Defense Production Act: Four Takeaways for Companies That Make or Sell Medical Personal Protective Equipment and Related Commodities

What is the DPA?

The Defense Production Act (DPA), enacted in 1950 as a response to the Korean War, allows for the President to shape the domestic industrial base for national defense preparedness, which includes emergency preparedness activities. The three key powers under the DPA are prioritization, allocation, and incentives.

• First, the DPA authorizes the President to require businesses to accept and prioritize contracts (either with the US government directly or with a higher tier contractor supporting the US government) for materials and services necessary for national preparedness. This is typically accomplished by issuing “rated orders” under the Defense Priorities and Allocations System. 
• Second, the DPA allows the President to allocate materials, services, and facilities as deemed necessary and appropriate by, for example, ordering the domestic industrial base to increase production and supply of specifically designated scarce or critical materials. Further, the President can use the authorities in the DPA to prohibit hoarding and price gouging of scarce or critical materials. 
• Third, to support these efforts, the DPA authorizes the President to provide incentives, such as loans, loan guarantees, and purchase commitments. 

Critically, many conditions of the DPA are waived in national emergencies, and President Trump declared COVID-19 a national emergency on March 18, 2020. This gives the President even broader authority to use the DPA.

Most authorities under the DPA can be delegated, and in the case the COVID-19 national emergency the President has delegated certain authorities to the Secretary of the Department of Health and Human Services (DHHS) as well as the Secretary of the Department of Homeland Security (DHS) through the course of several Executive Orders (EO) and statements.

How has the administration used the DPA in response to the COVID-19 crisis? 

With regards to the DPA and COVID-19, the President has issued the following EOs, memoranda, and statements:

• March 18, 2020. President Trump issued EO 13909 (Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of COVID-19). The EO states that “health and medical resources,” including personal protective equipment (PPE) and ventilators meet the criteria of “critical and strategic materials” under the DPA. 
• March 23, 2020. President Trump issued EO 13910 (Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19). The EO authorizes DHHS to take action to prevent hoarding of personal protective equipment and sanitizing and disinfecting products. Specifically, DHHS can limit the accumulation of these commodities, and designate any material as a scarce material to prevent hoarding and price gouging. 
  • Under the authority of the EO, DHHS issued a notice on March 30, 2020 (but effective March 25, 2020), designating 15 categories of health and medical commodities as “scarce materials.” 
• March 27, 2020. The President issued EO 13911 (Delegating Additional Authority under the Defense Production Act with respect to health and medical resources to respond to the spread of COVID-19), which delegates authority to DHHS and DHS to make and guarantee loans and other financial incentives to expand the domestic industrial base to supply medical resources. Additionally, DHS is delegated with prioritizing the allocation of medical resources, including “controlling the distribution of such materials in the civilian market.” 
• March 27, 2020. The President issued an order under the DPA directing DHS “to require [company] to accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate.”
• April 2, 2020. President Trump issued an order under the DPA directing DHS through FEMA to use the authority of the DPA to obtain the number of N-95 respirators that FEMA deems necessary from a specific company.
• April 2, 2020. President Trump issued an order under the DPA directing DHHS in consultation with DHS to use the DPA “to facilitate the supply of materials to the appropriate subsidiary or affiliate of the following entities for the production of ventilators: [specified companies].”
• April 3, 2020. President Trump issued a memorandum (Allocating Certain Scarce or Threatened Health and Medical Resources to Domestic Use), which authorizes DHS through the Federal Emergency Management Agency (FEMA) to use the authority of DPA §101 to “allocate to domestic use as appropriate” five of the scarce materials identified by DHHS in its March 25th notice. 

What is the impact of the Administration’s DPA-related orders and memoranda?

As we are reporting on an ongoing basis, countries worldwide are restricting the export of medical personal protective equipment under local laws and regulations. The goods subject to these restrictions are generally the same items DHHS has now designated as “scarce materials.” To date, the United States has not implemented similar regulatory measures.

However, as noted above, the US Administration is now taking actions through the DPA in relation to “scarce materials” that ultimately may mirror other countries’ export restrictions.

Hoarding and Price Gouging: The President’s issuance of EO 13902 and the actions of DHHS means that DPA §102 is in effect. That provision provides that “no person shall accumulate (1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices, materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation.” In other words, hoarding or price gouging in resale (domestic or export) for the PPE that has been designated scarce by DHHS is illegal.

Use of DPA to Restrict Exports: The Administration has not officially used the DPA to restrict exports in any published order or EO. However, the possibility looms and other countries have expressed concerns. On April 4, 2020, Canada’s prime minister Justin Trudeau stated that “it would be a mistake to create blockages or reduce the amount of back-and-forth trade of essential goods and services, including medical goods, across our border.” Trudeau’s concern stems from the fact that Canada does not manufacture any of its own N-95 masks.

FEMA Can “Allocate” PPE to “Domestic Use” as “Appropriate”: While the DPA does not directly address exports of domestic production, DPA §101 does allow the President “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” (emphasis added). Further, under the Act the President can control the distribution of specified materials in the civilian market if essential to national defense and if the requirements for national defense cannot otherwise be met. The President delegated this authority to DHS and DHHS in his March 27 EO.

The President’s April 3 EO authorized DHS through FEMA to use its delegated authority under DPA §101 to “allocate to domestic use as appropriate” five of the scarce materials. [1] On April 3, 2020, DHHS Secretary Alex Azar issued a statement regarding this use of the DPA, stating “President Trump’s latest orders under the [DPA] support HHS and FEMA’s efforts to ramp up ventilator production and ensure supplies of PPE that have been the target of hoarders—especially N95 respirators—go to America’s heroic healthcare workers rather than being exported.” 

Thus, it is clear that DHS through FEMA now has the authority to “allocate to domestic use” the five scarce resources, imposing an effective US export control on those items, though it is still unclear how this control will be implemented. At the time of this writing, DHS has not issued a broad order of this nature, and it is not clear whether DHS may decide to use its authority in a more narrow fashion.

What about enforcement? 

We are all familiar with penalties possible under the Export Control Reform Act (ECRA), however, if exports of PPE are restricted under the DPA, then DPA penalties apply to violations of those restrictions, rather than penalties under the Export Administration Regulations and ECRA. Violations of the DPA are actually financially less harsh than ECRA, but all penalties are criminal – willful violations of the DPA may result in a fine of $10,000 or imprisonment for one year.

In a memorandum dated March 24, 2020, the Office of the Attorney General indicated that DOJ is responsible for enforcing the DPA as it applies to hoarding or price gouging items identified as scarce or threatened materials by DHHS. In the same memorandum, the DOJ created a task force to address enforcement issues – the COVID-19 Hoarding and Price Gouging Task Force, and enforcement actions are already underway. For example, on April 2, 2020, DHHS and DOJ announced a bust of PPE and other medical supplies hoarding in New Jersey by the DOJ COVID-19 Hoarding and Price Gouging Task Force. As part of that operation, DHHS redistributed the medical supplies to the New Jersey Department of Health, the New York State Department of Health, and the New York City Department of Health and Mental Hygiene. In its announcement, DHHS indicated it will pay fair market value to the owner of the medical supplies.

While DOJ is responsible for enforcing hoarding and price gouging, it is unclear if it will also be responsible for enforcing export “violations” under the DPA. However, assuming such violations are criminal, DOJ will be involved. DOJ regularly partners with US export and import agencies on criminal enforcement actions. In the event of export restrictions under the DPA, enforcement will likely fall, at least in part, to Customs and Border Protection (CBP). CBP has broad authority to seize merchandise that is being exported in violation of the law.

What does this all mean for exporters?

Manufacturers, resellers, distributors, and brokers of medical supplies identified as scarce by DHHS and subject to US jurisdiction should tread carefully in any export of any of these materials. We have four key takeaways.

1. The DPA prohibition on the hoarding and price gouging of PPE is already in effect and violations can evidently lead to confiscation and redistribution of the PPE in question. 
2. While most companies are not currently legally prohibited from exporting the PPE, they should prepare for a possible prohibition on export in the near future. The Administration has set the stage for future export restrictions on PPE and other designated medical supplies.
3. Going forward with exports of PPE and medical equipment may draw the attention of DHHS and DHS as well as the President, potentially spurring an entity direct order under the DPA or triggering broader restrictions on export. 
4. Finally, given the totality of the COVID-19 pandemic, companies may be risking adverse publicity from continuing exports of designated medical equipment. 

Ultimately, we will need to wait and see what further transpires under the DPA in relation to export restrictions. We will be monitoring future actions and will send out updates, but do not hesitate to contact any member of the International Trade or Government Contracts team at Arent Fox with questions.

[1] The five scarce resources are:

a) N-95 Filtering Facepiece Respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates;

b) Other Filtering Facepiece Respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, P100), including single-use, disposable half-mask respiratory protective devices that cover the user’s airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level per 42 CFR 84.181;

c) Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges;

d) PPE surgical masks, including masks that cover the user’s nose and mouth and provide a physical barrier to fluids and particulate materials; and

e) PPE gloves or surgical gloves, including those defined at 21 CFR 880.6250 (exam gloves) and 878.4460 (surgical gloves) and such gloves intended {sic}.