bit: This was the Air Force, right? The Air Force was buying a technological solution and the people that they bought it from were not the original people that they started with, I think, is how I understand it.
Zach Prince That’s right. That’s a good framing. So the Air Force had a requirement for a tactical security system that was providing ground-based security and surveillance capability, assisting security forces in remote deployment locations. They had gone through a prior round of purchases for a version of what they referred to as a TSS or tactical security system, where they had determined that another company, Digital Force, offered just such a system. But that was a different system. It was a different procurement. And when they re-approached it, the Air Force’s requirements shifted. They put out an RFI, a Request for Information, for their new requirements for a new TSS system. There were 14 vendors who responded. The agency went through a few rounds with the RFI process and discussions. And they determined that two of those entities could be eligible for SBIR phase 3 awards, based on prior work they had done under Phase 2. The agency decided that’s the right way to proceed. And just as an aside, the agency arguably had to do that, because if there is work that derives from a Phase 2 project, the agency has to award it on a sole source basis to a company that had done that Phase 2 work. This has also been protested; it’s not an issue in this one, but if the agency decided we should have an open competition, it’s very likely and very reasonable that the ultimate awardee here would have protested that decision, too.
Terry Gerton So you can’t win whichever way you go, but the Air Force did award it and they got protested. Actually, they got protested twice.
Zach Prince They did. So the first time when the agency said, well, we’re going to issue awards to two different eligible entities, there was a protest first at the agency level and then GAO, brought by the same company, Digital Force Technologies. They had a lot of arguments, but they really came down in a lot ways to the argument that this technology, the procurement at issue, did not derive from, extend or complete the efforts from a previous award. At the agency-level protest, the [Air Force] disagreed. At GAO, the agency said, we’re going to take corrective action and clarify some things. So the agency went back. They said, we’re just going to award to one company, not two, and we think it very clearly shows that what we’re buying now derives from that SBIR Phase 2 that was performed by Clear Align, who is the awardee here. And then, of course, Digital Force protested again.
Terry Gerton I’m speaking with Procurement Attorney Zach Prince, a partner at Haynes Boone. All right, Zach, so GAO finally ruled on this, and you think there’s some important takeaways from what they determined.
Zach Prince The first I would note is the agencies have so much discretion, and GAO noted this more than once in the decision, to determine whether a Phase 3 is appropriate, and it’s whether the technology they’re purchasing really continues, derives from, extends or completes efforts from a prior award. There’s a lot of subjectivity there. And the agency, if they make a reasonable decision — which doesn’t mean the decision you would make, it means just a decision that withstands scrutiny — that wins. The agency gets that discretion. So the agency, even if not everything they’re buying derives from a prior effort, but some core aspect of the current buy derives from a prior phase, that’s enough. An agency is going to win in that scenario. The argument here that Digital Force made from that point was that really only one part of this overall system derived from a prior phase of the procurement; everything else was a commercial off-the-shelf item. In the phrasing of Digital Force, you’ve taken a bunch of COTS items from off the shelf and you’ve combined them together with this one thing that you developed previously, that’s not enough to make it a continuation of the phase to work, that’s not right. The GAO disagreed. The agency is just going to have the finger pressed heavily on the scale in favor of its determination, as long as it documented it and it was reasonable. The second point — which I’ve grappled with before, and this has driven me a little bit crazy — you’ve got this idea government contracts can’t be assigned, right? There’s a statute, this has been the case for a very long time. Unless the government consents through something called an novation process, or through some sort of implied consent, or if there’s what’s called an assignment by operation of law. I’m not going to go too far out in the weeds on that here; that could be an hour-plus of its own discussion. But for the SBIR program, the directives from SBA said that you have to be the entity that held the prior SBIR phase or a successor in interest. And they didn’t define what “successor in interest” means. And so a very cautious perspective would have been to say, successor in interest means that you are the entity that has had a novation of a prior government contract or you’ve otherwise totally acquired that prior entity — not assets, stocks or through a merger. It has become de facto the same as the current entity. Even that, I thought, had been a challenging position because the government might not always accept it. I’ve often butted heads with government folks who have not quite appreciated some of the corporate law nuances here. What was startling to me about this GAO decision, the Air Force looked at this and they said, well, the company that we’re awarding to had bought all of the intellectual property assets of the prior SBIR contract holder. That is an asset sale, not, in fact, a full stock sale. They haven’t merged that entity into this other entity. It’s just they bought the IP, and that is enough for the SBIR program to become the successor in interest. That is a very broad interpretation. I think it’s the right interpretation, particularly because there really is not any guidance. So what that means is the agency gets a ton of deference. GAO gave the agency a ton a deference, so as long as they’ve got a plausible interpretation, that wins, and so here the determination was the awardee was the successor in interest because of this asset acquisition.
Terry Gerton Those seem like a couple of pretty clear principles to take away. One, that as long as the agency is doing its best to make a good decision here, they get deference and preference, and that especially in today’s world, the sale of IP is enough to create that continuity from level 2 to level 3.
Zach Prince At least as long as it’s all of the IP. I think that was an important point, is that they bought everything, really, from the prior entity. And so the prior entity does technically still exist as far as I understand, but it was something more than just, we’re buying one isolated bit of IP that you’ve developed. I don’t know where that line ends, but I think it’s going to be up to agencies to decide on their own.
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