COVID-19 and the Defense Production Act: What Does This Mean for U.S. Businesses?

At the behest of 57 Democratic members of Congress, President Donald Trump announced on March 18 that he will invoke the Defense Production Act (DPA) of 1950 (P.L. 81-774, 50 U.S.C. §§4501 et seq.), as amended. In this instance, the invocation of the DPA is focused on the acquisition of medical supplies critical in the fight against the spread of the COVID-19 virus. These include personal protective equipment (PPE), e.g., masks, gowns and gloves, as well as respirators, ventilators and other breathing apparatus. Although the president seems to be backtracking a bit on whether the government will actually implement the DPA, it is helpful to understand at a high level how this authority works.

The DPA conveys broad authority to the president, including the following:

• Priorities and Allocations, which allows the president to require persons (including businesses and corporations) to accept and prioritize orders for materials and services as necessary to promote the national defense. If a particular program is deemed eligible to be supported under DPA priorities authority, the next step is to identify specific contracts awarded under eligible programs that are appropriate for inclusion of a Federal Priorities and Allocations System (FPAS) or Defense Priority and Allocation System (DPAS) rating. Once a contract carries a FPAS or DPAS priority rating, the government can then place rated or prioritized orders.
• Expansion of Productive Capacity and Supply, which allows the president to incentivize the domestic industrial base to expand the production and supply of critical materials and goods. Authorized incentives include loans, loan guarantees, direct purchases and purchase commitments, and the authority to procure and install equipment in private industrial facilities.
• General Provisions, which authorizes the government to execute agreements with private industry, to halt foreign corporate mergers, acquisitions or takeovers that threaten national security, and to create a volunteer group of industry executives that could be called to government service in the interest of the national defense.

The invocation of the DPA comes in response to complaints by state health officials that they have received only a fraction of the medical supplies requested from the Strategic National Stockpile, which, by all accounts, does not have adequate inventory to address the growing national needs.

For government contractors, the DPA allows the government to prioritize its needs over those of commercial customers and other governmental entities, but it does not permit the president to force companies to produce products or quantities of certain products. The DPA allows the president to authorize executive branch agencies to execute contracts with industry and to “cut the line” so that once an agency places an order with a company, assuming the company accepts the order, that company would then have to fulfill the government’s requirements before it could fill any of its other commercial orders.

Specifically, under contracts that contain a FPAS or DPAS rating, the government would be permitted to place rated or prioritized orders. Unless certain circumstances apply, including the contractor’s inability to deliver timely or the quantity requested, and the company rejects the order, the company would be required to prioritize the government’s needs over all commercial requirements.

Bottom line: Companies should review their existing contracts and any new contracts issued in response to this pandemic for the FPAS and DPAS designations. Those that have accepted or will accept contracts that provide the government with DPA prioritization authority should be aware that, in doing so, they may not be able to timely satisfy their commercial contractual obligations, and should take steps to limit resulting commercial contract liability.