The Federal Acquisition Regulation Council is out with a new proposed rule regarding small businesses. Specifically, it would align the FAR with the Small Business Administration, when it comes to Small Business Innovation Research and Small Business Technology Transfer, together known as SBIR and STTR. For the details, Federal Drive with Tom Temin  spoke with Hanes Boone procurement attorney Zach Prince.

Interview Transcript: 

Tom Temin Zach, I guess there is some variance between what the SBA wants for the government’s rights versus the contractors rights under these SBIR contracts, versus what is actually in the FAR. Tell us what’s happening.

Zach Prince So just as some background for the listener, the SBIR STTR programs are these small business R&D programs. They are intended to strengthen the role of innovative small business concerns and federally funded research and research and development programs. And so last year they’re reauthorized by Congress after extensive discussions or some changes to the program. In a nutshell, the program requires agencies with R&D budgets that are over $100 million to award about 3.2% the small businesses under SBIR, smaller amount under the STTR program. And the way that they incentivize small businesses to be part of this program, is they give them a broader band of IP rights than they would have under the baseline FAR and [Defense Federal Acquisition Regulation Supplement (DFARS)] rules. There’s also potentially sole source awards. It is really of interest to small businesses. The problem for a number of years, this isn’t just in this area. The FAR Council has not done a great job staying on top of changes in underlying programs, particularly with SBA. And so there’s been a disconnect in the DFARS as well, but also in the FAR, between the language that the SBA has put out and the language you actually see in your clauses.

Tom Temin The Small Business Administration wants contractors under the SBIR STTR programs to have longer and more complete rights to their intellectual property at the expense of the government rights. But that’s not what the FAR currently allows. Is that the issue?

Zach Prince That’s about right. So the FAR currently provides for SBIR STTR rights, which are a separate rights category to grant the government the right to use the data for any government purpose, much broader than what the SBA contemplates. It also, as a matter of the time limit, it might be essentially the same, but the markers are different. The current rule under the FAR is that SBIR rights expire and convert to government purpose rights after four years from the conclusion of contract deliverables. The new SBA rule measures it from 20 years from the date of contract award. It’s just an easier timeline to administer. Most cases probably going to be a longer period too.

Tom Temin Right. So the idea is that the FAR is basically oriented toward protecting the government’s rights. SBA is oriented toward giving the small businesses the economic development potential they would get by doing work for the government, and in so doing, create intellectual property that has commercial value.

Zach Prince Right. And that’s the net effect. It’s probably more fair to say that the FAR is just stuck in a slightly older version of this program.

Tom Temin Right. Got it. So the general idea is we want the FAR to be able to reflect what the program goals that it’s supporting.

Zach Prince That’s right. The DFARS has a disconnect too. But that’s why under the DFARS, they’ve been operating under a deviation since 2019. So in effect, the defense has already been implementing the SBA rule. It just hasn’t done a quite yet through a formal DFARS amendment.

Tom Temin Right, because each of the armed services has this elaborate SBIR STTR program office that they have hundreds of people just devoted to that type of work.

Zach Prince That’s right. It has a lot more focus in the [Department of Defense (DoD)] world.

Tom Temin We’re speaking with Zach Prince. He’s a partner at Hanes Boone law firm. And just give us a sense of the types of contracts. What do these look like? SBIR star contracts that would be subject to the new FAR rules, the new DFAR rules. What type of work is this? This is not just body shop type of stuff.

Zach Prince Oh, no, not at all. This is R&D work. This is real research and then research and development. There are three possible phases. The first, phase one is really just technical merit analysis. It’s usually competed. It’s usually low dollar value. Short periods of performance, not much money involved. Just to figure out if there’s any merit in the program that’s being explored. Phase two is continuing the research, research and development from phase one. And then phase three, is really the commercialization efforts. That’s where the big bucks are spent.

Tom Temin Right. And I guess my question is, is there any possibility that these types of contracts can get outside of the FAR altogether just by using other transaction authorities? Does that happen?

Zach Prince That could be possible. STTR in particular is not always contracts. I haven’t seen SBIR as OTA’s, but it could be.

Tom Temin All right. Is there any evidence that the government has abused the privilege of having longer rights or more extensive rights to this particular data? Because, I mean, that does come up from time to time that contractors of all sizes feel the government has maybe not been as careful as the contractors wish it had been in the use of what results from a contract.

Zach Prince So what we’ve heard some of is the government forcing contractors to give up source code when they’re developing computer software, which the government’s view is great. Now we have this unlimited license, internally to the government at least, to use this computer software however we want, which is not really the intent of the program. So there are contracting officers who are trying to get contractors to give up more rights than the program would otherwise a lot to them. And that defeats the whole point of the program.

Tom Temin I mean, the program is OK in theory if the government gets what it needs for its research purposes. And if the contractor under an SBIR STTR type of program then is able to develop this into a billion dollar business, who cares? Good for them.

Zach Prince It is good for them. And in an ideal world, the government’s view is we want to spur small businesses to innovate. And we’re going to use our DoD dollars or our government dollars to do that. Government gets a license to do what they want with it, small business has the right to commercialize it and some exclusivity for a while. Ideally, that’s a great program. The problem is that the rules are nebulous. There’s been this disconnect between the regulations from the SBA on the one hand and then the FAR council on the other. And then you’ve just got contracting officers out there demanding more rights than they’re entitled to.

Tom Temin All right. So this rule is in what state now? It’s proposed. What are the timelines looking like? And will you be commenting or your firm be commenting?

Zach Prince Well, the ABA’s public contract law section is working on comments, and some of my colleagues are part of that process. I usually would be, but I had some illness and had to duck out.

Tom Temin But essentially, this is something that people that represent these companies support. This is a good rule change.

Zach Prince It is a good rule change. There are a few points that could be refined. There’s still some disconnects between the devices and the FAR. Just some basic definitions of unlimited rights. For those listeners who are familiar with the data rights regimes under the FAR and DFARS. The DFARS is much better. It’s very nuanced, it’s quite sophisticated. The FAR is very simple. There are some basic issues there that could be improved to homogenized too. But from the SBA perspective, for this program in particular, the rule does a very good job.

Tom Temin And do we have any sense of which side of the government does more in SBIR STTR work? Is it Defense Department or is it the civilian side?

Zach Prince It’s definitely Defense Department. I haven’t looked at dollar comparisons. That’s just my sense. But it seems to me it’s mostly DoD. Department of Energy does quite a lot too, but it’s still primarily DoD.

Tom Temin Because you would think that the ability to commercialize broadly something that is developed would be easier on the civilian side than on the DoD side, where you’re aimed at combat types of systems which don’t have a lot of commercial usage.

Zach Prince That’s true, but there’s plenty that DoD funds, not the least being quite a lot of airframes and aviation improvements, but vehicles and computers and all sorts of interesting tech.