TITLE: B-298533, Celadon Laboratories, Inc., November 1, 2006
BNUMBER: B-298533
DATE: November 1, 2006
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B-298533, Celadon Laboratories, Inc., November 1, 2006

   Decision

   Matter of: Celadon Laboratories, Inc.

   File: B-298533

   Date: November 1, 2006

   Lawrence A. Kessner, Esq., for the protester.

   Douglas Kornreich, Esq., Department of Health and Human Services, for the
   agency.

   Katherine I. Riback, Esq., and James A. Spangenberg, Esq., Office of the
   General Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Agency failed to determine whether the evaluators of the protester's
   proposal under a Small Business Innovation Research program solicitation
   had a conflict of interest, where the evaluators were employed by firms
   that promote a type of technology that assertedly is directly challenged
   by the type of technology offered in the protester's proposal.

   DECISION

   Celadon Laboratories, Inc. protests the decision of the Department of
   Health and Human Services (HHS) not to fund its phase I proposal under the
   Small Business Innovation Research (SBIR) program solicitation No. PHS
   2006-1. Celadon asserts that the agency failed to reasonably consider
   conflicts of interest that it contends likely impaired the objectivity of
   the four members of the Special Emphasis Panel (SEP), which evaluated its
   proposal.

   We sustain the protest.

   The SBIR program is conducted pursuant to the Small Business Innovation
   Development Act, 15 U.S.C. sect. 638 (2000), which requires certain
   federal agencies to reserve a portion of their research and development
   funds for awards to small businesses. Firms first apply for a 6-month
   phase I award to test the scientific, technical, and commercial merit and
   feasibility of a certain concept. If phase I is successful, the firm may
   be invited to apply for a phase II award to further develop the concept.
   After the completion of phase II, firms are expected to obtain funding
   from the private sector and/or non-SBIR government sources to develop the
   concept into a product for sale in the private sector and/or military
   markets. See Small Business Administration's SBIR Website,
   http://www.sba.gov/sbir/.

   To commence the program, the agency issues an SBIR solicitation that sets
   forth research and development topics and subtopics that emphasize the
   need for proposals with advanced concepts to meet specific agency
   requirements, which may be general or narrow in scope, depending on the
   needs of the agency. The object of this phase I procurement is to obtain
   and evaluate small business proposals under stated evaluation criteria to
   determine which small businesses should receive phase I contracts. During
   phase I, the agency will determine the scientific and technical merit and
   feasibility of the proposed effort and the quality of performance of the
   small business concern with a relatively small agency investment before
   consideration of further federal support in phase II. SBIR Program Policy
   Directive para. 4(a).

   On August 4, 2005, HHS issued this solicitation which identified a number
   of research topics for the National Institutes of Health (NIH) and the
   Centers for Disease Control. One of the topics included in the
   solicitation was Topic 216, Development of Inhibitory Reagents for the
   Study of Protein Function, which was a research topic of interest
   requested by the National Cancer Institute (NCI), a division of NIH. The
   purpose of this topic was to solicit proposals from small business
   concerns to encourage the development and commercialization of new
   technology for the generation of small molecules and novel mechanisms to
   modulate protein function within a cancer cell. Solicitation at 33.

   Proposals submitted in response to this solicitation were to be evaluated
   by an SEP. The SEP is an independent peer review panel, which evaluates
   the proposals, determines which small business concerns should receive
   phase I contracts and makes specific recommendations related to the scope,
   direction and/or conduct of the proposed research. Solicitation at 18.

   In this instance, the SEP, assembled by the NCI, consisted of three
   members from private industry and one from academia. According to the
   agency, in preparation for their work on the SEP, prospective members were
   mailed a copy of NIH's rules, including those relating to conflicts of
   interest. Prior to their first meeting, the four members provided to HHS a
   signed NIH Pre-Review Certification Form, in which each member certified
   that he/she did not have a conflict of interest with the firms that had
   submitted proposals for review, including Celadon. Additionally, according
   to the agency, conflicts of interest were addressed in the SEP orientation
   conference and at the beginning of the first review meeting.

   On April 8, 2006, the protester's chief executive officer expressed
   concern to the agency about the composition of the SEP, asserting that
   each of its members had a real conflict of interest that would likely bias
   their review of Celadon's proposal.[1] Agency Report (AR), Tab 6, Letter
   from Celadon to NCI (April 8, 2006). In this letter, and in an April 19
   letter, Celadon identified with specificity why each of the SEP members
   had what Celadon considered a real conflict of interest. Id.; AR, Tab 10,
   Letter from Celadon to NCI (April 19, 2006). Basically, Celadon asserted
   that all four of the SEP members work for, or are associated with, a
   segment of the industry, specifically vendors that rely on siRNA
   technology, a technology that Celadon, without rebuttal, asserts was
   directly competitive with the technology it offered in its proposal,
   specifically siLNA technology. Celadon provided supporting details for why
   it considered each of these evaluators to have a real conflict of interest
   because of their employers' commitment to, and reliance on, siRNA
   technology. AR, Tab 10, Letter from Celadon to NCI (April 19, 2006).

   By April 25, the SEP had completed its evaluation of Celadon's proposal
   and found it to be technically unacceptable. In response to the concerns
   that had been expressed by Celadon, the agency took the following
   measures:

     The Contracting Officer asked the Project Officer to review the proposal
     and the minutes of the SEP and provide a recommendation as to whether
     the minutes reflect an accurate assessment of the proposal. The Project
     Officer's response concurred with the assessment of the SEP and [he]
     felt the minutes accurately reflected both the strengths and weaknesses
     of the proposal. The Contracting Officer reviewed the conflict of
     interest certifications, the minutes of the SEP and the recommendation
     of the Project Officer and concluded that, in his opinion, there was no
     bias exhibited in the review of the Celadon proposal.

   Contracting Officer's Statement at 2.

   On July 13, the agency informed Celadon that its proposal would not be
   considered for award and on that same day, Celadon requested a formal
   debriefing. The agency provided a debriefing on July 14, and Celadon filed
   this protest on July 24.

   The agency initially contends that Celadon's protest was untimely because
   it was aware of the composition of the SEP prior to the rejection of its
   proposal and it did not file a protest within 10 days of becoming aware of
   the composition of the SEP.

   Our Bid Protest Regulations contain strict rules for the timely submission
   of protests. These timeliness rules reflect the dual requirements of
   giving parties a fair opportunity to present their cases and resolving
   protests expeditiously without disrupting or delaying the procurement
   process. Peacock, Myers & Adams, B-279327, Mar. 24, 1998, 98-1 CPD para.
   94 at 3-4; Professional Rehab. Consultants, Inc., B-275871, Feb. 28, 1997,
   97-1 CPD para. 94 at 2. Under these rules, a protest such as Celadon's,
   based on other than alleged improprieties in a solicitation, must be filed
   not later than 10 days after the protester knew or should have known of
   the basis for protest, whichever is earlier. 4 C.F.R. sect. 21.2(a)(2)
   (2006). An exception to this general rule is a protest that challenges "a
   procurement conducted on the basis of competitive proposals under which a
   debriefing is requested and, when requested, is required." Id. In such
   cases, with respect to any protest basis which is known or should have
   been known either before or as a result of the debriefing, the protest
   must be filed not later than 10 days after the date on which the
   debriefing is held. Id.

   Here, the protest was filed within 10 days of the debriefing Celadon
   received, even though it knew its protest bases sometime earlier. The
   above-mentioned exception to our timeliness rules, however, applies only
   to procurements conducted on the basis of "competitive proposals," a term
   not defined by our Bid Protest Regulations, nor by statute or
   regulation.[2] See Systems Plus, Inc. v. United States, 68 Fed. Cl. 206
   (2005). We have previously determined that the use of negotiated
   procedures in accordance with Federal Acquisition Regulation (FAR) Part 15
   and as evidenced by the issuance of a request for proposals, constitutes a
   procurement conducted on the basis of competitive proposals. Professional
   Rehab. Consultants, Inc., supra, at 2. Here, while this SBIR procurement
   was not conducted under FAR Part 15 procedures, the solicitation requested
   "proposals" to be judged under specified evaluation criteria.[3]

   We need not resolve whether this procurement was conducted on the basis of
   competitive proposals within the meaning of our timeliness rules because
   we find that this protest is appropriate for consideration under the
   significant issue exception to our timeliness rules. 4 C.F.R. sect.
   21.2(c). What constitutes a significant issue is to be decided on a
   case-by-case basis. Pyxis Corp., B-282469, B-282469.2, July 15, 1999, 99-2
   CPD para. 18 at 4. We generally regard a significant issue as one of
   widespread interest to the procurement community and that has not been
   previously decided. Satilla Rural Electric Membership Corp., B-238187, May
   7, 1990, 90-1 CPD para. 456 at 3. The issue here--the application of
   conflict of interest regulations to peer review evaluators in SBIR
   procurements--is not one that we have previously decided and is one that
   can be expected to arise in future SBIR procurements. Accordingly, we
   consider the issue raised to be a significant one that should be treated
   on the merits.

   Celadon protests that the agency failed to reasonably consider the real
   conflicts of interest of each of the members of the SEP that would impair
   the SEP's objectivity in evaluating its proposal. Celadon claims that all
   three of the SEP members work for companies "whose economic lifeblood" is
   the development and sale of proprietary siRNA technology, which would be
   directly competitive with the technology proposed in Celadon's proposal.
   Protest at 3. While the fourth panelist was an academic researcher,
   Celadon contends that his work is supported by one of these companies
   involved with siRNA technology.

   Federal Acquisition Regulation (FAR) sect. 3.101-1 provides as follows:

     Government business shall be conducted in a manner above reproach and,
     except as authorized by statute or regulation, with complete
     impartiality and with preferential treatment for none. Transactions
     relating to the expenditure of public funds require the highest degree
     of public trust and an impeccable standard of conduct. The general rule
     is to avoid strictly any conflict of interest or even the appearance of
     a conflict of interest in Government-contractor relationships.

   NIH is required to have peer review evaluators of proposals for research
   and development contracts. 48 C.F.R. sect. 315.305(a)(3)(ii)(F) (2005).
   There are specific regulations governing scientific peer review of
   research grant applications and research and development contract
   projects, including "biomedical and behavioral research and development
   contract project concepts and proposals for contract projects administered
   by the National Institutes of Health," such as proposals in response to
   this SBIR program solicitation. 42 C.F.R. Part 52h. Among other things,
   this regulation defines apparent and real conflicts of interest for peer
   review evaluators and generally prohibits evaluators with such conflicts
   from evaluating proposals covered by 42 C.F.R. Part 52h.[4] 42 C.F.R.
   sections 52h.1, 52h.5. This regulation specifically contains the following
   definition of a "real conflict of interest":

     Real conflict of interest means a reviewer or close relative or
     professional associate of the reviewer has a financial or other interest
     in an application or proposal that is known to the reviewer and is
     likely to bias the reviewer's evaluation of that application or proposal
     as determined by the government official managing the review (the
     Scientific Review Administrator, or equivalent), as acknowledged by the
     reviewer, or as prescribed by this part. A reviewer shall have a real
     conflict of interest if he/she or a close relative or professional
     associate of the reviewer:

     (1) Has received or could receive a direct financial benefit of any
     amount deriving from an application or proposal under review;

     (2) Apart from any direct financial benefit deriving from an application
     or proposal under review, has received or could receive a financial
     benefit from the applicant institution, offeror or principal
     investigator that in the aggregate exceeds $10,000 per year; . . .

     (3) Has any other interest in the application or proposal that is likely
     to bias the reviewer's evaluation of that application or proposal.
     Regardless of the level of financial involvement or other interest, if
     the reviewer feels unable to provide objective advice, he/she must
     recuse him/herself from the review of the application or proposal at
     issue. The peer review system relies on the professionalism of each
     reviewer to identify to the designated government official any real or
     apparent conflicts of interest that are likely to bias the reviewer's
     evaluation of an application or proposal.

   42 C.F.R. sect. 52h.2(q).

   Celadon contends that each of these evaluators had a "real conflict of
   interest" under paragraph (3) above in that they each had an "interest in
   the application or proposal that is likely to bias the reviewer's
   evaluation of that application or proposal," given that each of the
   evaluators was employed by a firm whose "economic lifeblood" was directly
   competitive with the technology proposed in Celadon's proposal. 42 C.F.R.
   sect. 52h.2(q)(3).

   The record shows that the agency's investigation of Celadon's allegations
   consisted of verifying that each member of the SEP certified that he/she
   had no conflict of interest with regard to Celadon, and reviewing the
   evaluation record and finding no evidence of bias in the evaluation. While
   it is true that the NIH regulations contemplate a self-assessment by
   evaluators as to whether they think they have a real conflict of interest,
   the regulations do not contemplate that a self-certification by the
   evaluator is all that is ever needed to satisfy the requirement that he or
   she does not have a real conflict of interest, particularly where, as
   here, specific and colorable allegations of a real conflict of interest on
   the part of the evaluators were brought to the attention of cognizant
   agency officials. Under the circumstances present here, NIH was required
   to specifically determine whether these evaluators had real conflicts of
   interest under the applicable regulations. However, the record shows that
   NIH made no such determination.

   While the agency contends that the conflicts identified by the protester
   are too remote to be considered real conflicts of interest, it has not
   explained why this is the case in light of the protester's specific
   documented allegations that each of the members of the SEP, by virtue of
   their employment or financial relationship with a firm that promoted siRNA
   technology, would not be able to objectively evaluate Celadon's proposal
   that offered siLNA technology.[5] We have recognized that an actual or
   apparent conflict of interest may arise when an agency employee has both
   an official role in the procurement process and a personal stake in the
   outcome. For example, we sustained a protest because of a conflict of
   interest that invalidated the evaluation where, in the course of a
   competitive sourcing study conducted pursuant to the procedures of Office
   of Management and Budget Circular A-76, 14 of the 16 agency employees who
   were responsible for evaluating private-sector proposals also held
   positions that were subject to the study (and could be affected by the
   outcome of their evaluation). DZS/Baker LLC; Morrison Knudsen Corp.,
   B-281224 et al., Jan. 12, 1999, 99-1 CPD para. 19 at 5. While we do not
   decide whether the evaluators here had real conflicts of interest, the
   record shows that the agency failed in its obligation to determine whether
   these individuals' employment caused them a real conflict of interest that
   could bias their evaluation of Celadon's proposal as contemplated under
   its applicable regulation.[6]

   The agency's determination that there is no evidence of actual bias on the
   part of the evaluators in the evaluation of Celadon's proposal does not
   address the concerns arising from a conflict of interest. The strict
   limitations on both actual and apparent conflicts of interest reflect the
   reality that the potential harm flowing from such situations is, by its
   nature, frequently not susceptible to demonstrable proof of bias or
   prejudice. Department of the Navy--Recon., B-286194.7, May 29, 2002, 2002
   CPD para. 76 at 11. Thus, where the record establishes that a conflict of
   interest exists on the part of the evaluators, to maintain the integrity
   of the procurement process, we will presume that the protester was
   prejudiced, unless the record establishes the absence of prejudice. The
   Jones/Hill Joint Venture, B-286194.4 et al., Dec. 5, 2001, 2001 CPD
   para. 194 at 14. Indeed, where the majority of the evaluators have
   conflicts, as is alleged to be the case here, we have consistently
   presumed prejudice in the evaluation. The Jones/Hill Joint Venture, supra;
   DZS/Baker LLC; Morrison Knudsen Corp., supra.

   We would ordinarily recommend that the agency consider whether there is a
   conflict of interest on the part of the evaluators in accordance with
   42 C.F.R. sect. 52h and take appropriate corrective action if a conflict
   of interest on the part of the evaluators was determined to exist.
   However, here the agency has stated that all the SBIR funds for the fiscal
   years have been allocated and it has no funds for additional awards under
   the SBIR solicitation.[7] Under the circumstances, we recommend that it
   reimburse Celadon its proposal preparation costs. We also recommend that
   the agency reimburse Celadon for the costs of filing and pursuing its
   protest, including reasonable attorney's fees. Celadon's certified claim
   for costs, detailing the time spent and costs incurred, must be submitted
   to the agency within 60 days of receiving this decision. 4 C.F.R. sect.
   21.8(f)(1).

   The protest is sustained.

   Gary L. Kepplinger

   General Counsel

   ------------------------

   [1] During the course of this procurement, the protester had been informed
   by an NCI official of the identity of the SEP members.

   [2] We note, however, that Federal Acquisition Regulation (FAR) sect.
   6.401(b), "Competitive Proposals," begins with the reference, "See Part 15
   for procedures."

   [3] We note that the agency cited FAR Part 15 in offering Celadon a
   debriefing. AR, Tab 14, Letter from NCI to Celadon (July 14, 2006).

   [4] The regulation also provides that the Director may waive any
   requirements relating to a "real conflict of interest," if the Director
   determines that there are no other practical means for securing
   appropriate expert advice on the particular matter, and that the real
   conflict of interest is not so substantial as to be likely to affect the
   integrity of the advice to be provided by the reviewer. 42 C.F.R. sect.
   52h.5(b)(4). There was no such waiver here.

   [5] In support of this proposition the agency cites Grassetti v.
   Weinberger, 408 F.Supp. 142 (N.D. Cal. 1976). The plaintiff in that case
   argued that the three members in the peer review panel had a conflict of
   interest in that these individuals, or the institutions with which they
   were associated, were recipients of NCI funded grants. The court found the
   alleged conflicts were too remote, and granted the defendant's motion for
   summary judgment on the grounds that the record failed to show any
   violation of law in the denial of the plaintiff's grant application.

   [6] We disagree with the agency's characterization of Celadon's protest as
   being limited to a complaint about the "balance" of the SEP and thus not
   for consideration by our Office. See University Research Corp.,
   B-253725.4, Oct. 26, 1993, 93-2 CPD para. 259 at 7 (GAO will not generally
   review objections to the composition of a peer review panel absent a
   showing of possible abuse of discretion because of a conflict of interest
   or actual bias on the part of the evaluators). In fact, the focus of
   Celadon's protest is on the alleged conflicts on the part of all of the
   evaluators, a matter that the agency has not yet adequately investigated.

   [7] Moreover, it does not appear that it would be feasible to disturb the
   awards already made under this solicitation.