President Trump Issues Executive Orders Under the Defense Production Act

COVID-19 Update

On March 18, President Donald Trump issued an Executive Order invoking the Defense Production Act (DPA) to “Prioritiz[e] and Allocat[e] Health and Medical Resources to Respond to the Spread of Covid-19.”1 The President followed up on this action with a second Executive Order on March 24 invoking the act to prevent “Hoarding of Health and Medical Resources.”

This briefing describes the DPA and the federal powers it authorizes, particularly the government’s ability to place priority orders for goods and services, and the impact the Executive Order may have on the government’s response to the COVID-19 pandemic.

While the DPA authorizes potentially sweeping powers, the Executive Orders themselves do little more than delegate and authorize the use of those powers, in some cases simply restating authority already granted by previous Executive Orders. The focus of activity under the DPA now shifts to federal agencies, which have only wielded the DPA to a very limited degree thus far.

Background; the “National Defense”

The DPA, first passed in 1950 and as subsequently amended, grants the President a broad set of authorities to influence domestic industry in the interest of national defense. It arose out of the war powers acts enacted during World War II.

The scope of the DPA is broad, and the term “national defense” is not limited strictly to military goods and supplies or items needed in order to repulse an invasion. The DPA is intended by Congress to be used to respond to “natural or man-caused disasters” and “to provide for the protection and restoration of domestic critical infrastructure operations under emergency conditions.”2 Response to a pandemic would fall under this broad definition.

Priority Performance Authority

The primary power conferred on the President under the DPA is the “priority” authority. This authority permits the President or his delegate:

to require that performance under contracts or orders (other than contracts of employment) 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 . . .

Essentially, this allows the federal government to place mandatory contracts or orders for critical materials, goods and services, and grants those contracts priority in fulfillment over other contracts.
Orders for goods and services placed under the DPA are known as “rated orders.”3 Rated orders are coded in priority order (with “DX” coded orders ranking above “DO” coded orders).4 To place a rated order, an authorized federal agency—in this case, the Department of Health & Human Services (HHS)5—issues a signed order to a supplier invoking the DPA, specifying the order’s priority rating and identifying the delivery date.6

Once a rated order is received, a supplier must accept it, regardless of any other rated or unrated orders previously accepted, unless one of several exceptions applies.7 For example, a supplier must reject an order if it cannot be filled by the delivery date or would interfere with other rated orders’ delivery dates, though the supplier must communicate and counteroffer earliest possible delivery dates. And there are several circumstances under which a supplier is permitted to reject an order. For example, rejections are permitted if the order is for an item not supplied or a service not capable of being performed.8

After acceptance, the supplier must schedule operations in order to timely meet the delivery date of a rated order. Internal production and delivery schedules need not be modified unless modification is needed to meet the delivery date.9 The DPA contains provisions to enable suppliers to issue priority orders to subcontractors throughout the supply chain and obtain assistance through special priorities in order to fill the main priority order.10

Priority orders placed under the DPA are paid for according to the supplier’s “regularly established terms of sale or payment,” and suppliers may not discriminate against priority orders “such as by charging higher prices or by imposing different terms and conditions than for comparable unrated orders.”11

The law contains a clause protecting suppliers from liability, declaring that “[a] person shall not be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with any provision of this part, or an official action, notwithstanding that such provision or action shall subsequently be declared invalid by judicial or other competent authority.”12 For example, a supplier can raise the need to meet a rated order as a defense to a breach of contract action brought for failure to fill an unrated order.13 But this immunity has not been extended to tort or products liability claims, nor does this clause require the government to indemnify a manufacturer for such claims.14

The federal government may not impose wage or price controls using DPA authorities without approval of a joint resolution of Congress.15 Nor can the government compel any individual person to act under a “contract of employment.”16

Willful violation of the DPA is a criminal act, punishable by up to a $10,000 fine or one year in prison, or both.17 The government may also seek a civil injunction to prevent violations.18

Allocation Authority

Title I of the DPA also grants the President or his delegate the authority 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.19

This provision grants the federal government the authority to control the general distribution of materials, services and facilities. The allocation authority is rarely invoked and has not been used since the end of the Cold War.20

The authority is used to allocate materials when there is an insufficient supply to satisfy national defense requirements that cannot be satisfied through the priorities authority, or when use of the priorities authority will cause a prolonged disruption in supply. It is not intended for rationing in the retail market.21

No federal agency may invoke the allocations authority unless the President has determined that the products to be allocated are “scarce and critical material essential to the national defense” and that the defense needs for these products “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.”22

Orders issued under the allocation authority are similar in form to those used for priority performance, and can require suppliers to set aside materials, direct manufacturers to change their use of specific materials, or allot specific quantities of materials for specific uses.23

Prevention of Hoarding

The federal government may designate certain materials as “scarce materials or materials the supply of which would be threatened by . . . accumulation.”24 Once a material is designated as scarce, no person may accumulate the material in excess of what is needed for the reasonable demands of business or personal use, or for the purpose of resale above prevailing market prices. Like the priority performance and allocation authorities, violation of an order under the hoarding authority is punishable by up to a $10,000 fine or one year in prison, or both.25

Financial Incentives

Title III of the DPA authorizes the federal government to take steps to strengthen domestic production capacity for critical materials. The government can issue loan guarantees and direct loans to reduce current or projected shortfalls of industrial resources, critical technology items or essential materials needed for national defense purposes.26 And it can issue purchase orders or commitments, make subsidy payments, or install and purchase equipment in order to protect the domestic industrial base and strengthen the supply chain.27

Each of these powers is limited by the availability of appropriations. The DPA itself authorizes and appropriates $133 million a year for activities under the DPA overall, and an additional $117 million for financial incentives under Title III.28 This year’s Consolidated Appropriations Act granted the Department of Defense an additional $64 million for DPA purchases.29

The President’s Executive Orders

The President’s two Executive Orders (the first regarding the priority performance and allocations authorities, the second on hoarding) do not actually activate the DPA directly, take any action to compel a supplier to produce anything, or prohibit hoarding, in response to the COVID-19 pandemic.

Instead, the first Executive Order authorizes the HHS Secretary to use the DPA to ensure “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.” This largely duplicates the Secretary’s existing authority or that already delegated to him, and can be seen more as a symbolic direction by the President than as a legally significant action.

Still, there are two legally significant elements to the first Executive Order. First, there is a finding 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 Act.” This finding means, implicitly, that the President has determined that these products are “scarce and critical material essential to the national defense” and that the defense needs for these products “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.”30 Such a finding is a prerequisite for the exercise of the allocations authority. Without it, the Secretary could exercise only the priority performance authority.

This first Executive Order delegates all authority “with respect to all health and medical resources needed to respond to the spread of COVID-19 within the United States” to HHS. Authority to issue orders under the DPA related to “health resources” is delegated to the Secretary of HHS.31 But presumably this delegation is intended to quash any jurisdictional disputes during the current crisis.

The second Executive Order delegates the President’s power to prevent hoarding under the DPA to the Secretary of HHS “to prevent hoarding of health and medical resources necessary to respond to the spread of COVID-19 within the United States.” But it does not actually prohibit hoarding itself.

Agency Action Under the DPA

The focus of any DPA action now falls to the Secretary of HHS and, by extension, the HHS Assistant Secretary for Preparedness and Response. These officials could begin to issue priority orders for needed equipment, such as respirators or ventilators, at market prices. Or they could issue orders limiting the hoarding of medical equipment and countermeasures.

FEMA Administrator Peter Gaynor told media on Tuesday, March 24, that the government plans to invoke the DPA to order 60,000 test kits, and will add “DPA language” into existing orders for respirators, presumably to convert them into rated orders.32

As diagnostics and therapeutics for COVID-19 are developed, the government could similarly place orders for those products or issue directives allocating any scarce raw materials needed to develop them. The government could also begin to issue orders for medical services from hospitals and other facilities—for example, to require facilities to deliver acute care services to COVID-19 patients rather than perform elective procedures. But it could not compel any specific medical professional to serve, as the law does not encompass contracts of employment.

One significant gap in the DPA is an understanding of how therapeutics ordered through the DPA would be priced. The statute requires only that goods and services be provided under “regularly established” terms of payment and at the same terms as comparable unrated orders. That framework may be sufficient for ordinary industrial goods, but it does not answer questions as to how prescription drugs would be priced, given the complexity of list prices, wholesale prices, subsidized government purchases and rebates in that market.

It does seem that a DPA price could potentially be excluded from the Medicaid Best Price calculation, as best price does not take account of any prices charged to the public health service, prices under the General Services Administration Federal Supply Schedule, or “depot prices and single award contract prices, as defined by the Secretary, of any agency of the Federal Government.”33 Provided HHS used any of these mechanisms, such as a rated order issued for supply to the public health service, to acquire drugs through the DPA, the price charged under the DPA order might be excluded from Medicaid Best Price.

1 https://www.whitehouse.gov/presidential-actions/executive-order-prioritizing-allocating-health-medical-resources-respond-spread-covid-19/.

2 50 U.S.C. 4502.

3 45 C.F.R. § 101.31.

4 45 C.F.R. § 101.33.

5 Authority to issue orders under the DPA related to “health resources” is delegated to the Secretary of HHS. Executive Order 13603 (March 16, 2012).

6 45 C.F.R. §101.32.

7 45 C.F.R. § 101.33.

8 45 C.F.R. § 101.33(b-c).

9 45 C.F.R. § 101.34(a).

10 45 C.F.R. § 101.35; 45 C.F.R. § 101, Subpart D.

11 45 C.F.R. § 101.33.

12 50 U.S.C. § 4557; 45 C.F.R. § 101.90.

13 E. Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976) (airplane manufacturer required to fill DPA orders was not liable to airline for late delivery of airplanes).

14 Hercules Inc. v. United States, 516 U.S. 417, 427, 116 S. Ct. 981, 987, 134 L. Ed. 2d 47 (1996); In re Agent Orange Prod. Liab. Litig., 597 F. Supp. 740, 843 (E.D.N.Y. 1984), aff’d sub nom. In re Agent Orange Prod. Liab. Litig. MDL No. 381, 818 F.2d 145 (2d Cir. 1987).

15 50 U.S.C. §4514.

16 50 U.S.C. § 4511(a)(1).

17 45 C.F.R. § 101.74(a).

18 45 C.F.R. § 101.74(b).

19 50 U.S. Code § 4511(a).

20 DPA Committee Report to Congress (June 24, 2019) (available at https://www.fema.gov/media-library-data/1582898704576-dc44bbe61cce3cf763cc8a6b92617188/2018_DPAC_Report_to_Congress.pdf).

21 45 C.F.R. § 101.50.

22 50 U.S.C. § 4511(b).

23 45 C.F.R. § 101 Subpart E.

24 50 U.S.C. § 4512.

25 50 U.S.C. § 4513.

26 50 U.S. Code §§ 4531(a), 4532(a).

27 50 U.S.C. §§ 4517-18, 4533.

28 50 U.S.C. § 4561.

29 P.L. 116-93.

30 50 U.S.C. § 4511(b).

31 Executive Order 13603 (March 6, 2012).

32 https://www.cnbc.com/2020/03/24/white-house-to-use-defense-production-act-to-procure-test-kits-fema-chief-says.html?utm_source=dlvr.it&utm_medium=twitter.

33 SSA 1927(c)(1)(C)(i).

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