Defense of Charges Under the Defense Production Act During the Novel Coronavirus (COVID-19) Pandemic
The U.S. Department of Justice (DOJ) recently filed its first charges under the Defense Production Act in relation to the COVID-19 crisis. More similar cases will likely follow.
On March 18, 2020, President Trump issued an Executive Order invoking the Defense Production Act (DPA) in response to the novel coronavirus (COVID-19) pandemic. Among other things, the Executive Order gives the federal government the power to compel companies to produce personal protective equipment (PPE) and other necessary medica supplies, and it prohibits individuals and companies from hoarding these items.
In the weeks since President Trump invoked the Defense Production Act, a lot has changed. Our understanding of the virus and its potential effects has shifted dramatically, and companies across the country have been scrambling to meet the unprecedented demand for masks, respirators, face shields, gloves, sanitizers, and other essential items. In addition, the U.S. Department of Justice (DOJ) has launched its first novel coronavirus-related prosecution under the DPA.
Two Types of Federal Prosecutions Under the Defense Production Act
Given the nature of the Defense Production Act and the specific purposes for which it has been invoked in response to the COVID-19 crisis, we expect to see two primary types of cases being pursued against individuals and businesses. First, as the DOJ has shown already, it will be prosecuting individuals and businesses that hoard necessary supplies in order to sell them above market value. Second, we expect to see a significant number of cases in which companies that supply PPE, ventilators, and other items pursuant to the Defense Production Act are charged with government contract fraud.
1. Hoarding and Price Gouging During the COVID-19 Crisis
“If you are amassing critical medical equipment for the purpose of selling it at exorbitant prices, you can expect a knock at your door. . . . The Department of Justice’s COVID-19 Hoarding and Price Gouging Task Force is working tirelessly . . . with all our law enforcement partners to ensure that bad actors cannot illicitly profit from the COVID-19 pandemic.” These are the words of Attorney General William Barr, who is leading the nation’s fight against hoarding and price gouging during the COVID-19 crisis.
Attorney General Barr made this statement in a Press Release announcing the DOJ’s first major investigation of hoarding and price gouging under the Defense Production Act during the novel coronavirus pandemic. The same Press Release also quotes Peter Navarro, DPA Policy Coordinator and Assistant to the President, as stating:
“This is the first of many such investigations that are underway. . . . Our FBI agents and other law enforcement agencies are tracking down every tip and lead they get, and are devoting massive federal resources to this effort. All individuals and companies hoarding any of these critical supplies, or selling them at well above market prices, are hereby warned they should turn them over to local authorities or the federal government now or risk prompt seizure by the federal government.”
In other words, the DOJ, FBI, and other federal and state law enforcement agencies are actively targeting individuals and businesses suspected of hoarding PPE and other supplies. If authorities discover supplies that have been hoarded, in addition to seizing the supplies, the DOJ can also pursue criminal charges.
In a subsequent Press Release announcing the criminal complaint filed as a result of the DOJ’s first DPA hoarding investigation, the nation’s top law enforcement agency writes that it is seeking penalties including up to one year of federal imprisonment.
Importantly, individuals accused of hoarding and price gouging during the novel coronavirus pandemic can also face charges at the state level. While there is no federal statute that is specific to price gouging (which is why the DOJ is pursuing cases under the Defense Production Act), many states have price gouging laws that apply specifically during times of state and national emergencies. In addition to the DOJ and FBI, state Attorneys General are also actively targeting price gougers during the pandemic, and state-level prosecutions have the potential to lead to fines and incarceration as well.
2. Government Contract Fraud Under the Defense Production Act
In addition to hoarding and price gouging cases, the DOJ is also likely to pursue charges for government contract fraud against companies that engage in unlawful practices while supplying PPE, ventilators, COVID-19 test kits, and other necessary items under the Defense Production Act. Companies that enter into supply contracts with the federal government are subject to strict rules and regulations, and large companies have entire departments devoted to maintaining federal contract compliance. For companies with little or no federal government contracting experience, the call to immediately supply products under the DPA presents a significant compliance risk, and compliance deficiencies could lead to serious negative consequences.
Even when called upon to supply the federal government during the novel coronavirus pandemic, companies must still make compliance a priority. This means that they must quickly adopt necessary and appropriate policies and procedures with the assistance of federal compliance counsel. Some examples of potential allegations in federal government contract fraud cases involving the Defense Production Act include:
- Truth–in-Negotiations Act (TINA) Violations – Under the Truth-in-Negotiations Act (TINA), government contractors have a legal obligation to furnish complete and accurate cost and pricing information. Furnishing inaccurate or incomplete information in order to secure a higher price is a form of government contract fraud that can lead to steep penalties.
- Fraudulently Inflating the Cost of Labor or Materials – In addition to TINA violations, fraudulently inflating the cost of labor and materials can lead to prosecution under various other federal statutes as well. When calculating the cost of meeting demand pursuant to the Defense Production Act, companies must rely on accurate data, and they must ensure that they can substantiate the figures they provide.
- Delivering Substandard PPE, Ventilators, or Other Products – Delivering substandard products can also lead to fraud charges. Under federal government contracting rules, contractors must strictly adhere to their specifications. This is true in all circumstances, but it is especially important when manufacturing PPE, COVID-19 test kits, and other medical supplies. Companies that underperform, particularly when they have committed to meeting specific delivery thresholds, are likely to face heavy scrutiny.
- Substituting Inferior Materials in Violation of the Contract – Substituting inferior materials without an approved change order can result in liability for government contract fraud. Once a government contract is in place, the contractor must strictly comply with the terms of the agreement. Substituting inferior materials, particularly if the substitution has the potential to reduce the supplied product’s or test’s effectiveness, will often lead to fraud allegations.
- Quality Control (QC) Fraud – Similarly, even while timelines are significantly compressed during the novel coronavirus pandemic, government contractors supplying products pursuant to the Defense Production Act must still perform compliant quality control testing. Failing to perform quality control and misrepresenting quality control testing results are both common issues in federal government contract fraud cases.
- Improperly Allocating Costs to a Government Contract – When contracting with the federal government, companies must ensure that they are allocating all costs appropriately. This includes shared costs that should be allocated between the government and private clients. A common practice that gets many companies into trouble with the DOJ involves allocating additional costs to the federal government in order to increase their own profit margins or pass on savings to other companies.
- Utilizing Foreign Suppliers that are Ineligible Under the Defense Production Act – Under the Defense Production Act and other pertinent federal statutes, there are restrictions on government contractors’ use of foreign suppliers. Utilizing a prohibited foreign supplier under a DPA contract is another form of government contract fraud that has the potential to lead to termination of the contract and other penalties.
As you can see, there are numerous potential legal hurdles involved in supplying the federal government under the Defense Production Act. Even though companies that supply necessary items during the COVID-19 crisis will be providing an invaluable service to the country, they will not be immune from prosecution. For those charged with government contract fraud, presenting a strategic defense with the help of federal defense counsel will be essential to mitigating the consequences of any intentional or unintentional illegal practices.
Are You or Your Company Facing a Defense Production Act Investigation?
For individuals and companies that are targeted by the DOJ or the FBI under the Defense Production Act, a swift and effective response during the investigative process is crucial to avoiding federal charges. At Oberheiden P.C., our career federal defense lawyers, former DOJ prosecutors, and former DOJ and FBI agents have centuries of combined experience and a proven record of success in high-stakes federal cases. You can contact us 24/7 to discuss your case with a member of our defense team in confidence.
Discuss Your Defense Production Act Investigation with a Senior Federal Defense Attorney in Confidence
Our firm provides legal representation for individuals and companies facing federal law enforcement investigations nationwide. To speak with one of our senior attorneys about your Defense Production Act case in confidence, call 888-680-1745 or request a free case assessment online now.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.