March 19, 2020 - Coronavirus

Coronavirus Update: The Defense Production Act Is Not a Contractor’s Shield Against Local Shutdown Orders

FCAThe President is invoking the Defense Production Act (DPA), 50 U.S.C. §§ 4501 et seq., to acquire much needed medical supplies and equipment.  Meanwhile, contractors that already are performing DX or DO rated orders under the DPA are asking if the Act can be used affirmatively by them to avoid shutdown or shelter-in-place orders issued by state and local health authorities.  The short answer is “no,” the DPA per se does not permit contractors to continue operations in the face of a clear order precluding operations.  On the other hand, having rated orders under the DPA is proof that a contractor is performing essential services for the federal government.  This fact should be raised with local health authorities in any attempt to persuade those authorities to exempt the contractor’s operations from a shutdown order.  And if your rated orders are delayed because of a shutdown, there are steps you must take promptly to notify your customer.

There is a lot out there on the DPA.  In short, however, the DPA provides the President with a broad set of authorities to influence domestic industry in the name of national defense, including military readiness and domestic preparedness for national emergencies.   The DPA established several authorities (many of which have since been repealed), including the authority to prioritize performance of a rated contract over the contractor’s other work. This authority cannot be used for contracts of employment.  See DPA § 101 (a) (“The President is authorized (1) to require that performance under contracts or orders (other than contracts of employment) which he deems necessary or appropriate to promote the national defense …”).  Although in most cases a contractor is required to accept a rated order, there are circumstances that require or permit rejecting the order, as enumerated in 15 CFR 700.13 (b)&(c).  But nothing in the DPA or its implementing regulations states or suggests that the DPA would take priority over any state or local health department directive or order.

Although a valid federal law preempts any contrary state (or local) law, and may do so expressly or impliedly, the Supreme Court has recognized a presumption against preemption, which requires that federal law not be read to preempt state law “unless that was the clear and manifest purpose of Congress.”  Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947); see also CTS Corp. v. Waldburger, 573 U.S. 1, 19 (2014).  Moreover, courts have found various state and local health/safety regulations enforceable against federal contractors, despite the federal government’s invocation of broad procurement principles or agency goals with which they might come in conflict, in the absence of a clear Congressional intent to preempt state law.  E.g., Penn Dairies v. Milk Control Commission of Pa., 318 U.S. 261 (1943).

There is no such manifest purpose evident in the DPA or its legislative history.  To the contrary, the DPA’s regulations, found at 15 CFR 700 et seq., recognize that a contractor’s performance under an existing rated order, whether DX or DO, could be delayed. 15 CFR 700.13(d)(3).  If it could be delayed, for example, by an inability to continue operations due to a health department order, then implicitly the DPA could not logically be construed as overriding such an order.

Rather, the DPA’s delay provisions only require a contractor to notify its customers about the delay, give them reasons, and provide a new shipment date.  Contractors need to be alert to and promptly follow this requirement.  The regulation at 15 CFR 700.13(d)(3) is as follows:

“(3) If a person has accepted a rated order and subsequently finds that shipment or performance will be delayed, the person must notify the customer immediately, give the reasons for the delay, and advise of a new shipment or performance date. If notification is given verbally, written (hard copy) or electronic confirmation must be provided within one working day of the verbal notice.”

Just as it is difficult to conclude that the DPA can override a clearly worded health order, it is equally difficult to conclude that a federal agency — once notified per this regulation of a locally ordered shut down caused by coronavirus – would, or would have the ability to, take action against the contractor, assuming production begins promptly after business is permitted to reopen.  This is bolstered by the fact that, under FAR 52.249-8 and 52.249-14, epidemics and quarantine restrictions are excusable delays that would preclude a default and could give rise to equitable adjustments if a contractor were directed to perform under those circumstances.  In contrast, it is not difficult to imagine a local sheriff, police department, or the state police enforcing a plant closure; nor difficult to anticipate adverse publicity and employees bringing actions if directed by a contractor to report to work.  For example, the Sheriff in Alameda County, California, has been vigorous in enforcing that county’s order.

Nonetheless, local shutdown orders are being revised, and the DPA can help.  Understandably, the various directives being issued by state and local health agencies have been issued quickly and have focused exemptions from the orders on essential retail businesses.   Several of those agencies, however, including in San Francisco and Santa Clara, California, are updating their exemptions to include essential manufacturing operations, such as those essential to the national defense and military.   Contractors affected by shutdown orders should, accordingly, be notifying their local authorities about the importance of the contractor’s critical defense work and pressing for an exemption.  There is no better evidence of the essential nature of a contractor’s work than a DPA rating.