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COVID-19 Client Alert: Defense Production Act and Implications for Government Contractors

By Executive Order dated March 18, 2020, the President invoked wartime powers authority provided in the Defense Production Act ("DPA") to direct private industry in the interests of the national defense.  See, 50 U.S.C. Ch. 55; The Defense Production Act of 1950: History, Authorities, and Considerations for Congress (CRS Report No. R43767).  The definition of "national defense" is expansive and extends to domestic preparedness, response and recovery from natural hazards, terrorist attacks, and other national emergencies.  50 U.S.C. § 4552(14).  The President's authority includes the ability to prioritize government contracts over competing customers for goods and services and allocate or control materials, services, and facilities necessary to promote the national defense. 

The Executive Order specifically identifies ventilators and personal protective equipment as priorities and delegates authority to the Secretary of Health and Human Services to identify further necessary health resources relating to the COVID-19 emergency.  Although the Executive Order was initially limited to medical items, we are already seeing expansions to other sectors of the economy outside of the medical field. 

For example, the General Services Administration has identified a non-exclusive list of additional commercial supplies that could be subject to rated orders, such as "(1) hand sanitizer, disinfectants, cleaning gloves, and so forth to keep buildings safe and habitable to the public, and 2) laptop computers, accessories, and other IT products to support sharply increasing levels of telework."  GSA's Acquisition Letter MV-20-05 dated March 19, 2020 is effective immediately and provides guidance for contracting officials on how to place rated orders, citing to regulations at 15 C.F.R. Part 700, FAR Subpart 11.6, and GSAR subpart 511.6. 

The Acquisition Letter instructs contracting officers to contact existing sources of supply using existing contract vehicles; to use the appropriate rating; and to identify the required delivery date.  Terms such as “immediately” and “as soon as possible” do not meet the requirement for a specific delivery date.  The Acquisition Letter strongly recommends that contracting officers make contact with suppliers by phone because many suppliers may not be familiar with the DPAS requirements.  Contracting officers may issue rated orders orally and the vendor must accept or reject the order within one working day.  A vendor has limited grounds to reject an order including the inability to fill the order by the specified date.  Scheduling conflicts with previous, lower-rated or unrated orders are not acceptable reasons for rejecting an order.  Because many commercial, non-DOD contractors will not be familiar with rated orders, it is important for contractors to come up to speed on DPA.

Some of the relevant DPA authorities include:

  • allowing the President to (1) require that performance under certain contracts or orders take priority over performance of other contracts and require acceptance and performance of such contracts for materials and services as necessary to promote the national defense and (2) allocate materials, services, and facilities in such manner and upon such conditions as necessary to promote the national defense;
  • allowing the President to promote domestic production of scarce industrial resources, critical technology items, or essential materials by offering incentives such as loans, loan guarantees, direct purchases and purchase commitments subject to certain conditions, and the authority to procure and install equipment in private industrial facilities; and
  • allowing the President to establish voluntary agreements with private industry, employ experts who have experience and ability to assist in the response to the national emergency, and establish a volunteer pool of industry executives who could serve in the government in the interest of the national defense.

See, 50 U.S.C. Ch. 55, Subchapter I.

The DPA establishes two levels of priority for rated orders: DX and DO.  15 C.F.R. 700.11.  Contracts that are DX rated take priority over later DX rated contracts, all DO rated contracts, and all unrated contracts.  DO rated contracts take priority over later DO rated contracts and all unrated contracts.  Unrated contracts include all other contracts in the contractor's portfolio, regardless if they are with the federal government or a private entity.  The DPA grants a contractor performing a rated contract immunity from liability for delays or breaches to lower rated contracts due to the DPA rated contract—including other, lower rated contracts with the federal government—as long as the contractor first seeks assistance from the government.  See, 15 C.F.R. 700.90; 15 C.F.R. Part 700, Subpart H.

Although DPA rated contracts take priority once accepted, a contractor does not always have to accept a rated contract as long as one of several enumerated circumstances apply.  15 C.F.R. 700.13.  For example, a contractor is required to reject a rated order under certain circumstances where it would conflict with higher rated orders or orders of the same priority rating received on the same day.  See, 15 C.F.R. 700.13(b).  A contractor has the option to reject priority rated orders under certain other circumstances, such as when the contractor does not supply that material.  See, 15 C.F.R. 700.13(c).

Although the President's authority under the DPA is broad, it is not unbridled.  The DPA limits the President’s power over the civilian market to instances when the (1) material at issue is scare and essential to the national defense and (2) the need “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.”  50 U.S.C. § 4511(b).

The Executive Order has significant implications for companies who receive priority rated orders or other direction pursuant to the President's authority to allocate private resources.  Companies may have to shift production, interrupting existing supply chain sequencing and displacing non-government customers.  As stated above, there are limited grounds to reject a prioritized contract.  To avoid price gouging, companies are prohibited from discriminating against prioritized orders or contracts “by charging higher prices or by imposing different terms and conditions for such orders or contracts than for other generally comparable orders or contracts.” 50 U.S.C. § 4557.    

While full of sticks, the DPA also includes some carrots, in the form of loans and other financial benefits that could be attractive to private businesses who may be able to assist in the response to the COVID-19 outbreak if funding were available.

Companies who have products and facilities that fall within the scope of the emergency response should prepare to receive rated orders or alternatively, proactively contact agency officials to make them aware of your capabilities to assist in this time of national emergency.  Our firm will continue to monitor developments about this important Executive Order and related agency guidance.  We are available to assess legal compliance with any such orders.

If you have any questions, please contact:

Stephen D. Knight
sknight@smithpachter.com

Edmund M. Amorosi
eamorosi@smithpachter.com 

Michael T. Gwinn
mgwinn@smithpachter.com  

The authors acknowledge the assistance of Amanda C. DeLaPerriere with the research and drafting of this article.

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