Jonathan Cain | Oral commitment leaves company in the lurch

A Small Business Innovation Research grant can be a valuable tool to leverage scarce capital ? that is, if the company fully understands the risks and takes appropriate measures to protect its interests.

Several useful lessons were highlighted last month when the U.S. Court of Appeals for the Federal Circuit decided a case that brought to a close a long-running dispute between an SBIR grantee and the government.

In the late 1990s, the Air Force awarded a small company an SBIR phase I and phase II grant to develop and build prototypes of improved night vision goggles that would offer a broader field of view than was available. There was evidence that the Air Force contracting officer promised the grantee that if it successfully completed the phase II work, it would be awarded a phase III contract for commercial production of the goggles.

After the company successfully completed phase II, the Air Force refused to issue the grantee a phase III award. Instead, it issued a competitive procurement for the improved goggles, using technical data that the SBIR grantee had supplied in phase II, but had failed to mark as proprietary in accordance with Federal Acquisition Regulation requirements when it was delivered.

The Air Force eventually awarded the manufacturing contract to a competitor, and the grantee sued the Air Force in the U.S. Court of Federal Claims.

We previously discussed in this column ("No rights to limit disclosure of prototypes to competitors," Dec. 12, 2005) the court's decision to dismiss that portion of the complaint that alleged the Air Force's misuse of the phase II technical data to award the production contract to a competitor. The SBIR grantee had failed to comply with the technical requirements of the data rights clause in the phase II grant by failing to mark its proprietary data with the prescribed legends.

The court interpreted the regulations literally and determined that by failing to properly mark the data deliveries, they had been delivered to the Air Force with unlimited rights. Accordingly, the Air Force could use the phase II data to acquire manufactured goggles from the grantee's competitor.

The grantee did not appeal this aspect of the court's decision. But the court also said that the grantee was not entitled to rely on the contracting officer's promise of a phase III contract if the grantee successfully completed phase II. The grantee appealed this part of the decision.

The Court of Appeals agreed that, as with a commercial party, the government can be held liable for contracts formed by oral promises and for contracts implied in fact by the conduct of the parties. The grantee alleged and had produced evidence that the Air Force contracting officer, by her words and actions, had created a binding agreement to award a phase III contract to the grantee.

The Court of Appeals said, however, that although a contracting officer has broad discretion to execute and amend contracts, her authority does not include determining the type of procurement to be used for a particular transaction. That authority rests with other procurement officials.

Accordingly, said the court, the contracting officer could not make either an oral or implied in fact contract because it was outside her authority to decide to use a phase III SBIR award rather than a competitive procurement for the goggles.

The case reinforces that the oral promise of a government contracting official cannot be relied on, and that companies should be duly cautious in performing additional work in a contract in exchange for the promise of a future contract.

Jonathan Cain is a member of the law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC in Reston, Va. The opinions expressed in this article are his. He can be reached by e-mail at jcain@mintz.com.