By Kathryn Mims, Ira Raphaelson and Lily Kim

Law360 (January 20, 2021, 5:35 PM EST) --

Kathryn Mims

Ira Raphaelson

Lily Kim

The Korean War-era Defense Production Act has already loomed large in the federal response to the COVID-19 pandemic.[1] Recent press reports suggest that it may be invoked even more broadly in the coming weeks and months as the effort to vaccinate the country accelerates. 

At this time, though the details are yet to come, it appears nearly all companies in the COVID-19 vaccine supply chain could be affected. This includes the vaccine manufacturers, producers of the vials, syringes, freezer units and dry ice required for vaccine storage, as well as hospitals, nursing homes, medical professionals, universities and colleges, and others.

Even airlines and trucking lines enlisted to transport the vaccines across the country could become subject to executive orders pursuant to the DPA provisions. 

This article provides an overview from today's vantage point of the 70-year-old DPA, its purpose and key provisions. Next, we summarize how the DPA was employed by the Trump administration to combat the national emergency that is the COVID-19 pandemic. Finally, we outline some of the ways that the new Biden administration's intent to use the DPA to facilitate vaccine distribution may impact businesses in the COVID-19 vaccine supply chain.

The DPA in a Nutshell

The DPA is a wartime production law that confers upon the president a broad set of authorities to influence domestic industry in the interest of national defense.

Congress enacted the DPA in 1950 during the Korean War to create a means for the government to require private companies to meet the country's military needs. The DPA was modeled after similar World War II-era statutes, which gave the president enormous powers to direct private industry to meet that national emergency — under which, for example, the Ford Motor Company made nearly 300,000 vehicles and airplanes.

The DPA, as amended, "provides the [p]resident with an array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base."[2]

Gradually, Congress has expanded the DPA's definition of "national defense" beyond military application to include crises resulting from natural disasters, terrorist attacks and other national emergencies.[3] In 2018, the DPA was reauthorized through September 2025.[4]

The DPA is a complex law, as one might expect when dealing with essentially national emergency, wartime procurement needs.

Title I of the DPA grants the president powers to require companies to devote manufacturing capacity to a specific task — by requiring companies to accept what are known as priority-rated contracts[5] — or require companies to allocate or reserve materials, services or facilities for government purposes at the president's direction.[6]

The president can delegate both of these Title I authorities to various agencies, including the U.S. Department of Homeland Security, the U.S. Department of Defense and the U.S. Department of Health and Human Services.

Title III of the DPA authorizes the president to incentivize the domestic industrial base to expand production capacity and supply of critical materials and products.[7] The incentives include direct purchase commitments, direct loans and loan guarantees, and procurement and installation of equipment in government-owned or privately-owned industrial facilities.

A typical Title III project focuses on increasing production capacity and reducing production costs for new, state-of-the-art technologies needed for national defense purposes.

Under Title VII of the DPA, the president has authority to consult with private companies to develop voluntary collaboration agreements to help provide for the national defense, which are subject to antitrust immunity — civil and criminal — under Section 708.[8] Title VII also gives the president the authority to establish a volunteer pool of industry executives who could be called to government service.

The DPA and COVID-19 So Far

Declaring a National Emergency and Activating the DPA

After President Donald Trump declared COVID-19 a national emergency on March 13, 2020, he issued several executive orders between March 2020 and August 2020 delegating to federal agencies the DPA authorities to mitigate COVID-19 supply chain issues.

Two noteworthy examples:

• EO 13909 delegated the priorities and allocations authority under Title I to the secretary of HHS with respect to health and medical resources needed to respond to the spread of COVID-19;[9] and

• EO 13911 delegated to the secretary of HHS and the secretary of DHS the authority to take action to expand domestic industrial capabilities under Title III as well as Title VII authorities.[10]

Issuing Priority-Rated Contracts for Medical Supplies

Federal agencies initially used a targeted DPA approach to address medical supply issues, namely by issuing priority-rated contracts for ventilators and N95 masks.[11] By September 2020, the agencies expanded the issuance of the priority-rated contracts to other types of medical supplies, including surgical masks, gloves, swabs, test kits and syringes.[12]

The First Allocation Order Since the Cold War

In April 2020, the Federal Emergency Management Agency issued an allocation order — the first time the allocation order authority had been invoked since the Cold War[13] — to prevent U.S. companies from exporting certain personal protection equipment to foreign customers, first in April 2020 and modified and extended through June 2021.[14] HHS and the DOD also used the DPA Title III authorities to increase domestic production of PPE, testing and vaccine delivery supplies.

FEMA Establishes Voluntary Collaboration Agreement

In August 2020, FEMA used its Title VII authority — delegated by executive order — to establish a five-year voluntary agreement with private sector manufacturers, distributors and industry representatives to enhance coordination and cooperation to provide critical health care resources to respond to COVID-19.[15]

FEMA has stated that "a wide range of distributors, manufacturers, industry associations, and others with relevant expertise" have agreed to participate.[16] And the National Association of Manufacturers, the Healthcare Industry Distributors Association and the AdvaMed Advanced Technology Association participated in the development of the voluntary agreement.[17]

FEMA is still inviting more companies to participate in this voluntary agreement, which would allow them to share information about supply chains and challenges, manufacturer capacity and pricing considerations without being exposed to antitrust liability.

How Potentially Expanded Use of the DPA May Impact Businesses in the COVID-19 Supply Chain

President Joe Biden has announced his intention to use the DPA to expand vaccine manufacture and distribution. A series of executive orders are expected shortly after inauguration.

The following are some of the ways such an expansion may impact companies that do business in the vaccine supply chain.

Companies may be subject to DPA priority-rated contracts.

First, businesses in the COVID-19 supply chain may become subject to priority-rated contracts. This can significantly impact your ordinary business by forcing you to put your regular customers' orders on the back burner — even if you entered contracts with them first — in order to prioritize the priority-rated contract.

The DPA by its terms provides no express provision for compensation for any lost profits sustained if you have to abandon your regular contracts — or if your ordinary customers abandon you. But if your company suffers financial distress as a result of prioritizing priority-rated contracts, federal grants and favorable loans may be available. There may also be recourse against the federal government under the Takings Clause of the U.S. Constitution.[18]

Subject to a few narrow exceptions, you must accept DPA priority-rated contracts. Priority-rated orders may be made directly from the government, but may also come from a governmental contractor.[19]

The government cannot use the DPA to force you to manufacture goods that are different from what you normally make, or to provide services you are not in the business of providing.[20]

This is one of the few narrow exceptions to the general rule that you must accept priority-rated contracts, although companies should consult counsel to ensure a rejection on these grounds is appropriate.[21]

Prices under a DPA priority-rated contract must be at market prices. The government must meet the contractor's regularly established terms of sale or payment.[22] But the contractor must not charge higher prices or impose different terms and conditions than for comparable unrated orders.[23]

All businesses in the vaccine supply chain — regardless of where the president ultimately directs a DPA order — should be prepared to work with priority-rated contracts.

Subcontractors or suppliers have the same obligations as the direct contractor: They must (1) accept the contract, subject to the same narrow exceptions; (2) prioritize delivery/performance of that contract; and (3) place additional priority-rated contracts from their suppliers/subcontractors.[24]

Section 707 of the DPA provides liability protection to contractors performing under a priority-rated contract. This insulates contractors from liability that may arise from prioritizing priority-rated contracts above regular customers, such as if contractor has to breach a contract with a regular customer in order to fulfill the priority-rated contract.[25]

If a federal agency requires you to continue to operate your facilities in the face of a local shutdown order, DPA Section 707 is clear that you would not be liable for damages that might result.

While several cases involving the use of the defoliant Agent Orange during the Vietnam War have suggested that DPA does not provide immunity for state tort liability,[26] to the extent that the DPA requires your facilities to continue operating, a state law tort claim would appear to be in direct conflict with, and thus preempted by, the DPA.

Penalties for not complying with a DPA priority-rated contract can be severe. Penalties can include hefty fines and jail time for individuals.[27]

And as with government contracts, false statements in connection with reimbursement from federal funds can be treated as criminal fraud with substantial criminal penalties and subject the entity to fines and treble damages under the False Claims Act.[28]

Companies may be eligible for financial incentives or assistance.

Apart from priority-rated contracts, the federal agencies may provide substantial financial incentives to businesses in order to expand domestic production capacity and supply of necessary products, including in the form of direct loans and loan guarantees, which can be used for expanding capacity, upgrading technology or developing new processes.

The president can also authorize agencies to purchase or make purchase commitments of industrial resources or critical technology items, and procure and install equipment in private industrial facilities.[29]

You may be invited to join government collaborations, with antitrust immunity.

Finally, private companies in the vaccine supply chain may be asked to join voluntary government-sponsored agreements to enable collaboration across industries in ways that may otherwise be prohibited by the antitrust laws, for the national benefit.

In addition to any new voluntary, agency-sponsored collaboration agreements that the new administration may put into place, as mentioned above, FEMA has already established a voluntary agreement under Title VII for the manufacture and distribution of critical health care resources necessary to respond to the pandemic.

As of the date of this article, the FEMA contract is still open — businesses in the vaccine supply chain may already be invited or be eligible to participate in this agreement.[30]

An important feature of these voluntary agreements is antitrust immunity under Section 708 of the DPA, provided that the collaboration agreement (1) has a government sponsor; [31] (2) is developed in conjunction with the government;[32] and (3) is subject to ongoing governmental oversight.[33]

This allows companies to work together in response to COVID-19 in ways that could otherwise expose them to antitrust liability.[34]

Companies seeking to collaborate to aid the country's response to the pandemic outside of government-sponsored voluntary agreements — and which are therefore ineligible for Section 708 antitrust immunity — may still gain insulation from antitrust prosecution by seeking an expedited business review letter from the U.S. Department of Justice or the Federal Trade Commission.

At the beginning of the pandemic, the DOJ and the FTC established procedures for expedited business review letters to encourage collaboration aimed at combatting the pandemic, with the Antitrust Division committing to responding to COVID-19 crisis-related business review letter requests in seven days.[35]

Conclusion

The expanded use of DPA authority to mobilize and accelerate the immunization effort to meet the national emergency has the potential to disrupt existing business plans and commitments. The use of the DPA, however, can also involve both direct financial incentives and reduced liability. It remains to be seen how extensively the DPA will be used to target the vaccination supply chain.

---

Kathryn J. Mims is a partner, Ira Raphaelson is senior counsel and Lily Kim is an associate at White & Case LLP.

J. Mark Gidley, chair of the global antitrust practice at White & Case, contributed to this article. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Pub. L. No. 81-774 (1950), codified at 50 U.S.C. App. §§ 4501 et seq., as amended.

[2] 50 U.S.C. § 4502.

[3] 50 U.S.C. § 4552(14).

[4] Pub. L. No. 115-232, § 1791 (2018). 

[5] DPA-rated contracts are also commonly referred to as "priority-rated" or simply "rated" contracts. There is a system of prioritization among DPA-rated contracts called the Federal Priorities and Allocations System, administered by the U.S Departments of Agriculture, Energy, Health and Human Services, Transportation, and Commerce. FEMA, Federal Priorities and Allocations System (FPAS) Regulations, https://www.fema.gov/disasters/defense-production-act/federal-priorities-and-allocations-system/fpas-regulations#. Most relevant for our purposes would be HHS's regulation for administration of priorities and allocation actions, the Health Resources Priorities and Allocations System.

[6] 50 U.S.C. § 4511.

[7] Id. §§ 4531-4534.

[8] Id. § 4558.

[9] Exec. Order No. 13909, 85 Fed. Reg. 16227 (Mar. 23, 2020).

[10] Exec. Order No. 13911, 85 Fed. Reg. 18403 (Apr. 1, 2020).

[11] See U.S. Government Accountability Office, DEFENSE PRODUCTION ACT: Opportunities Exist to Increase Transparency and Identify Future Actions to Mitigate Medical Supply Chain Issues, GAO-21-108 (Nov. 2020), https://www.gao.gov/assets/720/710806.pdf.

[12] Id.

[13] See Congressional Research Service, The Defense Production Act of 1950: History, Authorities, and Considerations for Congress, 8-9 (Mar. 2, 2020), https://fas.org/sgp/crs/natsec/R43767.pdf (noting that the priorities authority has been routinely used for terrorism prevention and disaster preparedness but that "[u]nlike the prioritization authority, the allocation authority has not been used since the Cold War" as of March 2020).

[14] FEMA, Allocation Rule on Exports of Personal Protective Equipment (Dec. 31, 2020), https://www.fema.gov/fact-sheet/allocation-rule-personal-protective-equipment-exports.

[15] FEMA, Voluntary Agreement with Private Industry to Respond to Pandemics (Jan. 15, 2021), https://www.fema.gov/fact-sheet/voluntary-agreement-private-industry-respond-pandemics.

[16] Id.

[17] FEMA, Defense Production Act Section 708 Voluntary Agreement Public Meeting Transcript-May 21, 2020, Regulations.gov, https://www.regulations.gov/document?D=FEMA-2020-0016-0018.

[18] U.S. Const. amend. V; U.S. v. Winstar Corp., 518 U.S. 839 (1996).

[19] Department of Health and Human Services, Health Resources Priority and Allocations System, 45 C.F.R. § 101.33(a) (2015), https://www.federalregister.gov/d/2015-17047/p-187.

[20] Id. § 101.33(c)(2).

[21] The other notable exceptions are: (1) if fulfilling the DPA-rated order would conflict with your performance of an equal or higher rated DPA-rated order, but in this case you must make a counter offer to fill the order after you perform under the other DPA-rated contract (45 C.F.R. § 101.33(b)(2)-(4)); (2) if you cannot fulfill the order by the requested delivery date, but in this case you must inform the customer (the government or governmental contractor) of the earliest date on which delivery could be made, and you must offer to accept the contract for that date (Id. § 101.33(b)(1)); (3) if the customer (government or governmental contractor) is unwilling or unable to meet regularly established terms of sale or payment, you may reject the contract (Id. § 101.33(c)(1)); and (4) if the ordering customer is a contractor — not the U.S. government itself — and the contractor makes the goods or performs the services, you can reject the contract (Id. § 101.33(c)(4)).

[22] Id. § 101.33(c)(1). The Health Resources Priority and Allocations System final rule specifically notes that "[t]he rule does not require recipients to fulfill rated orders if the price or terms of sale are not consistent with the price or terms of sale of similar non-rated orders." 45 C.F.R. Part 101, https://www.federalregister.gov/d/2015-17047/p-68.

[23] Id. § 101.33(a)(2).

[24] See 45 C.F.R. § 101.35(b) ("The priority rating must be included on each successive order placed to obtain items or services needed to fill a customer's rated order. This continues from contractor to subcontractor to supplier throughout the entire procurement chain.").

[25] 50 U.S.C. § 4557 ("No person shall be held liable 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 this chapter, notwithstanding that any such rule, regulation, or order shall thereafter be declared by judicial or other competent authority to be invalid.").

[26] See, e.g., In re "Agent Orange" Prod. Liab. Litig. , 597 F. Supp. 740, 843-44 (E.D.N.Y. 1984) (noting that Section 707's immunity "should only be read to bar claims for strict liability, not negligence," given that negligence does not "truly result from compliance" with the DPA order).

[27] See 50 U.S.C. § 4513 ("Any person who willfully performs any act prohibited, or willfully fails to perform any act required, by the provisions of this subchapter [50 U.S.C. §§ 4511-4518] or any rule, regulation, or order thereunder, shall, upon conviction, be fined not more than $10,000 or imprisoned for not more than one year, or both.").

[28] See 18 U.S.C. § 1001 (false statements); 18 U.S.C. § 287 (false claims); 18 U.S.C. § 1031 (major fraud allegations) and the False Claims Act at 31 U.S.C. §§ 3729-3733.

[29] 50 U.S.C. §§ 4531-4534.

[30] FEMA, Meeting to Implement Pandemic Response Voluntary Agreement Under Section 708 of the Defense Production Act, 85 Fed. Reg. 86944 (Dec. 31, 2020) https://www.federalregister.gov/documents/2020/12/31/2020-29054/meeting-to-implement-pandemic-response-voluntary-agreement-under-section-708-of-the-defense.

[31] 44 C.F.R. § 332.2(b)(1)-(2).

[32] Id. § 332.2(c).

[33] Id. § 332.3; 50 U.S.C. § 4558(g).

[34] For more detail on antitrust immunity under Section 708, please see https://www.whitecase.com/publications/alert/novel-antitrust-defense-covid-19-agreements.

[35] For more information on the DOJ's expedited Business Review Letter procedure, please see https://www.whitecase.com/publications/alert/covid-19-competitor-collaborations-doj-antitrust-divisions-business-review.

For a reprint of this article, please contact reprints@law360.com.