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Using his authority under the Defense Production Act of 1950 (“DPA”), President Trump issued an Order on March 27 requiring that the General Motors Company accept and perform contracts and fulfill orders for the manufacture and production of ventilators to treat patients afflicted with the COVID-19 virus. Release of the Order follows issuance of a March 18 Executive Order that announced President Trump’s intention to invoke the DPA as part of the U.S. government’s response to the ongoing COVID-19 outbreak. While the Trump administration initially resisted expanding its authority under the DPA, issuance of the General Motors Order indicates that the U.S. government will employ the DPA when necessary to spur the production of products and materials necessary for COVID-19 response efforts.
This action represents a departure from the most common use of the DPA, which involves government contractors that are well versed in the strict deadlines and other requirements imposed under these types of contracts and bid for these contracts on that basis. This action expands the normal application of the DPA to U.S. businesses operating in sectors not normally considered subject to DPA authority. These businesses should review the potential legal obligations and business implications arising from use of the DPA, which imposes a number of requirements and grants certain legal protections to U.S. businesses that must be understood given the rapidly evolving nature of the U.S. government’s response to the COVID-19 outbreak. This alert summarizes these requirements and protections, while also providing guidance regarding potential business implications.
Initially enacted in response to the outbreak of the Korean War, the DPA is the president’s primary authority to mobilize public and private sector resources and to expedite the production of critical industrial items for “national defense” purposes. At its core, the DPA is intended to facilitate the supply and timely delivery of products, materials and services in times of national emergency. The DPA accomplishes these objectives by providing the president with two primary authorities. Most important for COVID-19 response efforts, the DPA empowers the president, or any agency to which he delegates DPA authority, to compel domestic businesses to prioritize the production of certain products and goods.
The DPA also authorizes the president to allocate or control the distribution or availability of materials, services and facilities in a manner deemed necessary or appropriate to promote the national defense. The authority to allocate resources has not been exercised for some time and the Trump administration is not expected to invoke it as part of its COVID-19 response efforts. As such, this alert focuses on the president’s authority under the DPA to order businesses to prioritize production of products and delivery of services.
The DPA empowers the president to mandate U.S. businesses sign contracts and fulfill purchase orders deemed necessary for national defense. The president, or any U.S. government agency to whom the president has delegated his DPA authority, also has the authority to demand that a business prioritize the fulfillment of these contracts and orders. The federal government applies a “priority rating” to these contracts and orders, which identifies the specific priority the government places on them. These contracts and purchase orders are known as “rated orders” under the DPA.
The DPA obligates businesses to fulfill a rated order ahead of any other commitments the business may have, including existing or prior obligations to other commercial customers and partners. The president can also incentivize businesses to expand their production and supply of materials and goods to fulfill rated orders through loans, loan guarantees, direct purchases and purchase commitments.
While businesses that have a significant number of contracts with federal government agencies or customers likely have rated orders in place, other businesses that do not typically have federal contracts could receive a rated order from a U.S. government agency in the coming weeks. As such, businesses in sectors potentially subject to DPA authority should prepare for their need to review and respond to a rated order as the U.S. government’s efforts continue to expand.
The following information should help businesses prepare and understand their obligations under the DPA.