President Trump invokes the Defense Production Act in response to COVID-19: What it means to you?

President Trump invoked the Defense Production Act (the Act) through executive order on March 18, 2020. The invocation of this emergency measure is currently targeting the medical equipment and supply industries. How could the Act impact your company, what opportunities may exist, and what other things should you be thinking about?

Companies that manufacture and sell medical equipment, supplies and devices, as well as companies that provide healthcare and healthcare-related services, and operate in the pharmaceutical and biotech industries could all receive covered orders. Other industries could also be impacted, particularly if certain types of supplies become scarce, or other threats to our national security emerge. These companies should stand ready and understand their obligations. 

Important considerations and questions

1.     My company just received a rated order. How do we respond?

You should review the order, follow the guidance outlined further below and the information contained in the order, review the associated regulations and law, and contact the procuring agency in accordance with these requirements.   

If accepted, be certain to fulfill the order in accordance with the requirements. Understand the impacts to other non-rated and commercial orders, and communicate proactively with these customers.   

2.     I believe my company can help the Government respond to the crisis? Where do I start, and how do I contact the right people to offer our products or services?  

There are a wide variety of methods to reach potential government customers. A number of contract vehicles exist that allow the Government (both federal and state and local governments in times of national emergency) to procure commercial items, many of them established specifically for medical supplies and devices, and also for pharmaceuticals. A number of dollar thresholds and other rules and regulations that apply to Federal Government procurements have been relaxed to allow the Government easier access to critical products and services. If you believe you can help, finding the right person at the right agency is likely the best first step. The White House recently established a web-based survey, so that companies who can meet some of the most pressing needs can respond and signal their ability to provide assistance.  

Understanding the Government buyer’s preferred methods for purchasing, and putting the right contract vehicles in place may be an important next step. Some of these things can take significant time and effort, and a phased approach that allows for immediate access, but also provides for a long term solution may be necessary. It is also important to note that most arrangements with the Government include some obligations related to pricing, accounting, reporting, contract performance, or in other areas that companies must understand and abide by.   

3.     The Act provides that the President can provide appropriate incentives to develop, maintain, modernize, restore, and expand the productive capacities of domestic sources for critical components, technology items, materials and industrial resources essential for the national security strategy of the United States. Baker Tilly was seeing a trend to “on-shore” production in some industries before to the COVID-19 pandemic struck. With the potential for enhanced Federal Government and state-level incentives, broad concern about the supply chain, cybersecurity, and counterfeit parts issues, in addition to a host of other concerns, the potential for more rapid and frequent occurrences of this phenomenon seem likely.     

4.     The Act allows the Government to stockpile critical components. We understand that the Government had stockpiled some supplies prior to this crisis. These supplies may have included personal protective equipment, ventilators, and many other types of equipment that could be important during a national emergency, a time of war, a terrorist attack, or even during a pandemic like the one we are currently experiencing. It seems likely that the Government will procure and ultimately stockpile this kind of equipment throughout the current crisis and beyond, so that it stands ready to respond in the event of future emergencies. It would be wise for companies who can meet the Government’s need to get engaged now. A wide array of avenues exist for accomplishing this. Understanding the Federal Government contracting landscape, the potential buyers, the most important contract vehicles, and the associated compliance obligations will all be vitally important for companies looking to help the Government meet its needs.   

5.     The Act provides a wide ranging set of powers and provides authorization and instruction for the Executive, Legislative and Judicial branches of government in a variety of areas across approximately 60 pages. For a full understanding of all that it bestows, we recommend reviewing the Act in the US Code of Federal Regulations.. We provide a brief primer below. 

Defense Production Act Primer

The Defense Production Act is a federal law that was enacted in 1950, in response to the Korean War. The Act addresses a wide array of issues, and includes a number of different provisions. The Defense Priorities and Allocation System (DPAS) regulations associated with the law are found in the US Code of Federal Regulations. Some of the most important portions of the Act for purposes of this discussion include:

1. Authorization for the President to require performance under contracts or orders (other than contracts for employment) which are deemed necessary or appropriate to promote the national defense. 
2. Contracts or orders issued pursuant to the Act, and any associated materials, services or facilities are required to take priority over any other contract or order.    

Many companies already hold contracts that are covered by DPAS and include the associated contract clauses. Medical equipment and supply companies that hold these contracts should be aware of them, and they should also be aware that they may be issued rated orders under these contracts. Companies are required to accept rated orders and fulfill them by the required delivery or performance date, regardless of the sequence in which they were received or whether they currently have any unrated or commercial orders. Companies may not discriminate against rated orders and charge higher prices or negotiate non-standard terms. Unless otherwise directed, companies should reject DPAS rated orders if they are unable to fill them by the delivery date, if acceptance would interfere with delivery of any previously accepted rated orders, or if they are unable to fill all rated orders of equal priority status received on the same day. 

Unless otherwise directed, contractors may reject rated orders under the following circumstances:

• The ordering agency is unwilling or unable to meet regularly established terms of sale or payment;
• The order is for an item or service the contractor does not provide;
• The order is for an item produced, acquired, or provided only for the contractor's own use and for which no orders have been filled for two years prior to the date of receipt of the rated order;
• The person placing the rated order, other than the U.S. Government, makes the item or performs the service being ordered;
• If acceptance of a rated order or performance against a rated order would violate any other regulation, official action, or order of the Department of Commerce.

A rated order must be accepted or rejected in writing within fifteen (15) working days after receipt of a DO rated order, and ten (10) working days after receipt for a DX rated order. If the order is rejected, the contractor must also communicate the basis for the rejection in writing. If a rated order is placed for the purpose of emergency preparedness and expedited action is required, the contractor must accept or reject the order within six (6) or (12) hours depending on the situation. Where delays occur on accepted rated orders, the contractor must notify the customer immediately, provide the reasons for the delay, and advise of a new shipment or performance date.

Because DPAS requires scheduling preference for rated orders over all non-rated and commercial orders, contractors are offered protection from liability for damages and penalties for acts or failures to act resulting from compliance with DPAS regulations; however, contractors are not entitled to indemnification from the Government against successful third-party claims.

Companies who do not currently hold DPAS-covered contracts can also be issued orders under the Defense Production Act. The rules outlined above apply to these companies when performing under a DPAS rated order.  

Baker Tilly’s experts frequently work with our clients to support on-shoring of manufacturing activities, to manage and mitigate risks to their supply chain, to manage cybersecurity risks, to obtain and manage government contracts and the associated compliance obligations, to produce and market medical supplies, devices and drugs, and to provide assistance in a wide variety of other areas. All of these and more are likely to be important as the country works to make it through, and ultimately recover from, COVID-19. We have a team of consultants and accountants who regularly work with medical and life sciences companies (and across a wide variety of other industries) to address issues, solve problems, generate new ideas, and work creatively with our clients.

This can be vitally important at a time like this. Please don’t hesitate to contact us if you have any questions or feel that we can assist in any way – we stand ready to help.