The Small Business Innovation Research program (SBIR) is a successful initiative that increases the participation of small business concerns in federally funded research and development. Awards under Phases I and II of the program are limited to small businesses. Of relevance to this article, federal agencies may award non-competed SBIR Phase III contracts to recipients of prior SBIR awards (and their legal successors-in-interest of any size), as long as any new award somehow “derives from, extends, or completes efforts made under prior funding agreements under the SBIR program.” 15 U.S.C. § 638(e)(4)(C). Phase III awards are not restricted to small businesses.
A small but growing body of law at the Government Accountability Office (GAO) has charted the outer boundaries of the extraordinary discretion that Congress has provided to agencies under this program. The GAO recently issued an important new decision, highlighting the breadth of the statutory authority, in the protest of Digital Force Technologies, Inc., B-423319, May 27, 2025.
Background and Award Decision
The acquisition at issue involved the Department of the Air Force’s need for “a tactical security system,” comprising a “modular, scalable, tailorable, lightweight, rapidly deployable, ground-based security and surveillance system.” The system was to have multiple capabilities, including “coverage range, radar coverage, image assessment sensors, ability to operate in high winds, and a maximum weight.”
This “Increment 1” acquisition was a successor to an “Increment 0” sole-source contract awarded to Digital Force Technologies, Inc. (the protester here) in September 2023. While Digital Force performed its contract, the Air Force conduct extensive market research, which identified multiple companies interested in fulfilling the next increment of the Air Force’s tactical security system requirements.
In January 2025, in response to an inquiry from Digital Force, the Air Force stated that it had decided to procure the Increment 1 tactical security system through a sole-source SBIR Phase III award to Clear Align, LLC.
Digital Force protested the award decision to the GAO. The protest raised two broad challenges to the award: (1) whether Digital Force qualified as the successor-in-interest to the company that that performed the underlying SBIR Phase I and II efforts; and (2) whether the new Phase III award derived from, extended, or completed those underlying Phase I/II efforts. The GAO answered both questions in the affirmative and denied the protest.
Successorship-in-Interest
Digital Force noted that, although the Air Force awarded the Phase III contract to Clear Align, Clear Align itself did not perform the underlying SBIR Phase II contracts on which the Phase III award was based. In this regard, the Small Business Administration’s (SBA) Policy Directive for the SBIR program provides in relevant part:
An SBIR/STTR Awardee may include, and SBIR/STTR work may be performed by, those identified via a “novated” or “successor in interest” or similarly-revised Funding Agreement. For example, a Phase III Awardee may have either received a prior Phase I or Phase II award or been novated a Phase I or Phase II award (or received a revised Phase I or Phase II award if a grant or cooperative grant) or be a successor-in-interest entity.
SBIR/STTR Policy Directive (May 2023) § 6(a)(5).[1]
Even though there is no reference to novation of the SBIR awards, the GAO found the record sufficiently documented that, in 2013, Clear Align acquired substantially all the assets of the SBIR Phase II contractor’s “high-tech optics business,” including “all intellectual property used or usable in connection with the Business.” The record also documented the Air Force’s understanding that the relevant SBIR Phase II contracts were performed by a predecessor company and that Clear Align was the successor-in-interest with respect to the underlying SBIR technologies. Therefore, the GAO found that Clear Align qualified for Phase III awards stemming from those underlying SBIR Phase II contracts.
SBIR Phase III Scope
The more interesting part of the protest decision involves the question of how closely a SBIR Phase III contract’s scope must align with the scope of the underlying SBIR Phase I or II agreement(s) on which the Phase III award is based. The protester raised three main challenges to the scope of the intended award.
First, Digital Force argued that the Air Force’s requirement for a tactical security system did not derive from, extend, or complete Clear Align’s prior SBIR efforts. The protester showed that the requirements in the solicitation provided to Clear Align were all developed “separately from and without reference to prior SBIR efforts.” The GAO found that this argument “misapplies the relevant law and policy directive and therefore does not provide a basis to sustain the protest.” The GAO held that the relevant question was not whether an agency’s requirements derive from, extend, or complete prior SBIR efforts, but rather whether the work the contractor will perform derives from, extends, or completes the prior SBIR efforts. Put another way, a proper legal analysis focuses not on the agency’s problem, but on the contractor’s proposed solution.
Second, the protester argued that the record did “not demonstrate the required link between the prior SBIR efforts and the proposed [Phase III work].” The GAO, however, observed that the solicitation stated that the tactical security system deliverable “shall contain SBIR-derived technology.” Clear Align’s proposal, in turn, stated it would satisfy the Air Force’s requirements by delivering a solution that included an infrared camera that “implements technology from two prior SBIR efforts,” which its predecessor-in-interest was awarded in 2002 and 2008. The record demonstrated that those two SBIR efforts resulted in improved optical polishing and coating techniques, and a special “opto-mechanism design” to allow better imaging performance over a wide temperature range. The proposal stated that Clear Align continued to invest in improvements after those old SBIR contracts ended. Clear Align then used those improvements to develop its current generation of cameras, which it would use to perform the Phase III contract.
The GAO found that the record demonstrated the Air Force was aware of the prior SBIR efforts and aware of Clear Align’s explanation of the connection between the prior efforts and the proposed Phase III work. And the GAO found no basis for disturbing the Air Force’s conclusion that Clear Align’s proposed tactical security system solution “directly benefits from the work performed under the two SBIR Phase II awards” because those prior SBIR efforts “enhanced the performance, manufacturability, and environmental resistance of the [particular camera the proposed system would use].”
The GAO emphasized that “the SBIR statute and policy directive set forth very limited requirements to justify an SBIR phase III solicitation or award.” For this reason, there is “significant discretion afforded to agencies in this area,” and a correspondingly basis for the GAO to second-guess a procuring agency’s judgment, if the agency has satisfied the very limited requirements set by law for awards of this nature.
Finally, the protester objected that the Air Force was procuring a system made up of numerous Commercially Available Off-the-Shelf (COTS) components, and only two of those components (the two cameras) were allegedly somehow derived from prior SBIR efforts. Thus, in the protester’s view, even if the Air Force could use a SBIR Phase III contract to buy Clear Align’s COTS camera, it was improper and anticompetitive for the Air Force to use the sole-source award to acquire the other COTS components (such as laptops, tablets, radios, and lift masts) and the system as a whole. The protester argued that “under the Air Force’s interpretation of the SBIR statute, a large defense contractor could purchase the rights to Clear Align’s [specialized] camera, install the camera on a C-40 aircraft, and win an SBIR phase III award for the Air Force’s C-40 fleet expansion program.”
The GAO rejected this argument, too. The GAO observed that “Digital Force points to no statue, regulation, or other legal authority stating that an agency may not use SBIR phase III authority to procure a system where only a component of the overall system derives from, extends, or completes a prior SBIR effort.” The GAO rejected the protester’s analogy to a camera strapped to C-40 justifying a sole-source fleet expansion because, here, “the SBIR-derived component [i.e., the camera] is reasonably related to the overall objective of the system the agency seeks to procure [i.e., security and surveillance].” In light of this reasonable relationship between the SBIR technology and the overall system being acquired, the GAO found nothing objectionable. “In sum, there simply is no requirement in statute or the policy directive that the entirety of a phase III solution must be derived from prior SBIR efforts.”
Takeaways
This protest decision highlights the value of being awarded (or acquiring) SBIR Phase I and II contracts and related technologies. Key observations:
- Agencies have broad discretion to award sole-source Phase III awards, without the ordinary justification-and-approval process, to SBIR Phase I and II contractors and their successors-in-interest.
- Because Phase III awards are not time-limited or restricted to small businesses, SBIR Phase I and II awards can be valuable assets in mergers and acquisitions.
- SBIR Phase III authority is a valuable tool for agencies looking for ways to meet their requirements more expeditiously than traditional acquisition methods permit.
- The SBIR statute and the SBA’s quasi-regulatory Policy Directive impose relatively few pre-conditions or documentation requirements for a Phase III award. An agency does, however, have to be able to show that the work to be performed under the Phase III contract reasonably derives from, extends, or completes an underlying Phase I or II effort performed (or acquired) by the intended Phase III awardee.
- SBIR Phase III sole source awards can be protested (as this decision shows). But it is extraordinarily difficult for a protester to prevail, even when there is little overlap between the Phase III award and the underlying Phase I or II work that it derives from, extends, or completes. See ASRC Fed. Data Network Techs., LLC, B-418765, Aug. 28, 2020, 2020 CPD ¶ 339 (denying protest where warship combat readiness assessment SBIR technology formed the basis for a Phase III sole-source award for a healthcare record software modernization).[2]
- The new Phase III effort need not directly stem from the prior Phase I or II work. As here, the prior contracts may have been awarded decades in the past and performed by an altogether different entity, and the Phase I/II technology may have undergone subsequent refinement and improvement outside the SBIR program.
- A Phase III award may encompass work that does not derive from, extend, or complete the prior Phase I or II efforts. The SBIR-related portion of the solution must only be somehow “reasonably related to the overall objective of the system the agency seeks to procure.”
- Acquisition of substantially all the assets of concern qualifies, in the GAO’s view, to make the awardee a successor-in-interest to the original SBIR Phase I award.
[1] The GAO noted that an earlier version of the Policy Directive provided that “[a]n entity may be considered a successor-in-interest, if it has secured the transfer of: (1) All the small business concern’s assets; or (2) the entire portion of the assets involved in performing the award.” The current version of the Policy Directive lacks this language. The protester also argued that the Policy Directive is inconsistent with the underlying statute, which does not expressly permit Phase III awards to successors-in-interest, but the GAO dismissed this argument as untimely raised.
[2] Full disclosure: MoFo represented the protester in ASRC Fed. Data Network Techs., LLC, as well as in a prior SBIR Phase III protest, ASRC Fed. Data Network Techs., LLC, B-418028, B-418028.2, Dec. 26, 2019, 2019 CPD ¶ 432, which the GAO sustained.
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