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January 22, 2021

Expanded Use of the Defense Production Act and Focus on Building the Domestic Supply Chain: What Companies Need to Know

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Introduction

In the first full day of his administration, President Biden issued 10 executive orders to serve as the cornerstone of what the Administration is calling the "National Strategy for the COVID-19 Response and Pandemic Preparedness." Aimed at, among other things, expanding testing and accelerating the administration of the vaccine, the executive orders include in their authority the potential for continued use of the Defense Production Act of 1950 (DPA) to require the manufacture and supply of equipment and other supplies needed for the federal government's COVID-19 response. We have previously addressed the reliance on the DPA by the Trump Administration (see previous Advisories here, here and here) and expect that the Biden Administration will seek ways to further use the DPA to accelerate COVID-related supply chains. The Biden Administration also focuses on the country's reliance on foreign-made medical products for pandemic response and identifies several possible measures to increase domestic production.

President Biden's Executive Order on a Sustainable Public Health Supply Chain

The President's new "Executive Order on a Sustainable Public Health Supply Chain" directs the Secretary of State, the Secretary of Defense, the Secretary of Health and Human Services, the Secretary of Homeland Security, and the heads of appropriate executive departments and agencies, in coordination with the newly designated COVID-19 Response Coordinator, to review and assess "the availability of critical materials, treatments and supplies needed to combat COVID-19 (pandemic response supplies), including personal protective equipment (PPE) and the resources necessary to effectively produce and distribute tests and vaccines at scale." To the extent these agencies identify "shortfalls in the provision of pandemic response supplies," the heads of the relevant agencies are instructed and authorized by the President to "take appropriate action using all available legal authorities, including the Defense Production Act, to fill those shortfalls as soon as practicable by acquiring additional stockpiles, improving distribution systems, building market capacity, or expanding the industrial base." Additionally, the COVID-19 Response Coordinator is tasked with submitting a recommendation to President Biden on whether additional use of the Defense Production Act, by the President or relevant agencies, would be helpful.

Guidance from the Biden Administration suggests that the DPA may be used to ramp up production of "critical supplies" including N95 masks, isolation gowns, nitrile gloves, PCR sample collection swabs, test reagents, pipette tips, laboratory analysis machines for PCR tests, high-absorbency foam swabs, nitrocellulose material for rapid antigen tests, rapid test kits, and all the necessary equipment and material to accelerate the manufacture, delivery, and administration of COVID-19 vaccine.

The Executive Oder also addresses the pricing of pandemic supplies. In particular, it directs the Department of Health and Human Services to consider whether President Trump's March 2020 Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19 should be modified. Under that order, the accumulation of excess supplies for the purpose of resale at above-market prices is unlawful. President Biden's Order also directs HHS and the Department of Defense to determine whether reasonable pricing clauses and other tools should be used to address the pricing of pandemic supplies.

In addition to these short term measures, the Order begins a process of developing a long-term strategy for securing a reliable supply chain for products for future pandemics and biological threats. The Order directs departments and agencies to prepare a strategy, within 180 days, that will include: mechanisms to respond to emergency supply needs of state and local governments; an analysis of the role of foreign supply chains in America's pandemic response and options for improving global coordination; mechanisms to ensure supply chain redundancies; the use of federal and military stockpiles to provide pandemic supplies; consideration of public/private partnerships and federal investments in "latent manufacturing capacity;" and a multi-year implementation plan for pandemic supplies.

What Does It Mean To "Use" the DPA?

The DPA is a Cold War-era law intended to ensure that the needs of national defense are given priority by US industry. It gives the President a broad set of authorities to manage the US industrial base to provide the government all essential materials and goods needed for the national defense. Through a series of Executive Orders and administrative actions, the DPA authority has been delegated through various agencies, including the Department of Defense, Health and Human Services, and Homeland Security (primarily through the Federal Emergency Management Agency (FEMA)).

The DPA provides two key authorities. The first is to issue "rated orders" for supplies critical to national defense, which must (with limited exception) be accepted and prioritized over non-rated orders. The second is to issue "allocation orders" that direct industrial allocation of resources such as materials, services and facilities.

"Priority orders" (often called "rated" orders) allow the government to issue orders to any US company that usurp any other outstanding orders, provided that the government accept the commercial terms on which the company offers the relevant product (and the company actually does make and sell the ordered product). With very few exceptions, companies that receive priority orders not only have to accept them, but they in turn must place rated orders with their entire supply chain necessary to meet the government's order. This is, in effect, a soft seizure by the government of an entire supply chain.

The government has also begun aggressively using "allocation orders" during the pandemic, including by requiring companies to set aside production capability, and even ordering that certain products not be exported but sold only domestically.

While there are certain procedural requirements that must be followed for DPA orders to be effective, the bottom line is that companies have very little recourse to reject DPA orders. Companies not directly subject to DPA orders but affected by them have even less recourse: the DPA generally provides a liability shield on companies that are subject to DPA orders, and there is no clear way that other companies (such as customers of companies subject to DPA orders that have had their orders pushed to the back of the line) have any basis to get compensated for any impact on their own production because of the impact of a DPA order on their supply chain.

What Is the Significance of the Strategy for Securing a Reliable Supply Chain?

Even before the COVID-19 pandemic, there was bipartisan concern regarding the country's reliance on foreign-made drugs and medical devices. The concern focused on national security, product quality, the potential for shortages of critical products, and the loss of domestic manufacturing jobs. Senators and congressmen introduced bills to address the issue in several ways, including "Buy American" procurement policies and grants and tax credits to encourage domestic production. President Trump issued an executive order requiring agencies to purchase certain essential medical products from US sources. As a candidate, President Biden issued a plan that included using Biomedical Advanced Research and Development Authority to fund domestic drug production, implementing revisions to the tax code, and establish domestic manufacturing requirements for federal procurement contracts.1

The new executive order's identification of public/private partnerships and federal investments in latent manufacturing capacity as possible tools may be a first step in a broader initiative to further develop the domestic manufacturing supply chain. Future steps could include federal procurement preferences for domestic products and the availability of grants, loans, and tax incentives to build domestic facilities. Although the executive order is limited to products used in pandemics and to counteract biological threats, it could set a template for broader action in the future.

Conclusion

The "Executive Order on a Sustainable Public Health Supply Chain" issued by President Biden makes clear that continued and likely broadened reliance on the DPA will be invoked in support of this administration's COVID-19 response. As noted in our previous advisories on the DPA, companies must be careful to respond to the receipt of any DPA order immediately. If a DPA order cannot be satisfied by the company, it should fully document the impediments and promptly communicate those reasons to the issuing agencies. Companies should maintain detailed, comprehensive records relating to all DPA orders for at least three years and such records should sufficiently detail compliance with the DPA in the event of a future audit or investigation.

More importantly, companies that have supply chains that may be touched by the scope of the new executive order (for example, companies that rely on suppliers that also supply PPE, vaccine materials, etc.) should begin preparing now for the possibility that they will have delays and shortages to deal with as the DPA is used to accelerate vaccine production and other COVID-19 response at the expense of other economic activity.

Companies should also closely monitor the new Administration's strategy to increase domestic manufacturing capacity of critical medical products. Changes to federal procurement policy could have significant effects on the industry. There may also be opportunities for federal funding and other incentives for domestic manufacturing.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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