SBIR, STTR Recipients Risk Disclosure to Competitors If Guidelines Aren't Followed

By Caroline Horton Rockafellow *

Those of us involved in the entrepreneurial community are all keenly aware of the impact that SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) funding has for small companies working to develop, grow and move to the next level.  It is a funding mechanism that has proven to be a lifeline for many entrepreneurial companies.  Without this source of funding, many technologies companies would not have gotten off the ground and key technology that we rely on today would not ever have been developed.

Now, however, there is a new and very dangerous risk related to use of these development funds.

If the technology is delivered to the granting agency without the proper marking, that agency may be able to make unrestricted use and disclosure of the technology.

Government Rights Under the SBIR/STTR Programs

Under the SBIR and STTR programs, certain federal agencies are required to reserve a portion of the federal research and development budget for grants and contracts aimed at small business concerns.  The intent is that these funds will be used in the small business community to develop technology and scientific advances that will be of future commercial benefit.  Under the Bayh-Dole Act,  the legislation that governs transfer of ownership and control of government funded inventions, principal worldwide patent rights to an invention supported in whole or in part with Federal funds may be retained by the small business subject to an obligation to report all such inventions to the granting agency.

The granting agency retains a nonexclusive license to practice the invention on behalf of the government, but the Bayh-Dole Act does not allow the government to compete with the small business for licensing of the invention.  All SBIR and STTR recipients are aware that the granting government agencies have certain “march-in” rights with respect to the technology developed under an SBIR or STTR.  Historically, this has not been a problem, and there are very few cases where the government has exercised its march-in rights under such agreements.  

However, there is now a much larger issue to consider with respect to intellectual property rights and SBIR or STTR grants.  That concern is the right the government agencies may have to deliver confidential and proprietary information and materials to third party competitors for the purpose of encouraging such third party to compete with the grantee company.  The potential risk for the small business is far more onerous than any concern related to march in rights ever could have been.

The Troublesome Scenario

Imagine the following situation: An entrepreneurial company is fortunate enough to win a Small Businesses Innovation Research (SBIR) grant.  As a part of the contract, the company engages a subcontractor to assist in the development work.  The subcontractor and company have a falling out, the subcontractor makes demands on company outside of the original contract and the relationship becomes adversarial.  The company successfully completes its Phase I and Phase II SBIR work and delivers a prototype to the granting agency, as required under the SBIR grant.  The company then applies for Phase III funding from the government agency.  The government agency does not engage the original grantee company for Phase III, but rather seeks out the problematic subcontractor and engages the subcontractor to perform the final commercial development of the  technology developed by the original grantee under the SBIR Phase I and Phase II grants.

Worse yet, the government agency delivers all of that company’s confidential and technical information to the subcontractor for use in subcontractor’s development of the commercial product.  

This should be a completely fictitious scenario, but, unfortunately, it is a real fact pattern and an actual holding from a recent case decided by the United States Court of Federal Claims.

Night Vision Corp. vs. the United States of America  

In November of last year, the United States Court of Federal Claims issued its opinion in the case of Night Vision Corp. vs. the United States of America.  The plaintiff, Night Vision Corp. (“NVC”) claimed that the Air Force violated the SBIR prohibition against disclosing third party proprietary data when the Air Force delivered NVC’s prototypes developed under the SBIR to NVC’s competitor and former subcontractor, Insight Technologies, Inc. (“Insight”).  It is generally understood that technical data is protected from government disclosure, provided that the appropriate legends are affixed to the technical data.  

Whether the prototypes delivered by NVC to the Air Force constituted “technical data” was disputed by the parties, but, nevertheless, the Court found that even if the prototypes were found to be technical data and subject to the protections afforded technical data under SBIR contracts, NVC had waived its rights by not affixing the restricted rights legend directly to the prototype.  Although the Court agreed that the Air Force would be restricted under the SBIR contract from disclosing or delivering the prototypes to NVC competitors, it found that the failure of NVC to clearly mark the prototype with the prescribed legend effectively waived NVC’s rights in the prototypes and provided the government with complete and unrestricted use of the prototypes.  

This finding has and should send chills through the SBIR community.  It should also raise significant concerns for any entity that works under government grants or contracts.   Not only can the government assert rights in inventions if the company fails to commercialize the technology, but now if technology is delivered without proper marking the government can also make an unrestricted disclosure of the technology to third parties.  Worse yet, this confidential technology can be delivered to the developing party’s competitors and used against it in a competitive bidding process.  

What Does This Mean?

The fact pattern of this particular case is extremely disturbing.  On the face of the case, it appears that the Air Force was able to secure rights in technology owned by one of its SBIR recipients for the purpose of transferring such technology to a third party competitor of that SBIR recipient.  Whether this action was taken because the third party was technically more adept and the Air Force believed better able to move the technology to a commercial product, or whether it was because the third party had better political connections within the granting agency, is unclear.  What is clear is that rights were lost because prototypes were not properly marked.

The plaintiff in this case will likely appeal the ruling, and it is possible the case could be overturned.  In the meantime, this case should serve as a warning to all entities working under government contracts.  Not only must such entities be extremely careful and establish all the proper administrative procedures to ensure that reporting and record keeping requirements are met, but such entities must also closely screen all disclosures and deliveries made under the government contract or grant to ensure that all proper markings are in place.  

Whether or not this ruling is upheld, the fact pattern of this case should cause significant concern for all parties involved with any government contracts, and specifically SBIR and STTR grants.  The SBIR/STTR program is an invaluable program that has significantly promoted the advancement of science and technology in this country.  It is disheartening to think that such programs could be put at risk if the most promising of recipients no longer believe that their technological innovations are safe from the reaches of their competitors.  This case and the resulting fall out will be closely monitored.   In the meantime, all SBIR/STTR recipients must closely review their administrative procedures when it comes to making deliveries and disclosures to the granting agency.  

THE AUTHOR: Caroline Horton Rockafellow focuses her practice in the intellectual property needs of technology-based business. Ms. Rockafellow earned her undergraduate degree in chemistry from Drury University and her law degree and a Masters in Intellectual Property from Franklin Pierce Law Center. Prior to joining Daniels Daniels & Verdonik, she worked as in-house counsel for EcoScience Corporation, a biotechnology company, and Electronic Book Technologies, a software development corporation. Ms. Rockafellow is co-chair of the RTP chapter of the Licensing Executives Society, on the steering committee for NCEITA's Women in Information Science and Engineering, and is a member of the American Bar Association, the Section of Intellectual Property Law, the American Intellectual Property Law Association. She is a member of the North Carolina, Pennsylvania and Connecticut Bars and is registered to practice before the Patent and Trademark Office.  Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years.  To respond to this article or contact Ms. Rockafellow send e-mail to

* with permission of the author

SBIR Center note: to view/download a PDF copy of the required data rights notice click here.