Coronavirus: The Defense Production Act's authorities and limitations in the fight against COVID-19

Government Affairs Alert

COVID-19 Alert

A cura di:

On March 18, 2020, the President issued an Executive Order invoking the Defense Production Act (DPA) to prioritize and allocate health and medical resources to respond to the coronavirus disease (COVID-19) pandemic. On March 27, 2020, the President directed the Secretary of Health and Human Services (HHS) to use “any and all authority available” under the DPA to require General Motors Company (“GM”) to manufacture ventilators to treat patients suffering from COVID-19. Signaling his intent to rely more broadly on the DPA to combat the COVID-19 pandemic, the President appointed Peter Navarro as the national DPA policy coordinator. On April 3, 2020, the President again invoked the DPA to direct the Secretary of Homeland Security (DHS) to “allocate for domestic use” the personal protective equipment (PPE) needed to fight COVID-19. This latest order authorizes DHS to prevent the export of certain PPE and to reallocate PPE that has been “accumulate[ed] 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.”

President Trump’s use of the DPA has raised questions about his authority and limitations to that authority under the DPA. Although the DPA provides several executive powers, its implications for companies in today’s COVID-19 pandemic fight may be significant not only for those companies receiving a direct order from the President but also for the subcontractors and suppliers behind them. In addition, recent legislation enacted in response to the COVID-19 pandemic has created significant procurement opportunities under the DPA for companies looking to provide goods and services to the US government.

Background on the DPA

Although not normally associated with democratic and capitalistic norms, government imposition on private enterprise is not unprecedented. The First and Second War Powers Acts of 1941 and 1942, respectively, granted sweeping emergency power to the President to enlist industry to support the war effort. The War Powers Acts lapsed at the end of World War II, but the Korean War and the threat of the impending Cold War inspired Congress to enact the DPA in 1950. The DPA authorizes the President to compel industry to fulfil government orders, requisition materials and property, ration consumer goods, fix wage and price ceilings, force labor dispute settlements, control consumer credit, create antitrust protections, and expand production capacity, among other significant powers.

The foremost limitation on the President’s authority under the DPA remains that these powers must be used to shape and provide for the “national defense.” The definition of national defense has expanded through the DPA’s many reauthorizations, such that it now includes military and energy programs, assistance to foreign nations, homeland security, stockpiling, space, and “emergency preparedness” under title VI of the Stafford Act. Emergency preparedness includes “all those activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population [and] to deal with the immediate emergency conditions which would be created by the hazard.”

Most of the authorities granted by the DPA lapsed in 1953, but others have been reauthorized and remain valid today.  The John S. McCain National Defense Authorization Act for Fiscal Year 2019 reauthorized the remaining three titles of the DPA through 2025:

  • Title I grants the President sweeping authority to compel the domestic industry to accept, prioritize, and perform contracts or orders for the government.
  • Title III authorizes the President to provide financial incentives such as loans, purchase commitments, or subsidies to develop, maintain, modernize, restore, and expand the production capacity of critical equipment or technology for the national defense.
  • Title VII includes myriad provisions, such as preferences for small businesses, industrial base assessments, anti-trust and liability protections, and it establishes the Committee on Foreign Investment in the United States (CFIUS).

Title I: authority to issue priority contracts and allocate resources

Title I provides the President the authority to (i) prioritize government contracts or orders over performance of any other contract or order; (ii) require acceptance and performance of such contracts or orders by any person he finds to be capable of their performance; and (iii) allocate or control materials, services, and facilities in any manner deemed necessary or appropriate to promote the national defense.  Thus, the President can ensure that the government has priority and timely access to critical materials, equipment, technology, and services by requiring companies to accept, prioritize, and perform contracts. The allocation authority allows the President to redistribute critical resources, raw materials, or technical data to maximize production of goods required for national security.

Title I authority has been delegated to six government agencies: the Departments of Agriculture, Defense, Commerce, Energy, Health and Human Services, and Transportation.  However, the Department of Commerce’s Defense Priorities and Allocations Program (DPAS) regulations are the most commonly used to establish priority ratings on contracts and issue “rated orders” as a prime contractor or purchase order. Subcontractors and suppliers must grant similar priority to necessary components throughout the acquisition supply chain.

Title I places certain express limitations on presidential authority. Most prominently, Congressional approval is required to enact wage and price controls and contracts of employment are explicitly excluded, meaning that the government cannot, at least under this authority, conscript individuals into government service.

The implementing regulations promulgated by the empowered agencies provide some protections for companies and offer some limited allowances for when a company may reject an order issued under Title I of the DPA. Under the Department of Health and Human Services (HHS) regulations, a company must accept a priority order issued under the DPA but may reject an order if the requestor (typically either the government or a prime contractor) is unwilling or unable to accept regularly established terms of sale or payment, or the order is for goods or services that the supplier does not produce or perform. However, HHS can supersede such rejection and require the supplier company to perform on the contract in many instances. A business that fails to reject a rated order by the stated deadline (which can be as short as six hours), will be deemed to have accepted the order.

Willful violations of or willful failure to perform any act required under the DPA, including failure to accept, prioritize, and fulfill orders under the DPA, are subject to a criminal penalties of up to $10,000 and one-year imprisonment per violation.

Title III: authority to incentivize industry

Title III authorities incentivize industry through a variety of economic measures to provide for and support the national defense. Unlike Title I, which is meant to ensure the government has priority access to goods and services, Title III is intended to develop industry production capacity of items deemed essential to national security. Under Title III, the government may issue direct loans or loan guarantees, purchase or make purchase commitments, subsidize domestic production, or install production equipment for industry as necessary to create, maintain, expedite, expand, protect, or restore production and deliveries or services that are essential to the national defense.

Title III establishes a DPA fund to provide for these incentives. The unobligated balance in the DPA fund at the end of any fiscal year normally cannot exceed $750 million, excluding monies already appropriated for that year. Existing monies in the fund were approximately $228 million as of October 2019. Although the Secretary of Defense manages the fund, projects exceeding $50 million normally must be authorized by Congress. Before allocating these funds, the President normally must first determine that (i) there is a “domestic industrial base shortfall” of a good or technology; (ii) that industry cannot reasonably be expected to meet the need in a timely manner; and (iii) that purchases, purchase commitments, or other actions are the most cost effective, expedient, and practical alternative method.

The March 27, the 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act allocated $1 billion to the DPA fund for use in Title III allocations and suspended many of the requirements and limitations, including the following:

  • the unallocated budget cap of $750 million is suspended for two years;
  • the requirement for specific Congressional appropriations for DPA loans is suspended for two years;
  • the requirement for Congressional approval for projects exceeding $50 million is suspended for two years; and
  • the requirement for a presidential finding of a domestic industrial base shortfall prior to allocation of DPA fund money is suspended for one year.

Title VII: additional authorities

Title VII includes several authorities and clarifications for implementing the DPA. Two key provisions of Title VII are antitrust protections and limitations on contractual liability as a result of DPA compliance.

The President’s authority under Title VII includes the power to consult with industry and other parties to coordinate efforts for the national defense through voluntary agreements. To avoid potential antitrust concerns that such cooperation by private parties might create, Title VII provides for an affirmative legal defense against potential antitrust claims related to action taken during a voluntary agreement under the DPA and authorized by the President.

Similarly, Title VII provides limited liability protections for companies that violate other legal and contractual obligations as a result of the requirement to fulfill DPA orders. Specifically, Title VII provides that no person may be held liable for damages for any act or failure to act resulting directly or indirectly from compliance with any order issued under the DPA, even if such order is later found invalid. This protection, however, does not confer blanket tort immunity for liability to injured third parties during performance under such an order.

Takeaways

The DPA is a powerful tool in the executive branch’s arsenal to prepare for and protect against threats to US national security, including the COVID-19 pandemic. Although many US businesses have voluntarily engaged in herculean efforts to provide for shortfalls in medical personal protective equipment and ventilators, the DPA empowers the President to prioritize and coordinate private industry efforts to ensure their best and most efficient use. Industry should monitor further developments on the use of the DPA, including the secondary effects on subcontractors and suppliers, and is encouraged to answer the phone if Peter Navarro calls.

For more information, please contact the authors, your DLA Piper relationship attorney, or any member of our Litigation group.

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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.