March 23, 2020 - Coronavirus

The Defense Production Act: a Little Known Statute that May Soon Be Running Your Company

FCALast week, the President invoked a Cold War-era law called the Defense Production Act (DPA), 50 U.S.C. §§ 4501 et seq., to acquire much-needed medical supplies and equipment during the COVID-19 pandemic.  Although a handful of provisions of the DPA – such as “rated” orders – may be familiar, particularly to those in the defense industry, the Act is a mystery to most.

The DPA provides the President with a broad set of authorities to influence domestic industry for the purposes of military readiness and domestic preparedness for national emergencies.  See our post here for a list of all of these authorities.  Of these authorities, the “Priorities and Allocations” power, 50 U.S.C. §§ 4511-18, has received significant media attention in recent weeks, and for good reason.  Under this authority, the President has the power to require companies to accept and perform contracts for critical items and to prioritize the Government’s orders for critical items over orders for other customers.  The President also may allocate the distribution of critical items, as he deems necessary.  These provisions are enforceable with both criminal and civil penalties.

Last week, the President invoked these powers for “health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators.”  See Executive Order on Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of Covid-19.  As the pandemic progresses, we expect additional products may be added to address other shortages related to the coronavirus.  Based on the President’s order, the Government will soon begin issuing orders to companies for the types of medical equipment outlined in the President’s executive order.  These orders will be rated DX (the highest priority) or DO (the second highest priority), signifying that they are subject to the priorities and allocations powers discussed above.

Three Key Takeaways About the DPA.

  1. Generally, you must accept DPA-rated orders.

If you are approached by a Federal customer (or a prime contractor) with a rated order under the DPA, you are generally required to accept it, with pricing and terms and conditions that are comparable to similar orders for other customers.  See 15 CFR 700.13 (b) and (c).  You have between 10 and 15 days to reject a rated order, depending on the assigned rating, and generally may only do so if (1) you are unable to meet the requested delivery date, in which case you must inform the customer of the earliest date on which you could make delivery and offer to accept the order on those delivery terms; or (2) if accepting the order would interfere with your fulfillment of other previously placed rated orders.  There may be other circumstances in which a rated order may require a counter-offer or clarification, but failing to respond to a rated order or improperly rejecting the order can result in significant civil or criminal penalties.  Accordingly, companies in impacted industries should be prepared to quickly respond to Federal inquiries.

  1. The DPA provides some protections for participating contractors, but there are still many risks.

DPA-rated orders are likely to have a significant impact on a company’s existing business.  While no compensation is provided for lost profits associated with prioritizing rated orders, there are provisions in the DPA that allow the Government to grant other relief, in the form of loans or loan guarantees, to contractors facing hardships as a result of complying with the DPA.  See 50 U.S.C. §§ 1431-34.  The DPA also grants companies limited immunity from liability for complying with DPA-rated orders and other DPA-authorized rules or regulations, which, in theory, provides protection from third-party claims for breach of contract or delay.  See 50 U.S.C. § 4557.  However, this provision does not provide a contractor with blanket tort immunity for liability to injured third parties, nor does it entitle a contractor to indemnification from the government for any third-party liability imposed despite this immunity.

DPA-rated orders also pose complicated questions of compliance with local shelter-in-place orders.  Receipt of a DPA-rated order does not necessarily exempt a contractor from local orders, but it may be a useful tool in obtaining valid exemptions from local health authorities.  See our recent posts for an in-depth analysis of this topic and for guidance on specific local orders.  Compliance with DPA-rated orders may also create the potential for liability to employees required to work on rated orders during the pandemic.

  1. The DPA does not grant the President authority to nationalize industry.

 Despite some news media claims to the contrary, the DPA does not grant the President the authority to nationalize industry.  Although the DPA once contained seizure powers that arguably could have been used to nationalize entire industries, those powers, and many others, were formally repealed in 2009.  Further, the Supreme Court previously rejected the President’s ability to nationalize industry in Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), in response to President Truman’s Cold War attempt to seize several privately owned steel mills in response to nationwide strikes that halted steel production in the country.  Thus, while Congress might pass new legislation allowing the government to acquire an equity stake in companies in exchange for bail out funds, as it did with Fannie Mae in response to the 2008 financial crisis, the DPA, as currently written, does not allow the President to take over industries or specific companies.

For more information, or other concerns related to the Coronavirus, see our Coronavirus Resource Center.