On March 18, 2020, President Trump invoked the Defense Production Act (“DPA”) in response to the coronavirus outbreak and delegated his authority under the DPA to the Secretary of Health and Human Services (“HHS”). The Executive Order issued by the President directed HHS Secretary Alex Azar to obtain “all health and medical resources needed to respond to the spread of COVID-19 within the United States.” In doing so, the Secretary is required to consult with Commerce Secretary Wilbur Ross and the other agency heads to determine “the proper nationwide priorities and allocation of all health and medical resources, including controlling the distribution of such materials in the civilian market, for responding to the spread of COVID-19 within the United States.”
The Executive Order’s reference to “health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators,” indicate that HHS will likely use its newfound DPA authority to obtain from private industry masks, gloves, and ventilators, along with other protective equipment. The Secretary may also identify additional specific health and medical resources that meet the DPA’s criteria.
Below, we provide background on the DPA and what this means for those in the healthcare and other industries who may be called upon to provide critical resources in this time of need.
Summary of the DPA
In 1950, Congress enacted the DPA to provide the President with the power to, among other things, demand that manufacturers give priority to defense production and to requisition materials and property. Since then, amendments to the DPA have extended the DPA beyond military preparedness to general emergency preparedness pursuant to Title VI of the Stafford Act. In doing so, the DPA grants the executive branch broad powers to command domestic industrial activities for national emergencies.
The DPA authorizes the President to control facilities and materials (including data) in order to produce and distribute scarce supplies that are “essential to the national defense.” It empowers the U.S. government to contract with and compel companies to prioritize production of scarce essential goods. If the government cannot incentivize cooperation within an industry, the DPA’s “allocation authority” grants the government the right to purchase firm products before anyone else. The DPA grants the Departments of Defense, Energy, Agriculture, Health and Human Services, Homeland Security, and Transportation authority to issue regulations that “establish standards and procedures by which the priorities and allocations authority under this section is used to promote the national defense, under both emergency and nonemergency conditions.”
The Federal Priorities and Allocations System (“FPAS”) is a compilation of five regulations issued by different Departments to implement the President’s authority under the DPA. While similar, these sets of regulations are issued and administered separately to cover resources required by each Department. The most commonly known and often utilized set of regulations implementing the DPA is the Defense Priorities and Allocations System (“DPAS”) regulations issued by the Department of Commerce and utilized by the Department of Defense (15 CFR Part 700). Orders issued by HHS pursuant to the President’s recent grant of authority will likely be subject to the Health Resources Priorities and Allocations System (“HRPAS”) (45 CFR Part 101).
Under HRPAS, DPAS and the other FPAS regulations, there are two levels of priority for issued orders: DX and DO. The DX rating carries the highest priority and DX-rated contracts have priority over DO-rated contracts, unrated government contracts, and commercial contracts. DO-rated contracts take precedence over unrated government contracts and commercial contracts.
Under these regulations, a company must accept prioritized contracts/orders if it is capable of fulfilling the order, unless an expressly enumerated basis for rejection exists. For example, a contractor must reject a rated order if it is unable to fill the order by the date specified, but it also must inform the customer of the earliest potential delivery date and offer that delivery date to the customer. However, scheduling conflicts with existing orders with a lower priority, or no priority, do not provide a basis for rejection if the company can otherwise produce the quantities ordered by the customer by the date requested. Among other reasons, a contractor may reject a rated order if the order is for an item not supplied or service not performed, or if the customer placing the order is unwilling or unable to meet the contractor’s regularly established terms of sale or payment. Note in invoking these rights of rejection, contractors are prohibited from discriminating among customers. Under these regulations, a rated order is deemed accepted if it is not rejected, in writing, within fifteen (15) working days after receipt for DO-rated orders and within ten (10) working days after receipt for DX-rated orders.
Companies must include applicable DX or DO ratings on all orders issued to lower-tier suppliers in support of a rated contract. If a company accepts a rated order and subsequently finds that shipment or performance will be delayed, the company must notify the customer immediately in writing, give the reasons for the delay, and advise of a new shipment or performance date. Also, if a company is having trouble obtaining necessary supplies or materials required to fill a rated order, the company can seek special priorities assistance through the applicable FPAS regulations.
The DPA also authorizes financial incentives to private industry to encourage the expansion of industrial capacity to produce and supply critical goods required for national defense. While not yet invoked by the President, Sections 301 and 302 of the DPA authorize direct loans to targeted industries and loan guarantees. Loan options are subject to a number of restrictions, including that they must be budgeted and accounted for in congressional appropriations bills, which in turn must be enacted by the President. Before issuing the loan, the President must confirm that the loan meets a number of conditions and ensure that the loan recipient will be able to repay the loan. All of these requirements beyond budgetary allocation, however, may be waived during a national emergency.
Section 303 of the DPA allows for additional incentives to companies, such as procurement of equipment or resources and direct purchase or subsidy of goods produced. These incentives aim to develop a national stockpile of critical materials for national defense. The President cannot invoke Section 303 incentives unless he first determines that there is a particular “domestic industrial base shortfall” for an industrial resource that is critical to the national defense.
Anticipated Impact on Industry
- Companies should closely review all orders received from the federal government or customers acquiring goods or services in support of the federal government. For all orders containing a DX or DO rating, references the DPA, or references any of the HRPAS or other FPAS regulations, such orders will be deemed accepted if not rejected in writing (with a stated permitted basis for rejection) within the timeframes specified in the regulations.
- Once accepted, companies must prioritize the fulfillment of rated orders over unrated orders and give DX-rated orders priority over DO-rated orders.
- Companies should include the relevant DX or DO rating on all orders for materials/supplies issued to lower-tier subcontractors in support of a rated order. If a company is having difficulty getting materials/supplies that are needed to fill rated orders, they can seek special priorities assistance from the government under the applicable set of FPAS regulations.
- If a company accepts a DO or DX rated order, and subsequently finds that shipment or performance will be delayed, the company must notify the customer immediately, give the reasons for the delay, and advise of a new shipment or performance date. This notification should be made in writing or, if made verbally, written (hard copy) or electronic confirmation must be provided within 1 working day of the verbal notice.
- For companies that have traditionally only serviced the commercial sector and are new to federal government contracting, keep in mind that federal government contracts include a host of compliance requirements. This Federal Government Contracts: Overview provides a summary of some of the requirements that apply to federal government contractors.
For more information about recommended steps and compliance obligations, please contact your Foley relationship partner or one of the attorneys below. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
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