Coronavirus and the Defense Production Act: What It Might Mean for Your Business

On March 13, 2020, the federal government released its COVID-19 Response Plan. Within the plan is a section addressing measures the government could take to ensure that private companies that provide critical supplies to the government remain viable. On March 18, President Trump announced at a White House briefing that he would invoke the Defense Production Act of 1950 (DPA) which could have profound effects on government contractors. This alert provides a brief overview of those effects and suggestions for contractors to mitigate them.

The purpose of the DPA is to give wide authority to the president to control and direct national economic policy. It grants to the president an “array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base.”¹ “National defense” is broadly defined in the DPA to include “emergency preparedness activities conducted pursuant to 42 U.S.C. §§ 5195 et seq. and critical infrastructure protection and restoration.”² National defense further includes “all those activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population…”³ From these definitions it is clear that the coronavirus falls within the threats to national security that the DPA was designed to address.

Upon invocation of the DPA, one possible result is that the United States Department of Health and Human Services could begin issuing rated orders for “health resources.”⁴ A rated order requires a government contractor to prioritize that contract above all other contracts. With a few limited exceptions, contractors are required to accept rated orders.⁵ Additionally, the government can require that a contract between two private parties be prioritized if that work is necessary to complete a rated order.⁶ Speed is essential when a contractor receives a rated order. Depending on the classification of the order a contractor must respond within either 10 or 15 working days.⁷ Needless to say, receipt of a rated order will require the contractor to alter its production schedule and—possibly—cause it to breach other, nonrated contracts. The DPA affords the contractor protections against third-party lawsuits for breach of contract, but that protection is limited only to breach of contract.⁸

If a rated order changes the requirements of an existing contract, the contractor should be able to recover some of its additional costs pursuant to the “Changes” clause found in most government contracts. Since the main purpose of the DPA is to strengthen the domestic industrial base, one would assume that the government will provide the necessary funding to ensure contract performance. However, it is unlikely that a contractor would be able to recover damages for work that it lost or was unable to perform due to its forced prioritization of the rated order. 

When a contractor receives a rated order from the government, it should immediately contact its counsel to determine how best to respond. If a contractor does not comply with the terms of a rated order, it faces possible fines and imprisonment.9 When the government invokes the DPA, it is very serious. Contractors should be just as serious in their responses.

Notes

1. 50 U.S.C. § 4502(a)(4).

2. 2 50 U.S.C. § 4552(14).

3. 3 42 U.S.C. § 5195a(a)(3).

4. 4 45 C.F.R. § 101.20.

5. 5 15 C.F.R. § 700.13.

6. 6 15 C.F.R. § 700.3.

7. 7 15 C.F.R. § 700.13(d)(1).

8. 8 50 U.S.C. § 4557.