Protest challenging the award of a Small Business Innovation Research (SBIR) phase III contract is sustained. The agency awarded a phase III contract to a company that had not performed the phase I or II contracts. The awardee, however, had acquired the company that performed phase I and II, and the awardee had been novated to a different phase III contract held by the acquired company. Nevertheless, GAO found that the awardee was ineligible for the new SBIR phase III award. To be eligible for a phase III award, a contractor must have either performed the phase I and II contracts or been novated to the phase I or II contracts. Here, the awardee had not performed the phase I and II contracts. Additionally, while it had been novated to a phase III contract, it had not been novated to the underlying phase I and II contracts. That the awardee had acquired a company that had actually performed the phase I and II contract was irrelevant. Nothing in the SBIR statute or regulations provides that a company becomes eligible for a phase III contract simply because it acquired a company that performed phases I and II.
The SBIR program seeks to increase the participation of small businesses in federally funded research and development. The program has three phases. Under phase I, companies apply for an award to test the feasibility of a concept. In phase II, they receive an award to further develop the concept. And in phase III, contractors develop the concept into a product they can sell to the private sector or military.
The Defense Health Agency (DHA) issued a sole-source SBIR phase III ordering agreement to American Systems Corporation to further develop technologies related to the Theater Medical Information Program, a system that collects healthcare data of service members. American Systems, however, had not performed the phase I or phase II contracts that initially developed the concept. Rather, another company, DDL Omni Engineering, had performed phases I and II. Indeed, DDL had also received a different phase III contract related to its work in phases I and II. But American Systems acquired DDL Omni after DDL had received the phase III award. American Systems had assumed DDL Omni’s phase III contract and executed a novation with the government to step in as the successor to that contract. Thus, American Systems was a party to two SBIR phase III contracts: (1) the contract it assumed from DDL Omni, and (2) the contract it was directly awarded by DHA.
ASRC Federal Data Network Technologies protested the phase III contract that DHA awarded to American Systems. ASRC argued the award did not meet the statutory definition of a phase III award because it did not derive from a phase I or phase II award that American Systems had performed or succeeded to.
DHA argued that GAO did not have jurisdiction to hear the protest because in a previous case, Complere Inc., B-406553, 2012 CPD ¶ 189l, GAO had opined that it does not have jurisdiction to review an agency decision declining to enter an SBIR phase III funding agreement.
GAO, however, did not find this previous case apposite. Under CICA and GAO’s bid protest regulations, GAO had jurisdiction to hear protests alleging violations of the procurement statutes or regulations. The SBIR statute and regulations allow for award of a sole-source phase III contract, but they also define a phase III and delineate who is eligible to receive a phase II award. Here, ASRC alleged that the award to American Systems did not meet the statutory definition of a phase III award, and that American Systems was not eligible for a phase III award. Thus, the issue broached by ARSC’s protest was whether the award complied with SBIR statutes and regulations, which is a matter within GAO’s jurisdiction.
DHA also argued that ASRC was not an interested party in the protest because it had not performed an SBIR phase I or II contract and thus was not eligible for award of phase III contract. But ASRC alleged in its protest that it was able to perform the work sought, and that DHA should meet these requirements through full and open competition. Accordingly, ASRC was an interested party because it may be able to compete if the phase III award to American Systems was improper.
As to the merits of the protest, GAO agreed that American Systems was not eligible for a phase III award. The plain language of the SBIR Policy Directive states that in order to be eligible for phase III award, a company “must have either received a Phase I or Phase II award or been novated a Phase I or Phase II award.” Here, American Systems had not received a phase I or II award. Moreover, while it had been novated to DDL Omni’s phase III contract, it had not been novated to DDL’s phase I or II contracts.
DHA and the Small Business Administration argued that American Systems was eligible for phase III award because it was the successor to DDL Omni by virtue of the acquisition. GAO, however, noted that that the SBIR Policy Directive clearly stated the requirements for a phase III award, and those requirements do not provide that a company is a successor in interest for purposes of phase III eligibility simply because it acquired a company that previously performed the phase I and II contracts.
DHA and SBA also argued that American Systems was eligible because it had been novated DDL Omni’s previous phase III award. The SBIR Policy Directive states that there is no limit on the time that may elapse between a phase III award and any subsequent phase III award. Based on this language, the agencies argued that the phase III award based on a prior phase III award is implied by the Policy Directive.
GAO rejected this argument, finding that this language simply referred to the timing of a phase III award, not to the eligibility of phase III awardee. There was nothing in the Policy Directive that allows for a phase III award to be made on the basis having received or been novated a prior phase III award. In other words, American Systems was not eligible for a phase III award simply because it had been novated to a different phase III award.
ASRC is represented by Damien C. Specht, James Tucker, and Caitlin Crujido of Morrison & Foerster LLP. The intervenor, American Systems, is represented by Katherine Burrows and Nathanael Hartland of Nelson Mullins Riley & Scarborough LLP. The government is represented by Timothy J. Haight, Jennifer M. Hesch, Song U. Kim, and Morgan Hilgendorf of the Defense Health Agency as well as Meagan K. Guerzon of the Small Business Administration. GAO attorneys John Sorrenti and Christina Sklarew participated in the preparation of the decision.
