The Executive Order
On March 18, 2020, President Trump invoked his authority under the Defense Production Act of 1950 (“DPA”) and issued an executive order (“EO”) “prioritizing and allocating health and medical resources to respond to the spread of COVID-19.” The order is based on a finding that “health and medical resources needed to respond to the spread of COVID-19 . . . meet the criteria specified in section 101(b) of the Act.” The order delegates substantial authority to the Secretary of the Department of Health and Human Services (“HHS”) with respect to relevant medical resources.
The order affects medical equipment needed for the health care response, “including personal protective equipment and ventilators.” Under the DPA, the HHS Secretary will be empowered “to require performance of contracts or orders (other than contracts of employment) to promote the national defense [e.g., the pandemic response] over performance of any other contracts or orders.” That authority will include the ability “to allocate materials, services, and facilities as deemed necessary or appropriate.”
The order gives HHS the ability to set nationwide priorities for the allocation and distribution of medical resources, “including applicable services,” that are necessary for the coronavirus response. That authority includes substantial control over the civilian market for such products and services.
The Defense Production Act
The DPA was enacted in 1950 in response to the Korean War and is rooted in the First and Second War Powers Acts of 1941 and 1942, which provides executive broad authority to regulate and mobilize domestic industry.
The DPA confers on the President “an array of authorities to shape national defense preparedness programs and to take steps to maintain and enhance the domestic industrial base.” 50 U.S.C. § 4502(a)(4). The DPA broadly defines “national defense” to include US military preparedness and capabilities as well as “emergency preparedness activities” conducted pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act, such as measures undertaken “to deal with the immediate emergency conditions” created by a “hazard upon the civilian population.” 50 U.S.C. § 4552(14).
- Title I, Section 101(a) of the DPA (50 U.S.C. § 4511(a)) authorizes the President to require persons (including businesses and corporations) to (1) prioritize and accept contracts for materials and services deemed necessary or appropriate to promote the national defense, and (2) allocate or control the distribution of materials, services, and facilities to the extent necessary to promote the national defense.
- Title VII includes several additional authorities, including the authority to establish voluntary agreements with private industry and to block proposed or pending foreign corporate mergers and acquisitions that threaten national security.
The DPA has been amended and authorized on numerous occasions, including, most recently, in 2019. The authority to prioritize contracts is used routinely by the Department of Defense (“DoD”) under its Defense Priorities and Allocations System (“DPAS”) regulations. The use of the priorities by other agencies is less frequent but not unusual. For instance, the Federal Emergency Management Agency (“FEMA”) recently used prioritizing contracts to obtain supplies for assistance and recovery efforts in Puerto Rico following the hurricanes of 2017.
What to Expect
Based on the authorities discussed above, here is what industry can expect:
Designation: Industry must be alert for any order for covered resources that is “rated” under the DPA. Rated orders must be given priority under the DPA. An order that is “rated” must state expressly that it is rated.
Form: A rated order could come in the form of a prime contract or a purchase order from a federal agency or as a subcontracted item under a rated prime contract. A company that receives a rated order must promptly inform the customer if the order cannot or will not be filled or cannot be filled in time. Federal regulations impose strict rules as to when and how orders may be rejected. Accordingly, personnel taking orders must be on alert to (i) identify whether an order is rated and (ii) communicate that status within the company to enable the order to be given appropriate priority status.
Scope: The EO contemplates that the Secretary of HHS in consultation with other agencies may address the priorities and allocation of covered resources in the “civilian market.” The DPA is more commonly used to address military-unique needs or targeted geographical emergencies (such as hurricanes). Use of the DPA nationwide and for the civilian market may take time to implement in light of the logistical challenges and legal concerns it poses.
Timing: The EO has immediate effect but also contemplates further actions by HHS. Such actions are likely to include orders and revisions to regulations that are necessary to explain how the DPA will be employed to respond to COVID-19. These measures may take some time, particularly the issuance of new regulations, although we expect HHS to act on an expedited basis to the extent practicable.
DPA Limitations and Protections
Businesses potentially affected by the order should be aware of several limitations imposed by the statute on the Trump administration’s powers under the DPA, as well as protections for such businesses provided by the DPA:
- Section 104 of the DPA (50 U.S.C. § 4514) prohibits the use of DPA authority to impose wage or price controls unless authorized by a joint resolution of Congress.
- Section 101(b) (50 U.S.C. § 4511(a)) limits the federal government’s authority under the DPA with respect to the civilian market by requiring that the President find (1) that affected material is a scarce and critical material essential to the national defense and (2) that the requirements of the national defense for such material cannot otherwise be met without creating a significant dislocation of the normal distribution of such material in the civilian market to such a degree as to create appreciable hardship.
- Section 707 of the DPA (50 U.S.C. § 4557) grants persons limited immunity from liability for complying with DPA-related orders and regulations. For instance, if a rated order causes a contractor to fall behind in fulfilling other orders (for either commercial customers or other agencies), the contractor will be protected from actions for delay damages or breach of contract. See, e.g., Eastern Airlines, Inc. v. McDonnell Douglas, 532 F.2d 957 (5th Cir. 1976).