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PepperHamilton: Defense Production Act FAQs

On March 18, President Donald Trump issued an executive order finding that the “health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators” meet certain criteria set forth in the Defense Production Act of 1950, as amended (DPA). In the executive order, the president also delegated authority under the DPA to the Secretary of Health and Human Services “to determine, in consultation with the Secretary of Commerce and the heads of other executive departments and agencies as appropriate, the proper nationwide priorities and allocation of all health and medical resources, including controlling the distribution of such materials (including applicable services) in the civilian market, for responding to the spread of COVID-19 within the United States.”

In the midst of the evolving health crisis presented by the COVID-19 pandemic, it is important for businesses — particularly those in, or with application for, the health and medical industries — to understand what the DPA is and how its potential use may affect them.

What is the DPA?

The DPA is a federal statute that Congress passed in 1950 at the start of the Cold War. The DPA confers upon the president a broad set of authorities to influence domestic industry in the interest of “national defense.”

What is the scope of “national defense” in the DPA?

The president’s exercise of authority under the DPA is necessarily tied to the definition of “national defense.” The DPE defines “national defense” broadly, as follows:

programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity.

The term “national defense” also includes emergency preparedness activities conducted pursuant to another federal law, the Stafford Act. The Stafford Act’s definition of “emergency preparedness” further broadens the scope of “national defense” to include:

those activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population, to deal with the immediate emergency conditions which would be created by the hazard, and to effectuate emergency repairs to, or the emergency restoration of, vital utilities and facilities destroyed or damaged by the hazard.

What authority does the DPA give the president over private businesses?

The DPA provides the president with a number of key authorities over private businesses in the interest of “national defense,” two of which are potentially most relevant to the COVID-19 crisis:

1. “Priorities” Authority (Title I). This authority permits the president to require persons and businesses to prioritize and accept certain contracts for materials and services that are necessary to promote “national defense.”

2. “Expansion of Productive Capacity and Supply” Authority (Title III). This authority permits the president to incentivize domestic businesses to expand production and supply of critical materials and goods.

Does the DPA authorize the president to seize companies or their property?

No. While the DPA does give the president authority to compel certain actions by private businesses, it does not permit the seizure of property. The “Priorities” Authority (Title III) authorizes the president to ensure the timely availability of critical materials, equipment and services produced in the private market by requiring businesses to accept and prioritize contracts mandated by the government. But the government must still pay market value for the performance of those contracts.

For example, if the president were to compel a private company to accept and prioritize a contract to build ventilators (a product specifically identified in the president’s order) to promote the “national defense,” the federal government would have to pay the company market value for those ventilators; the government could not simply require the ventilators be turned over for no charge.

Are there limits on the president’s authority to compel and prioritize contracts?

Yes, the “Priorities” Authority cannot be used to compel employment or to set wage or price controls.

Can companies be punished for failure to comply with government directions issued pursuant to the DPA?

Yes. There are criminal penalties for violations of the DPA, and the government may seek an injunction to prohibit continued violations.

What is the exposure to civil liability for private companies that are compelled to accept and prioritize government contracts?

Businesses that are required to execute prioritized contracts receive limited immunity for actions taken to comply with a presidential order. But the DPA does not confer blanket tort immunity, nor does it entitle businesses to indemnification from the government if a product causes injury to a third party (unless, of course, an indemnification provision is included in the government contract).

Can the president require businesses to expand production of certain materials or goods?

Yes. Besides compelling a business to accept and prioritize a government contract under the “Priorities” Authority, the DPA empowers the president to incentivize businesses to expand production under the “Expansion of Productive Capacity and Supply” Authority (Title III).

The financial incentives that are available to the president under this Authority include (1) direct loans to businesses — either with interest or without — that must be repaid and (2) loan guarantees, where the government guarantees a loan from a nonfederal lender and agrees to pay back all or part of the loan if the business defaults. For example, under the DPA, a company that manufactures masks, ventilators or hand sanitizer may be eligible for loans to increase production.

Whether any of the authorities under the DPA are actually exercised to respond to the COVID-19 crisis remains to be seen. However, having a general understanding of its scope and powers will better enable businesses to respond appropriately if and when any of those authorities are exercised in a manner that affects (or could affect) them.

Callan G. Stein, William M. Taylor, Nicholas A. Stawasz

Compliments of Pepper Hamilton LLP – a member of the EACCNY.