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Understanding the Goals and Phases of Small Business Innovation Research and Small Business Technology Transfer Programs

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With the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs, the Government seeks to support technological innovation by small businesses while meeting federal research and development (R&D) needs and promoting private-sector commercialization of the innovations derived from federal R&D funding. SBIR/STTR programs are the Government’s largest source of early-stage/high-risk funding for start-ups and small businesses, often referred to as the backbone of the economy, that create two-thirds of new jobs and account for nearly half of the country’s gross domestic product. The aim is to increase the nation's competition, productivity, and economic growth. This objective is achieved incrementally through the three phases of the SBIR and STTR.

The Small Business Act (15 U.S.C. 631 et seq.) defines a small business concern (SBC) as a business that is independently owned and operated, is in conformity with specific industry criteria, such as the size standard, and is not dominant in its field of operation. To be eligible for the award of Phase I or Phase II funding agreements in the Small Business Administration’s (SBA’s) SBIR/STTR program, a business concern must be organized for-profit with a place of business located in the U.S., be more than 50 percent owned and controlled by one or more individuals who are citizens or permanent resident aliens of the U.S. or by other SBCs that are each more than 50 percent owned and controlled by one or more individuals who are citizens or permanent resident aliens of the U.S., and have no more than 500 employees including affiliates.

Each year, federal agencies with extramural R&D budgets that exceed $100 million are required to allocate 3.2 percent of the extramural R&D budget to fund small businesses through the SBIR program, and agencies with extramural R&D budgets exceeding $1 billion are required to set aside 0.45 percent of the R&D budget for the STTR program. Currently, eleven federal agencies participate in the SBIR program, and five of those also participate in the STTR program. The Department of Defense (DoD) is one of the five. Even though SBIR and STTR are each composed of three phases, the dollar amount, the duration of each phase, and the specific procedures that an SBC must follow may differ with different federal agencies participating in the programs.

Phase I

Phase I is to establish the technical merit, feasibility, and commercial potential of the R&D efforts proposed by the SBC and determine the quality of performance of the small business awardee. As of October 2022, a participating agency may issue a Phase I award of up to $295,924 without seeking SBA approval and generally for six months for SBIR and one year for STTR.

Phase II

Phase II is to continue the R&D efforts initiated in Phase I. Funding is based on the results achieved in Phase I and the scientific and technical merit and commercial potential of the project proposed in Phase II. Only Phase I awardees are typically eligible for a Phase II award for up to $1,972,828, as of October 2022, without SBA’s approval and for two years. The dollar values for Phase I and Phase II are adjusted periodically by the SBA to account for inflation.

Phase III

The ultimate goal of the SBIR/STTR programs is for a business concern to enter Phase III. This phase is for the SBC to pursue commercialization of the technology developed during Phases I and II. However, Phase III is funded not by the SBIR/STTR programs funds but by non-SBIR/STTR funds. At some federal agencies, Phase III may involve follow-on non-SBIR/STTR-funded R&D or production contracts for products, processes, or services intended for the Government’s use. There is no dollar limit associated with Phase III awards.

While SBIR and STTR programs share many same conditions and criteria, there are a few significant differences. The major one is that while SBIR is geared toward small businesses conducting independent research, STTR is only available to small businesses that team up with a non-profit research institution (RI). The RI must be located in the U.S. and be either a non-profit college/university, a domestic non-profit research organization, or a federally funded R&D center. The focus of STTR is on the transfer of technology from the RI to the small business and, ultimately, to the marketplace. Therefore, an SBC that wins an SBIR award may collaborate with another entity, but an STTR awardee must collaborate with a non-profit RI.

Further, in SBIR, the winning SBC must perform at least two-thirds (66 percent) of the effort in Phase I and at least half (50 percent) in Phase II. However, in STTR Phases I and II, the SBC must perform at least 40 percent of the effort and the non-profit RI at least 30 percent. The remainder can be subcontracted out to the RI or another subcontractor.          

Per Section 9 of the Small Business Act (i.e., 15 U.S.C. §638) – which has been reauthorized until 30 September 2025 – and the SBA’s Policy Directive, each of the federal agencies participating in the SBIR/STTR programs conducts its own program by designating its R&D topics of interest in its solicitations, accepting proposals from small businesses, making awards on a competitive basis after proposal evaluation, and providing the funding.  

SBIR/STTR programs incentivize SBCs to participate in the program by allowing them to retain the title and ownership rights to data, both technical data and computer software, generated in the performance of an SBIR/STTR award. Such rights are critical in the commercialization of the technology developed under the program, so it is vitally important that the SBC understand the nature of SBIR data and its rights in them. While the SBC retains ownership, the Government gets license rights to the SBIR/STTR data necessary to evaluate the SBC’s work and effectively utilize the results. At the same time, however, the Government must ensure that it or other entities do not use the SBIR/STTR data in ways that would inappropriately diminish the rights or associated economic opportunities of the small business that developed the data. SBIR data rights carry an especially significant advantage in Phase III contracts. As the Government cannot disclose SBIR data outside the Government without the express consent of the data rights owner, it cannot award an SBIR Phase III contract to any firm other than the SBC that developed the data if the contract requires the use of the SBIR data. This means that the SBC owning the SBIR data necessary to perform the Phase III scope of work has the right to receive a sole-source funding agreement, and the Government must award, to the greatest extent practicable, a Phase III to the SBIR firm that developed the Phase III technology. If Phase III is not awarded to the SBIR firm that developed the technology, the agency must justify in writing to the SBA why it did not do so.

Further, Phase IIIs are exempt from SBA’s size standards. So, SBIR firms can grow to any size and still get Phase IIIs for their technologies. Additionally, because of this size exemption, a large firm can purchase the SBIR firm and still receive Phase IIIs for the SBIR firm’s technologies.

Within the DoD, Defense Federal Acquisition Regulation Supplement (DFARS) 252.227-7018 Rights In Noncommercial Technical Data and Computer Software – Small Business Innovation Research (SBIR) Program (MAR 2020) (Deviation 2020-O0007) ensures that during the SBIR/STTR protection period, the Government has a non-exclusive, royalty-free, paid-up, worldwide license to use the properly marked SBIR/STTR data but cannot disclose the data during the protection period. This provides effective protection of the SBIR/STTR data that is comparable to and at least as strong as the protection the Government gives to delivered, appropriately marked data that is developed exclusively at private expense. Upon expiration of the protection period, the DoD acquires Government Purpose Rights in the SBIR/STTR data.

For more information on how to protect your TD/CS rights and/or how to create an Assertions of Restrictions for your TD/CS, contact us at Whitcomb Selinsky, PC. Our skilled Intellectual Property and Government Contracting attorneys will review your contract and help ensure your assertions are adequately documented and founded.

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About the AuthorAnne Lanteigne

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