COVID-19: Government Poised to Use Defense Production Act to Prioritize Pandemic Related Contracts

COVID-19: Government Poised to Use Defense Production Act to Prioritize Pandemic Related Contracts

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On March 18, 2020, President Trump issued an executive order paving the way for the government to use the Defense Production Act (DPA) to prioritize and compel production of materials required to respond to the COVID-19 pandemic. The DPA is familiar to defense contractors that regularly receive contracts requiring prioritization of government orders over commercial sales. But the use of the DPA to prioritize production of medical devices and supplies is new, and companies that may receive such orders should be prepared to quickly evaluate requirements, performance capacity, their own supply chain requirements, and engage with government contracting officials about expectations and performance.

Background

The DPA was initially enacted in 1950 to give the executive branch the power to require private businesses to (a) prioritize government contract performance over commercial transactions to promote the national defense or respond to a crisis, and (b) direct private companies to allocate their resources to address critical production needs for crisis response efforts. President Trump’s new executive order expanded an Obama-era executive order to more clearly give the secretary of Health and Human Services (HHS) the power to use these DPA authorities, including the issuance of priority “rated” contracts and the imposition of contracts upon companies under the DPA’s allocation powers. President Trump’s order is widely viewed as a key initial step for deploying the DPA in the future to respond to the pandemic.

Although it includes a wide range of authorities potentially relevant for response to COVID-19, the DPA is most likely to be used in the near term to invoke contract prioritization requirements. This power has in the past primarily been administered through the Defense Priorities Allocation System (DPAS), which has historically been overseen by the Commerce Department’s Bureau of Industry and Security through regulations (15 CFR Part 700) designed to ensure the timely availability of industrial resources to meet national defense and emergency preparedness requirements. HHS has issued similar regulations to implement its Health Resources and Priorities Allocation System.

Companies that act pursuant to DPA prioritization or allocation orders are protected against liability “for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with a rule, regulation, or order issued pursuant to [the DPA], notwithstanding that any such rule, regulation, or order shall thereafter be declared by judicial or other competent authority to be invalid.” 50 U.S.C. § 4557.

Key Compliance Considerations

In the defense sector, contractors and subcontractors commonly receive DPAS-rated contracts or orders that must be fulfilled before necessary resources can be diverted to other business. Large defense contractors may receive dozens, even hundreds, of priority rated contracts or orders in a given year. But companies that have never encountered the priority performance requirements mandated by the DPA may not appreciate the significance of the contracts or the steps involved in responding to them.

In general, there are two types of priority rated contracts used for DPA priority orders:

  • DX rated orders have equal priority and take preference over DO and unrated orders.
  • DO rated orders have equal priority and take preference over unrated orders.

 

Rated orders are accompanied by delivery deadline requirements. Companies that receive rated orders are required to accept any order they receive for goods they typically supply to the market, so long as they are capable of satisfying the deadline assigned to the order. Companies may reject an order (with a written explanation for the rejection) if they are not capable of fulfilling it because the deadline cannot be satisfied, or the order is for a good the company does not produce, among other reasons. Once a company accepts a rated order, it must then schedule its operations to fulfill the order within the applicable time frame and may, in turn, issue its own rated orders to its suppliers to ensure that adequate materials are available for performance.

Conclusion

The DPA’s priority and allocation contracting system is not new. It is used every day in the defense space to prioritize orders placed with the contracting community. But the coronavirus pandemic may present the DPA requirements for the first time to companies that are unfamiliar with these authorities. Such contracts and orders merit a compliance effort to ensure timely and successful performance.

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