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What Does President Trump’s Invocation of the Defense Production Act Mean for Businesses in the U.S.?

Defense Production Act and U.S. Businesses

The Defense Production Act is a Federal Law that Authorizes the President to Direct Companies to Supply Needed Products in Times of Crisis

On March 18, 2020, President Trump issued an Executive Order invoking the Defense Production Act of 1950 (the “Act”). Enacted in response to the Korean War, the Defense Production Act was originally intended to ensure the availability of necessary military and medical supplies during wartime. Since its enactment, the Defense Production Act has been invoked multiple times in various capacities, most recently (prior to the novel coronavirus pandemic) by President Trump in order to provide critical technology in the space industrial base.

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Dennis A. Wichern

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The March 18 Executive Order states, in part, as follows:

“[W]hile the Federal Government, along with State and local governments, have taken preventive and proactive measures to slow the spread of the [novel coronavirus] and to treat those affected, the spread of COVID-19 within our Nation’s communities threatens to strain our Nation’s healthcare system. To ensure that our healthcare system is able to surge capacity and capability to respond to the spread of COVID-19, it is critical that all health and medical resources needed to respond to the spread of COVID-19 are properly distributed to the Nation’s healthcare system and others that need them most at this time.

“Accordingly, I [President Trump] find that health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators, meet the criteria specified in section 101(b) of the [Defense Production] Act (50 U.S.C. 4511(b)). Under the delegation of authority provided in this order, the Secretary of Health and Human Services may identify additional specific health and medical resources that meet the criteria of section 101(b).”

Section 101(b) of the Defense Production Act, Explained

For businesses that may be impacted by the President’s invocation of the Defense Production Act in response to the novel coronavirus (COVID-19) pandemic, the key language of the Act appears in Section 101(b). However, in order to understand the context of this section, it is first necessary to examine Section 101(a):

(a) Allocation of Materials, Services, and Facilities. The President is authorized (1) to require that performance under contracts or orders . . . which he deems necessary or appropriate to promote the national defense shall take priority over performance under any other contract or order, and, for the purpose of assuring such priority, to require acceptance and performance of such contracts or orders in preference to other contracts or orders by any person he finds to be capable of their performance, and (2) to allocate materials, services, and facilities in such manner, upon such conditions, and to such extent as he shall deem necessary or appropriate to promote the national defense.”

In plain English, under Section 101(a), invocation of the Defense Production Act allows the President (or his designee—in the present circumstances, the Secretary of Health and Human Services) to require companies to prioritize their government contracts, and it also requires non-government-contractors to accept “orders” issued by the government if the government determines them capable of performing. Companies must prioritize these orders as well. Separately, Section 101(a) of the Defense Production Act authorizes the President to “allocate materials, services, and facilities” as he deems necessary in order to defend the country. The full extent of the President’s authority under this broad provision is not entirely clear; and, at present, it appears that the March 18 Executive Order primarily seeks to invoke the “contracts or orders” provisions appearing earlier in Section 101(a).

This brings us to Section 101(b). This section begins with the proviso that, “[t]he powers granted in this section shall not be used to control the general distribution of any material in the civilian market . . . .” However, it goes on to establish a broad exception which has the potential to be relevant within the context of the novel coronavirus (COVID-19) pandemic. Under Section 101(b), the President can use the powers granted in Section 101(a) to control distribution in the civilian market if:

  • “[S]uch material is a scarce and critical material essential to the national defense, and
  • “[T]he requirements of the national defense for such material cannot otherwise be met without creating a significant dislocation of the normal distribution of such material in the civilian market to such a degree as to create appreciable hardship.”

As quoted above, the March 18 Executive Order states that, “[the] health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators, meet the criteria specified in section 101(b).”

How Does the Defense Production Act Work in Practice for Companies that are Asked to Comply?

For companies that supply ventilators, face masks, and any other products that may ultimately prove to fall within the scope of President Trump’s March 18 Executive Order, how does the invocation of the Defense Production Act work in practice?

One possibility is for the government to issue contracts for the supply of critical necessary supplies and materials. As time permits, companies may have the opportunity to negotiate these contracts with the government, and companies can seek (or the government may offer) incentives and protections such as direct loans, loan guarantees, and immunity from certain types of prosecution (i.e. prosecution for antitrust violations resulting from collaboration or cooperation between companies that would normally be competing for market share). However, another possibility is that the federal government will simply assert the powers granted in Section 101(a) of the Defense Production Act (as extended to the civilian market under the Section 101(b) exception) in order to require companies to produce needed materials and supplies.

What Do Companies Need to Know about Contracting with the Federal Government?

As with all of the various business and corporate aspects of responding to the novel coronavirus (COVID-19) pandemic, while these are unprecedented times that call for an unorthodox approach, companies still need to remain focused on maintaining compliance and mitigating their risk of liability. Supplying critical products to the federal government and/or making critical materials available pursuant to a federal government contract is no exception—even when companies are called upon to serve the nation under the Defense Production Act.

With regard to government contract compliance in particular, there is a lot that companies need to know. While companies that currently contract with the government should have comprehensive compliance programs in place already, they will want to review these programs quickly but carefully to ensure that they are adequate—particularly if they will be ramping up their production in response to the invocation of the Defense Production Act. For companies that are new to federal government contracting, quickly establishing appropriate compliance controls will be critical, as government contractors can face steep penalties for various forms of government contract fraud, including:

  • Truth-In-Negotiations Act (TINA) violations
  • Bid fraud and bid rigging with third-parties
  • Inflation of labor and material costs
  • Delivering substandard products or services
  • Substitution of inferior materials
  • Failing to conduct adequate quality control (QC) testing or misrepresenting QC results
  • Improperly allocating costs to federal government contracts
  • Paying unlawful “bribes” or “kickbacks”
  • Utilizing foreign third-party suppliers that are ineligible under the Defense Production Act

While companies may feel pressured to act quickly in response to government contract requests, and while company leaders may feel obligated to do whatever is necessary in order to protect their shareholders and employees, the importance of compliance cannot be overlooked. Even if the federal government’s priorities are focused elsewhere during the novel coronavirus (COVID-19) pandemic, when the dust settles, the U.S. Department of Justice (DOJ) and other agencies will be reviewing government contractors’ bids, contract performance, and billings for legal and regulatory violations.

So, while companies need to be prepared to respond if and when they get the call under the Defense Production Act, they need to be prepared to establish compliance as well. This starts with implementing appropriate internal policies and procedures, and it also includes various ongoing monitoring, auditing, and other compliance efforts. Ultimately, the key to avoiding unwanted federal scrutiny is to maintain appropriate and comprehensive documentation, and to ensure that all relevant personnel are adequately trained with regard to their respective roles in maintaining compliant business operations.

Oberheiden P.C. | Compliance Counsel for Federal Government Contractors and Other Companies During the Novel Coronavirus Pandemic

Oberheiden P.C. is a team of senior attorneys and former federal agents who advise government contractors and other companies with regard to all aspects of statutory and regulatory compliance. If you have questions about your company’s obligations under the Defense Production Act during the novel coronavirus (COVID-19) pandemic, we can explain what you need to know and help you quickly implement an effective compliance program.

Based in Dallas, Texas, we have attorneys and consultants stationed nationwide, and we are actively representing companies in a broad range of industries with regard to coronavirus-related legal and compliance matters. To speak with a member of our federal compliance team in confidence, please call 888-680-1745 or contact us online today.

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