On March 18, 2020, President Donald Trump signed an Executive Order invoking and delegating the authorities of the Defense Production Act (DPA) to the secretary of the U.S. Department of Health and Human Services (HHS) to provide critical health and medical resources to respond to the spread of the novel coronavirus pandemic (COVID-19). On March 27, 2020, the president further directed HHS to utilize the DPA authorities to compel General Motors (GM) to manufacture ventilators. Under the DPA authority, HHS can compel businesses to prioritize the production and supply of health and medical devices and equipment. These authorities apply equally to those that currently do business with the government, as well as those that never have. Manufacturers and producers of health and medical devices and equipment, including ventilators, masks, gloves, and other personal protective equipment, should familiarize themselves and their employees with the president’s executive order and the obligations they may face under the DPA.
A declaration of emergency affecting the national defense is necessary to invoke the DPA. Over time, Congress has broadened the definition of “national defense” from purely military purposes to also encompass domestic preparedness, response, and recovery from natural hazards, terrorist attacks, and other national emergencies, such as the COVID-19 emergency declaration. The DPA authorities encompass military and energy production or construction, critical infrastructure construction or repair, homeland security, and stockpiling, and have been utilized more recently by civilian agencies in support of anti-terrorism activities and natural disaster response.
The president’s March 18 executive order only invokes the DPA authorities under Title I, Priorities and Allocations, though, depending on the development and severity of the pandemic and the government’s response, other DPA authorities (discussed below) may be invoked. The Executive Order also includes a finding that personal protective equipment and ventilators meet criteria to be considered “scarce and critical material essential to the national defense” under the DPA.
Title I permits the government to compel companies to provide the government with materials and services deemed necessary for the national defense and establishes a priority system for such orders. Under this Title I authority, the government may prioritize and allocate services and materials by mandating certain contracts, overriding competing contracts, and by directing the allocation of materials, services, and facilities. The recent Executive Order specifically authorizes the government to determine proper nationwide priorities and allocation of all health and medical resources, including controlling the distribution of such materials to combat the spread of COVID-19.
The president’s March 27 memorandum to HHS, instructing the agency to utilize the invoked DPA authorities to compel GM to accept, perform, and prioritize a government ventilator contract, illustrates the Title I priority system.
The prioritization system will be regulated by HHS using the process described at 45 C.F.R. § 101. The HHS system is comprised of “rated orders” which compel manufacturers and suppliers to fulfill the order, even if it means rescheduling the fulfillment and delivery of other non-rated orders. The effect of a rated order flows down the entire supply chain. That is, businesses that receive a rated order must in turn place rated orders with their subcontractors and suppliers to ensure expedited delivery of materials, components and supplies needed to fulfill a rated order. There are few exceptions to complying with a rated order, and willful failure to perform a rated order is considered a criminal violation that subjects those involved in the violation of up to one year of imprisonment and a fine of up to $10,000. Exceptions include:
- If the contractor is unable to fill the order by the specified date, it must inform the customer of the earliest date on which delivery can be made and offer to accept the order on the basis of that date;
- If accepting a rated order would interfere with delivery of any previously accepted rated orders, the contractor must offer to accept the order based on the earliest delivery date otherwise possible;
- If the business placing the order is unwilling or unable to meet regularly established terms of sale or payment;
- If the order is for an item not supplied or for a service not capable of being performed;
- If the order is for an item or service produced, acquired, or provided only for the supplier’s own use for which no orders have been filled for two years prior to the date of receipt of the rated order. If, however, a supplier has sold some of these items or provided similar services, the supplier is obligated to accept rated orders up to that quantity or portion of production or service, whichever is greater, sold or provided within the past two years;
- If the business placing the rated order, other than the U.S. government, itself already makes the item or performs the service being ordered;
- If acceptance of a rated order or performance against a rated order would violate any other regulation, official action, or order of the HHS issued under the authority of the DPA or another relevant statute.
The DPA, however, does exempt businesses from liability for damages or penalties for any actions taken to comply with governing rules, regulations and orders, including third-party liability over production delay (even orders later declared legally invalid). Note, these limitations on liability do not provide blanket tort immunity for liability to injured third parties or immunity from Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) liability or antitrust liability.
In addition to DPA Title I authorities, other relevant DPA authorities that may be invoked include:
- Title III, Expansion of Productive Capacity and Supply, allows the government to provide incentives and financial support to the domestic industrial base to create or expand the production and supply of critical materials and goods. The incentives and financial assistance can include loans, loan guarantees, direct purchases and purchase commitments, and the authority to procure and install equipment in private industrial facilities; and
- Title VII,General Provisions, authorizes establishment of voluntary agreements with private industry. It also provides authority to (1) block proposed or pending foreign corporate mergers, acquisitions or takeovers that threaten national security, (2) employ persons of outstanding experience, and (3) establish a volunteer pool of industry executives and experts to advise or serve the government.
If additional authorities such as Title III incentives or financial support are invoked, they will likely require an additional executive order, or an amendment to the March 18 Executive Order. Under the invoked Title I authorities, the exercise of the government’s DPA authorities may take on other forms of executive action, including HHS priority setting, or instructions from the White House, such as the president’s March 27 memorandum to HHS concerning the GM ventilator contract.
Businesses that manufacture, produce, or supply personal protective equipment or ventilators should start preparing their employees and relevant teams for the possibility of receiving a rated order. Similarly, businesses that supply essential health and medical devices or equipment other than those specifically named in the Executive Order should also prepare for the possibility of expanding the scope of included products or DPA authorities utilized. Businesses that receive rated orders will have a very short response time in which they must accept or reject those rated orders. It is important to understand your rights and responsibilities regarding rated orders and the legal consequences of failure to perform. Understanding the implications of the Executive Order invoking DPA authorities will help affected businesses position themselves to respond accordingly.