Alerts

Impact of the President's Invocation of the Defense Production Act on Federal Contractors

Alerts / March 19, 2020

The president’s issuance of an executive order on March 18, 2020, invoking his authorities under the Defense Production Act of 1950 (DPA or Act) to ensure that our nation’s healthcare system is able to effectively respond to the spread of COVID-19 has generated questions concerning its impact on federal contractors and their associated federal contracts. Below, BakerHostetler’s Government Contracts team broadly describes the president’s executive order, the DPA and its authorities underlying the executive order, and the impacts on federal contractors.

The COVID-19 Executive Order

On March 18, 2020, the president issued an executive order declaring “health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators” met the criteria set forth in the DPA to permit the use of the powers granted by the DPA.[1] The president then delegated his power to “require performance of contracts or orders (other than contracts of employment)” to the secretary of Health and Human Services with respect to “all health and medical resources needed to respond to the spread of COVID-19 within the United States.”[2] The executive order authorized the secretary to “determine the proper nationwide priorities and allocation of all health and medical resources, including controlling the distribution of such materials (including applicable services) in the civilian market, for responding to the spread of COVID-19 within the United States.”[3]

The Defense Production Act of 1950

The Defense Production Act of 1950 originated in response to the country’s urgent military needs arising from the Korean War. The DPA, as amended,[4] “provides the President with an array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base.”[5]

The DPA’s scope of authorities extends beyond military readiness. It includes “emergency preparedness,” [6] which covers measures “to prepare for or minimize the effects of a hazard upon the civilian population, to deal with the immediate emergency conditions which would be created by the hazard, and to effectuate emergency repairs to, or the emergency restoration of, vital utilities and facilities destroyed or damaged by the hazard.”[7]

Authorities Under the Act

Presidential authorities under the Act fall into three categories: priorities and allocations; expansion of productive capacity and supply; and general provisions.

Priorities and Allocations

The Act provides presidential authority to prioritize contracts and orders – most relevant to federal contractors. This authority permits the president to require companies to prioritize performance under contracts or orders (other than contracts of employment) deemed necessary to promote the national defense over any other contract or order, and to require acceptance and performance of such contracts or orders in preference to other contracts or orders. Additionally, the president is authorized to allocate materials, services and facilities as deemed necessary or appropriate to promote the national defense.

Of particular relevance to the COVID-19 pandemic, the Act prohibits hoarding of materials which the president designates as scarce materials or materials the supply of which would be threatened by such accumulation. Specifically, no person or company shall accumulate designated material in excess of the reasonable demands of business, personal or home consumption, or for the purpose of resale at prices in excess of prevailing market prices.

The Act provides penalties for willfully performing a prohibited act or willfully failing to perform a required act, which include a fine of not more than $10,000 or imprisonment for not more than one year, or both.

Expansion of Productive Capacity and Supply

The Act authorizes the president to promote through various fiscal incentives the expansion of domestic production capacity and supply of industrial resources, critical technology items and essential materials needed for national defense. The incentives include guaranteeing loans for financing any contractor, subcontractor, provider of critical infrastructure, or other person or company in support of production capabilities or supplies necessary for the national defense; loans to private businesses creating, maintaining, expanding, protecting or restoring capacity, developing technological processes, or producing essential materials; direct purchases and purchase commitments; and procurement and installation of equipment in private industrial facilities.

General Provisions

The Act provides several general provisions. Those most relevant to federal contractors include protection from liability for acting or failing to act under the DPA.[8] The Act also provides presidential authority for voluntary agreements between representatives of industry, business, financing, agriculture, labor and other interests to help provide for the national defense. Generally, any person[9] has a defense under the DPA against “any civil or criminal action brought under the antitrust laws (or any similar law of any State)” with respect to any action taken to develop or carry out any voluntary agreement or plan of action that the president initiated.[10]

The Defense Priority Allocation System – Mandatory Prioritized Contracts

It may have come as a surprise to some that the federal government, under the DPA, may require some contractors to accept certain contracts and orders supporting the government’s COVID-19 response and to allocate materials, services and facilities in such a manner as to prioritize the contract or order over other contracts and orders. The government’s authority under the DPA is typically implemented through the Defense Priorities and Allocations System (DPAS). See 15 C.F.R. Part 700.

While traditional defense contractors may be familiar with DPAS requirements, traditional commercial companies – especially those in the life sciences arena – are finding that the government is increasing its issuance of DPAS-rated orders in their respective business sectors. This is not surprising given that civilian agencies, such as the Federal Emergency Management Agency (FEMA), have authority to issue such orders, and are currently exercising their authority under DPAS. In addition to the Department of Homeland Security, under which FEMA sits, the Department of Defense and the Department of Energy also have authority to issue DPAS-rated orders. See 15 CFR § 700.8. And of course, under the president’s recent COVID-19 executive order, the secretary of Health and Human Services has the authority to “determine the proper nationwide priorities and allocation of all health and medical resources, including controlling the distribution of such materials (including applicable services) in the civilian market, for responding to the spread of COVID-19 within the United States.”

We stress that, unless the following narrow exceptions apply, federal government contractors must accept, prioritize and perform DPAS-rated orders.[11] See 15 CFR § 700.13. Contractors must reject rated orders with delivery dates that the contractors cannot satisfy or with delivery dates that interfere with the delivery date of a previously accepted rated order (depending on the rating priority status). However, contractors must also offer to accept such orders on the basis of the earliest date that delivery can be made. Also, if a contractor is unable to fill all the rated orders of equal priority status received on the same day, the contractor must accept, based on the earliest delivery dates, only those orders that can be filled, and reject the other orders.

Contractors may – but are not obligated to – reject certain rated orders, as long as contractors do not discriminate among customers. For instance, contractors may reject rated orders if 1) the person placing the order is unwilling or unable to meet regularly established terms of sale or payment; 2) the order is for an item not supplied or for a service not performed; 3) the order is for an item produced, acquired or provided only for the supplier’s own use; 4) the person placing the rated order, other than the U.S. government, makes the item or performs the service being ordered; or 5) acceptance of the rated order would violate related regulations, official actions or orders.

Any company that is in receipt of a DPAS-rated order should pay close attention to its requirements and respond timely (within 10 or 15 days for DX- and DO-rated orders, respectively) and in an appropriate manner to the issuing agency.

Impact of the President’s Invocation of the DPA

Federal contractors are encouraged to review all new and active government orders for DPAS ratings. DPAS-rated orders typically include the clause located at FAR 52.211-15. DPAS-rated orders typically also include a field indicating the level of the DPAS rating, which is either “DX” or “DO” followed by a program symbol such as “A1” or “C9.” Contractors must prioritize DX-rated orders over DO-rated orders, and DO-rated orders over unrated orders. See 15 CFR § 700.13. Contractors generally must also flow DPAS ratings down to subcontractors. Even for currently unrated contracts and orders, contractors must prepare for the possibility of receiving new guidance under the DPAS system.

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As COVID-19 continues to affect all facets of life, as evidenced by the president’s invocation of his authorities under the Defense Production Act of 1950, federal government contractors will continue to serve as integral parts of the government’s COVID-19 response. BakerHostetler’s Government Contracts team continues to be available as a resource through these uncertain times.

For further information, contact Barron Avery at wavery@bakerlaw.com or 202.861.1705, Brian Johnson at bvjohnson@bakerlaw.com or 202.861.1537, Orga Cadet at ocadet@bakerlaw.com or 202.861.1576, or any member of BakerHostetler’s Government Contracts team.

Authorship Credit: Barron Avery, Brian Johnson and Orga Cadet

[1] Executive Order on Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of COVID-19 (Mar. 18, 2020) (EXORD COVID-19).
[2] EXORD COVID-19.
[3] EXORD COVID-19.
[4] P.L. 81-774, 50 U.S.C. §§4501 et seq.
[5] DPA § 2(a)(4).
[6] 50 U.S.C. §4552(14); DPA § 702(14).
[7] 42 U.S.C. §5195a(a)(3).
[8] See DPA § 707; 50 U.S.C. § 4557.
[9] “The term ‘person’ includes an individual, corporation, partnership, association, or any other organized group of persons, or legal successor or representative thereof, or any State or local government or agency thereof.” DPA § 702.
[10] See DPA § 708(j).
[11] Certain federal departments may have rules that supersede the exceptions available in the DPAS.

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