B-245032, Mar 9, 1992, 71 Comp.Gen. 310

B-245032, Mar 9, 1992, 71 Comp.Gen. 310

Appropriations/Financial Management - Federal Assistance - Grant recipients - Small businesses - Profits Miscellaneous Topics - Federal Administrative/Legislative Matters - Administrative regulations - Grant recipients - Small businesses - Profits The Department of Health and Human Services should follow a Small Business Administration policy directive providing for payment of a profit to grant recipients in the context of a Small Business Innovation Research Program. The Department's regulation prohibiting the payment of profits to for-profit organizations is superseded because the Administration's policy directive is mandated under the Small Business Innovation Development Act of 1982 and the provision of profits is a proper exercise of discretion by the agency charged by Congress to oversee the program.

The Assistant Secretary for Management and Budget at the Department of Health and Human Services requests a decision on the applicability of a Small Business Administration policy directive requiring that research grants awarded to small businesses under the Small Business Innovative Development Act include "a reasonable fee or profit." A Department regulation prohibits the inclusion of profits in grants to for-profit institutions. For the reasons discussed below, we conclude that the Department should follow the Small Business Administration's policy directive and include reasonable profits in grants to small businesses participating in the Small Business Innovation Research Program.

BACKGROUND

In 1982, Congress enacted the Small Business Innovation Development Act (SBIDA), amending the Small Business Act, to stimulate technological innovation by encouraging increased participation of small businesses in federal research and development efforts. Pub.L. No. 97-219, 96 Stat. 217 - 221, codified as amended at 15 U.S.C. Sec. 638 (1988). The Act mandates that federal agencies funding research and research and development activities exceeding designated dollar amounts institute Small Business Innovation Research (SBIR) Programs providing a set-aside for small businesses. Regarding the general conduct of the program, the statute provides that

"the Small Business Administration, after consultation with the Administrator of the Office of Federal Procurement Policy, the Director of the Office of Science and Technology Policy, and the Intergovernmental Affairs Division of the Office of Management and Budget, shall, within one hundred and twenty days of July 22, 1982, issue policy directives for the general conduct of the SBIR programs within the Federal Government,including providing for--

(2)(H) cost principles and payment schedules." 15 U.S.C. Sec. 638(j).

Under this mandate, the Small Business Administration issued a policy directive stating in section 12 i.(2) that:

"Unless expressly excluded by statute, awarding agencies are to provide for a reasonable fee or

profit on SBIR funding agreements, including grants, consistent with normal profit margins provided to profit-making firms for R/R D work." 48 Fed.Reg. 38794, 38802 (Aug. 26, 1983), as amended, 53 Fed.Reg. 23829, 23836 (June 4, 1988).

Paragraph 3.b. of the policy directive indicates that no participating agency may promulgate a contrary or inconsistent rule or regulation.

The Department of Health and Human Services has a longstanding policy of not awarding profits to grant recipients, which predates its participation in the Small Business Innovation Research Program. In 1982, the Department issued regulations establishing rules for making grants to for- profit organizations. In particular, 45 C.F.R. Sec. 74.705 (1990), entitled "Prohibition against profit," states that:

"Attention is directed to 74.170, which provides, in effect, that no grant funds may be paid as profit to any recipient of a grant or subgrant, even if the recipient is a for-profit organization. Profit is any amount in excess of allowable direct and indirect costs of the recipient."

The Small Business Administration's policy directive did not cause a conflict with the Department's regulation previously because the Department's appropriation formerly contained a provision which in effect prevented payment of profits for grants. /1/ That provision has since been dropped and the Administration now maintains that, consequently, the Department should follow the policy directive's provision on profits.

ANALYSIS

The Department questions the Administration's authority to require the inclusion of profits in research grants because neither the Small Business Innovation Development Act nor its legislative history explicitly mention payment of profits. The Department cites language in Senate Report No. 194, 97th Cong., 2d Sess. 26 (1982), reprinted in 1982 U.S. Code Cong. and Admin. News 537, describing how cost principles should take into account the importance of providing "full and adequate renumeration [sic!" as implying that profits are prohibited. Remuneration is defined as "Payment; reimbursement. Reward; recompense; salary; compensation." Black's Law Dictionary 1296 (6th ed. 1990). The Department treats "recompense" or "reimbursement" as suggesting that only the costs of the researcher should be included in the grant and not profits. However, the definition of "remuneration" is flexible enough to encompass payment of profits, whether as a "reward" or as part of "compensation." Without further evidence of what the Committee intended by "remuneration," we simply cannot determine whether or not it intended profits to be paid. /2/ Since the statute is silent with respect to the specific issue of profits and since we are unable to identify any specific congressional intent with respect to this matter, the next question is whether the Administration's requirement is based on a permissible construction of the statute. See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). As described above, the Administration's policy directive was promulgated under 15 U.S.C. Sec. 638(j), which directed the Administration to issue and implement policy directives for the general conduct of Small Business Innovation Research Programs within the federal government, including the establishment of cost principles. Where, as here, Congress delegates broad authority to an agency to issue regulations implementing a statute, such agency regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Chevron, supra. An agency is traditionally accorded deference with regard to its interpretation of the statute so long as its interpretation is rational and consistent. NLRB v. Food & Commercial Workers, 484 U.S. 112, 123 (1987).

We see no basis for concluding that the Administration's profit requirement is improper under this test. As indicated in the Act and its legislative history, enhancing participation of small businesses in federal research and development necessitates a unique program designed to accommodate the special needs of small business. /3/ The inclusion of reasonable profit or fees in such grants to small businesses certainly serves to enhance the statutory objective of stimulating small business participation in federal research and development efforts. Thus, we think the Administration's determination that providing small business grant recipients profits or fees will help accomplish the objectives of the Act is within the agency's discretion to make. Additionally, we are unable to find any overriding legal authority that generally prohibits payment of fees or profits under grants.

The Department claims, however, that decisions of this Office do not allow payment of profits to grant recipients. To support this view, it cites decisions in which we have held generally that interest earned on federal grants belongs to the federal government. The rationale for this rule is that "statutes authorizing grant programs contemplate that grantees shall not profit other than in the manner and to the extent provided by law. 64 Comp.Gen. 96, 97-98 (1984)." 69 Comp.Gen. 660, 662 (1990) [emphasis added!. Grant funds "are not intended to be used for the profit of the grantee unless expressly agreed to or authorized." Comp.Gen. 701 [emphasis added!. While some grant programs may not (or do not) contemplate payment of profits, /4/ our decisions do not support the Department's assertion that we have prohibited categorically the payment of a fee or profits on grants. As we observed in 62 Comp.Gen. 701, such an arrangement is permissible if expressly agreed to or otherwise authorized. Here, profits are authorized by the Administration's policy directive, which, as we discussed above, is a valid exercise of administrative discretion in accordance with the Small Business Innovation Development Act.

While we do not question that the Department's regulation prohibiting profits retains the force of law in other circumstances, the Administration's policy directive supersedes any contrary regulation because it was issued by an agency specifically authorized by Congress to administer this program. Thus, where required by the Administration, the Department should include a fee or profit in grants awarded under its Small Business Innovation Research Program.

/1/ See Pub.L. No. 98-619, 202, 98 Stat. 3320 (1984), which stated that "none of the funds appropriated herein shall be used to pay any recipient of a grant for the conduct of research an amount equal to as much as the entire cost of such research." Subsequently, in hearings on 1986 appropriations, a witness from a company participating in the SBIR program stated that "only at HHS/NIH have we encountered resistance to the program, and that stems almost entirely from certain ill-considered and outdated language in the annual HHS appropriation law," referring to section 202. Hearings on H.R. 3424 before a subcommittee of the Committee on Appropriations, United States Senate, pt. 4, 99th Cong., 1st Sess. 859 (1985)(statement of Dr. Harold K. Lonsdale). The language was not included in appropriations for 1986 or, apparently, thereafter. See H.R. Rep. No. 402, 99th Cong., 1st Sess. 27 (1985).

/2/ Capalli, Federal Grants & Cooperative Agreements 3:11 (1982). Otherwise, the legislative history of the Act is not illuminating. /3/ In contrast with many large-profit and non-profit institutions which often achieve `economies of scale' by participating in several federal programs at one time, small businesses tend to focus on a single contract with a correspondingly greater overhead. For this reason, cost principles established for SBIR programs should take into account the importance of providing full and adequate remuneration for R D services provided to the federal government." H.R. Rep. No. 349, pt. I, 97th Cong., 1st Sess., 24 (1981).

/4/ While there is no general prohibition in the law against grants to profit-making institutions, "whether a particular grant may or would be made to such an organization would depend on, among other factors, the purpose and terms of the statute authorizing the grant and the policies of the agency administering it." B-177733, Jan. 26, 1973 (non decision letter). Of course, "if the statutory authority for a grant program restricts the grants to nonprofit organizations, such grants generally could not be made to a profit oriented organization even though the work under this grant is not a part of the organization's profit-making activities." Id.