COVID-19 and The Defense Production Act

March.22.2020

On March 18, President Trump announced that he will invoke the Defense Production Act of 1950 (DPA), 50 U.S.C. § 4501 et seq., to cope with shortfalls of essential medical supplies in response to the COVID-19 pandemic. The DPA confers broad, emergency authority to the President to control national economic policy in furtherance of national defense, which includes emergency preparedness. Among other things, the DPA allows the federal government to direct private industry to accept and prioritize contracts, permits the federal government to purchase essential materials or supplies, and allows the government to guarantee or extend loans.

Clients in industries that produce essential medical supplies or technology should be aware that the federal government may use the DPA to address shortfalls caused by COVID-19. Below, we analyze the DPA’s legal framework and identify potential risks and implications associated with government contracts under the DPA.

DPA Background and Powers

The DPA was enacted to allow the President to marshal private industry to aid in national security or in addressing a national emergency. The Department of Defense routinely uses the DPA to prioritize defense contracts for automobiles, aircrafts, and equipment. It has also been invoked to address emergencies like Hurricane Katrina.

The DPA is a powerful grant of authority. The four powers under the DPA that appear to be most relevant to the COVID-19 response are:

  • Title I’s Priority Power, § 4511. The President may “require that performance under contracts or orders … which he deems necessary or appropriate to promote the national defense shall take priority over performance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance.”

    In simple terms, the President can require a company to accept a contract and then jump the line, requiring performance of the DPA contract before that of other contracts the company has with other parties.

  • Title III’s Purchasing Power, § 4533. “To create, maintain, protect, expand, or restore domestic industrial base capabilities essential for the national defense, the President may make provision … for purchases of or commitments to purchase an industrial resource or a critical technology item, for Government use or resale.”

    This provision would permit the Government to purchase and redistribute large quantities of needed medical equipment or materials.

  • Title III’s Loan Guarantee and Direct Loan Power, § 4532. The loan powers permit the federal government to guarantee or provide direct loans to private industry for purposes of ensuring the supply of resources, critical technology items, or other materials. This power has not been used in over 30 years, but could be deployed in these circumstances to help boost relevant production or industrial capacity.
  • Title I’s Allocation Power, § 4511. Contained in the same section that contains the priority power, the allocation power permits the President to “allocate materials, services, and facilities in such manner, upon such conditions, and to such extent as he shall deem necessary or appropriate….”

    Historically, this power has been rarely deployed. But it is quite possible that it could be used for the centralized allocation of, for example, medical care facilities, hotels, convention halls, or other large spaces for use in combatting COVID-19.

The DPA in Practice

In practice, the powers of the DPA are exercised by executive agencies to which the President has delegated power.

The DPA’s implementing regulations, located at 15 C.F.R. § 700 et seq., provide the legal framework governing the DPA’s use. The basic contours are as follows.

  • A prioritized contract under the DPA is known as a “rated order.” With limited exceptions described below, a contractor must accept and fill a rated order, and may itself place rated orders to suppliers of materials needed to fill the order. Id. § 700.3(b), (d).
  • A “rated order” takes priority over “any other contract order,” and applies to all types of orders, with the exception of employment contracts. Id. § 700.13(a)
  • A contractor must perform a rated order for the same price it would charge for comparable non-rated orders. Id. § 700.13(a)(2).
  • A contractor may reject an order in certain circumstances, most notably “[i]f the order is for an item not supplied or for a service not performed” or “[i]f the person placing the order is unwilling or unable to meet regularly established terms of sale or payment.” Id. § 700.13(c).
  • Companies receiving rated orders should be mindful of additional regulations concerning, for example, required notices and scheduling performance of rated orders with different priority ratings. In addition, the full panoply of government procurement regulations and accounting standards are applicable.

Notably, the DPA contains a provision for voluntary agreements, § 4558. This provision contemplates negotiation between the federal government and private parties to reach mutually agreeable terms. As described below, parties entering voluntary agreements under the DPA are also entitled to immunity from antirust liability.

Liability, Immunity, and Indemnity

A frequently recurring set of issues in the DPA context involves the potential liability of a DPA contractor for the acceptance and performance of a DPA contract.

  • Antitrust liability. As a general matter, government contracting can present difficult questions under the antitrust laws—for example, with respect to “teaming” agreements between prime contractors and subcontractors. The DPA contains no exemption from otherwise applicable antitrust laws, 50 U.S.C. § 4558(a). The DPA does, however, confer antitrust immunity for the development or performance of voluntary agreements reached under § 4558. Id. § 4558(j).
  • Immunity from breach of contract, §§ 4557 (for orders), 4558(o) (for voluntary contracts). The DPA forecloses liability “for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order to be issued pursuant to [the DPA].” This immunity operates as a defense to a breach of contract claim from a dissatisfied contracting counterparty that suffered delays or nonperformance of a contract because its counterparty was forced to prioritize a DPA contract. E.g., E. Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 998 (5th Cir. 1976) (recognizing DPA as a defense to a breach of contract claim).
  • No immunity from or indemnity for torts. The courts have not definitively resolved whether § 4557 or § 4558 immunize DPO contractors from tort liability for harms proximately flowing from performance of DPO contracts. The federal government has, however, previously argued that the DPA provides immunity only from breach of contract suits. Hercules Inc. v. U.S., 516 U.S. 417 (1996). The weight of authority has taken that approach. E.g., U.S. v. Gen. Dynamics Corp., CA No. 4-87-312-K, 1988 U.S. Dist. LEXIS 17256 (N.D. Tex. June 9, 1988); see also In re Agent Orange Prod. Liability Litig., 597 F. Supp. 740, 845 (E.D.N.Y. 1984) (stating in dicta that at most § 4557 would immunize against strict liability torts).

    The Supreme Court has held that the DPA does not operate to automatically indemnify private parties subject to DPA contracts for harms to third parties. See Hercules Inc. v. U.S., 516 U.S. 417, 430 n.14. Any indemnity must be express or implied.

  • Possible government contractor immunity. In some circumstances, despite the absence of indemnity from the federal government, a private party may be able to raise a government contractor defense to an action for harms flowing proximately from performance of a DPA contract. See generally Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016) (discussing government contractor immunity generally).
  • Intellectual Property Immunity. Manufacturers performing DPA contracts will also be entitled to immunity from patent and copyright liability under 28 U.S.C. § 1498. Section 1498 provides that the only remedy for infringement that occurs through performance of a government contract is a suit against the United States in the U.S. Court of Claims.

     

  • Other considerations subject to contract law. Where no statutory or common law immunity governs, the parties’ respective rights and responsibilities are of course governed by the contract. A contract may, for example, contain a broad force majeure clause or excusable delay clause that would permit cancellation of a contract in the event a private party can no longer perform due to a DPA contract. On the other hand, the contract and governing contract law may provide a disappointed contractual counterparty of the party subject to a DPA order the right to terminate the contract. The rights of the parties will be subject in any given case to the text of the contract and the applicable contract law.

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The DPA is a potentially powerful tool in the fight against COVID-19. Companies with the capacity to manufacture essential medical supplies and equipment should be aware of its provisions and the risks and opportunities associated with its use.