The Korean-War era Defense Production Act ("DPA")1 has already loomed large in the federal response to the COVID-19 pandemic. 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, 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. Here is what you need to know.
In confronting the unprecedented COVID-19 pandemic, the outgoing administration invoked the provisions of the 70-year-old Defense Production Act ("DPA") to address a range of issues from production and distribution of personal protective equipment ("PPE") to food production. The incoming administration has already signaled its intent to utilize the DPA to accelerate the ongoing vaccination program. This paper will address the key provisions of the DPA and how they may affect those in the vaccination 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 Conflict 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, including B-24s at Willow Run during World War II).
The DPA, as amended, "provides the President 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
- 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" contracts5 —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 Departments of Homeland Security ("DHS"), Defense ("DOD"), and Health and Human Services ("HHS").
- 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; and
- 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.
How Potentially Expanded Use of the DPA May Impact Businesses in the COVID-19 Supply Chain
The President-elect 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 primary impact on COVID-19 supply chain businesses will be that you may become subject to DPA 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 Constitution.9
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.10
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.11 This is one of the few narrow exceptions to the general rule that you must accept priority-rated contracts, though companies should consult counsel to ensure a rejection on these grounds is appropriate.12
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."13 But the contractor must not "charg[e] higher prices or impos[e] different terms and conditions than for comparable unrated orders."14
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.15
Incentives Under and Penalties Related to the DPA
- 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.16
Limitations on Liability
DPA, by its terms, provides a shield against third-party claims arising from contracts breached in conformity with DPA priority.
Section 707 insulates contractors from liability that may arise from prioritizing priority-rated contracts above regular customers, such as if a contractor had to breach a contract with a regular customer in order to fulfill the priority-rated contract.17
- DPA provides shield against certain third-party claims arising from operations and manufacturing
If a federal agency requires you to continue to operate your facilities in the face of a local shutdown order, the 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 Conflict have suggested that DPA does not provide immunity for state tort liability,18 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.
- DPA provides antitrust immunity (civil and criminal) to certain government required/approved collaborations
- In addition to any new voluntary, agency-sponsored collaboration agreements that the next Administration may put into place, FEMA has already established a voluntary agreement under Title VII for the manufacture and distribution of critical healthcare resources necessary to respond to the pandemic. As of the date of this article, the FEMA contract is still open – business in the vaccine supply chain may already be invited or be eligible to participate in this agreement.19
- 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;20 (2) is developed in conjunction with the government; 21 and (3) is subject to ongoing governmental oversight.22 This allows companies to work together in response to COVID-19 in ways that could otherwise expose them to antitrust liability. For more detail on antitrust immunity under Section 708, please see here.
- Companies seeking to collaborate to aid the country’s response to the pandemic outside of government-sponsored voluntary agreements (and therefore ineligible for Section 708 antitrust immunity) may still gain insulation from antitrust prosecution by seeking an expedited Business Review Letter from the Department of Justice or the Federal Trade Commission. At the beginning of the pandemic, the DOJ and 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-crisis related Business Review Letter requests in 7 days. For more information on the DOJ's expedited Business Review Letter procedure, see here.
- Penalties for not complying with a DPA priority-rated contract can be severe. Penalties can include hefty fines and jail time for individuals.23 And as with government contracts, false statements in connection with reimbursement from federal funds can be treated as criminal fraud with substantial criminal penalties (18 U.S.C. § 1001 (false statements); 18 U.S.C. § 287 (false claims); 18 U.S.C. § 1031 (major fraud allegations)) and subject the entity to fines and treble damages under the False Claims Act (31 U.S.C. §§ 3729-3733).
The expanded use of DPA authority to mobilize and accelerate the immunization effort has the potential to disrupt existing business plans and commitments to meet the national emergency. 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.
1 Pub. L. No. 81-774 (1950), codified at 50 U.S.C. §§ 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 ("FPAS"), administered by the Departments of Agriculture, Energy, Health and Human Services, Transportation, and Commerce. FEMA, 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 ("HRPAS").
6 50 U.S.C. § 4511.
7 Id. §§ 4531-4534.
8 Id. § 4558
9 U.S. Const. amend. V; United States v. Winstar Corp., 518 U.S. 839 (1996).
10 Department of Health and Human Services, Health Resources Priority and Allocations System ("HRPAS"), 45 C.F.R. § 101.33(a) (2015), https://www.federalregister.gov/d/2015-17047/p-187.
11 Id. § 101.33(c)(2).
12 The other notable exceptions are: (i) 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)); (ii) 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)); (iii) 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 (iv) 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)).
13 Id. § 101.33(c)(1). The Health Resources Priority and Allocations System ("HRPAS") 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.
14 Id. § 101.33(a)(2).
15 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.").
16 50 U.S.C. §§ 4531-4534.
17 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.").
18 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).
19 FEMA, Meeting to Implement Pandemic Response Voluntary Agreement Under Section 708 of the Defense Production Act, 85 Fed. Reg. 86944 (Dec. 31, 2020).
20 44 C.F.R. § 332.2(b)(1)-(2).
21 d. § 332.2(c).
22 d. § 332.3; 50 U.S.C. § 4558(g).
23 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.").
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2021 White & Case LLP