Coronavirus Aid, Relief and Economic Security Act – Enhanced Acquisition and Industry Support Authorities

To respond to the substantial issues raised by the COVID-19 virus, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed and became law on March 27, 2020. In addition to numerous stimulus provisions that have been discussed in Mayer Brown Legal Updates and blog posts, the CARES Act provides funding and augments certain federal procurement authorities and allows agencies to obtain critical resources—as well as supporting the ability of crucial industry sectors to respond to the current, rapidly changing emergency.

Government Contracts

Defense Production Act – Department of Defense

The stimulus package includes, for procurement by the Department of Defense ("DoD"), an additional $1 Billion in appropriations to be used for Defense Production Act ("DPA") Purchases—available until expended—for prevention, preparation for, and response to the coronavirus, either domestically or internationally. (The DPA, of course, also can be used to prioritize acquisition of necessary equipment, supplies and resources with existing DoD funds.)

This DoD section also waives certain restrictions on the use of particular DPA authorities for the two-year period beginning on the date of enactment.

• Guarantees normally require that an appropriations act provide advance budget authority for the cost of the guarantee and limit the loan principle that can be guaranteed. 50 U.S.C. §4531(a)(3)(A); however, the CARES Act waives such requirements. Under 50 U.S.C. §4531, existing authority provides for guarantees of loans by private institutions for purposes of financing production, capabilities or supplies necessary to create, maintain, expedite, expand, protect or restore production and deliveries or services essential to the national defense.
• Loans normally are subject to the requirement (50 U.S.C. §4532(c)(1)) for an appropriations act providing advance budget authority and a limitation on the total loan principle; however, the DoD provisions of the CARES Act also waives such requirements. 50 U.S.C. §4532 authorizes loans to private businesses (including non-profit research corporations and providers of critical infrastructure) to reduce current or projected shortfalls of industrial resources, critical technology items, or materials essential for the national defense.

Relief from Certain Restrictions Otherwise Applicable to DPA Authorities

Separate from the DoD specific provisions, Section 4017 of the CARES Act removes certain other restrictions on use of the DPA for limited periods. These provisions may be used by any agency (not just DoD) to which DPA authority has been delegated.

Restrictions inapplicable for two years:

• 50 U.S.C. § 4533 permits the President, for purposes of creating, maintaining, protecting, expanding, or restoring domestic industrial base capabilities essential for the national defense, to among other things: (i) purchase or make purchase commitments for industrial resources or critical technologies for government use or resale; (ii) encourage exploration, development and mining of critical and strategic materials; develop production capabilities; or (iii) increase use of emerging technologies in security program applications and the rapid transition of emerging technologies from government or commercial sponsored research and development. Normally, if any action to correct a domestic industrial resource shortfall would cause the aggregate outstanding amount of these actions to exceed $50 million, no actions could be taken without a specific Act of Congress. The CARES Act makes this restriction inapplicable for a two -year period beginning on the date of enactment.
• 50 U.S.C. § 4534 provides for the Defense Production Act Fund which is generally available to carry out the purposes of Title III of the DPA. While moneys in the DPA Fund are available until expended, current law provides that if the Fund balance at the close of a fiscal year exceeds $750 million (excluding moneys appropriated in or obligated in that year) the excess shall be paid into a Treasury General Fund. The CARES Act makes the reversion to Treasury inapplicable for a two-year period beginning on the date of enactment, thus enabling increased appropriations for the Fund.

Restrictions inapplicable for one year:

• With respect to 50 U.S.C. § 4532 (loans to private businesses) above, if any loan to correct a shortfall causes the aggregate amount of all obligations related to the shortfall to exceed $50 million, the President normally is required to notify the Senate Banking and House Financial Services Committees and wait 30 days before proceeding. This notice and waiting period is inapplicable for one year from the date of enactment of the CARES Act. Similarly, with regard to purchases or commitments under 50 U.S.C.
• § 4533 above, the normal rule that any action to correct a shortfall causing the aggregate amount of all such actions to exceed $50 million requires notice to the Senate Banking and House Financial Services Committees and a 30 day waiting period also is waived for one year from the date of enactment.

Additional Funds for National Security

Section 4003 of the CARES Act – Emergency Relief and Taxpayer Protections, includes in subsection 4003(b)(3) (Loans, Loan Guarantees and other Investments), a designated amount of $17 billion to be made available for loans and loan guarantees for “businesses critical to maintaining national security.” No explanation is provided regarding this provision. A report published in the Washington Post on March 25, 2020, citing persons knowledgeable about internal deliberations, indicated that this provision was crafted "largely" for the benefit of Boeing.

Affected Contractor Workers

Section 3610 of the Act authorizes agencies to modify contracts to reimburse contractors for paid leave through the end of this fiscal year where contractor employees cannot perform work on a site approved by the federal government (such as a federally-owned site) due to “facility closures or other restrictions” and whose activities cannot be performed remotely during the COVID-19 emergency, but such paid leave is necessary to keep employees in a “ready state” to perform.

By memorandum dated March 30, 2020, the office of Defense Pricing and Contracting (“DPC”) stated it would issue implementing guidance regarding Section 3610 “as soon as possible.” https://www.acq.osd.mil/dpap/policy/policyvault/Managing_Contracts_under_COVID-19_Memo_DPC.pdf

Health and Human Services Acquisition

$27 Billion Appropriated Under the CARES Act for the Public Health and Social Services Emergency Fund

As part of the CARES Act, Congress appropriated just over $27 billion “to prevent, prepare for, and respond to coronavirus, domestically or internationally.” The stated goal of the funding is “the development of necessary countermeasures and vaccines, prioritizing platform-based technologies with U.S.-based manufacturing capabilities, the purchase of vaccines, therapeutics, diagnostics, necessary medical supplies, as well as medical surge capacity” to address numerous parts of the United States’ healthcare infrastructure.

The money is appropriated to the Public Health and Social Services Emergency Fund, which is administered by HHS. HHS is given guidelines in the legislation but has substantial flexibility regarding how the funds will ultimately be spent. Among other things, the legislation:

• makes clear that “funds appropriated under this paragraph in this Act may be used to develop and demonstrate innovations and enhancements to manufacturing platforms to support such capabilities”;
• provides that HHS “shall purchase vaccines developed using funds made available under . . . this Act to respond to an outbreak or pandemic related to coronavirus in quantities determined by the Secretary to be adequate to address the public health need”;
• specifies that “products purchased by the Federal government with funds made available under this paragraph in this Act . . . shall be purchased in accordance with Federal Acquisition Regulation guidance on fair and reasonable pricing”;
• indicates that HHS “may take such measures . . . to ensure that vaccines, therapeutics, and diagnostics developed . . . will be affordable in the commercial market”; and
• gives the HHS Secretary discretion to “deposit[]” goods purchased with these funds “in the Strategic National Stockpile under section 319F–2 of the Public Health Service Act.”

National Stockpile 

Of the $27 billion appropriated for the Public Health and Social Services Emergency Fund, the CARES Act authorizes the HHS Secretary to deposit (at his discretion) up to $16 billion in appropriations in the Strategic National Stockpile (“SNS”). The SNS is the nation’s largest supply of life-saving pharmaceuticals and medical supplies for use in a public health emergency that is severe enough to cause local supplies to run out. By statute, HHS maintains a stockpile of drugs, vaccines and other biological products, medical devices, and other supplies in such numbers, types, and amounts as are determined to be appropriate and practicable to respond to a public health emergency. 42 U.S.C. § 247d-6b(a)(1).

SNS medicines and supplies are stored in strategically located repositories across the country. As resources from the SNS have been used in response to COVID-19, there likely will be a considerable need to replace the amounts used as well as to build greater capacity to respond to future emergencies, such as pandemics. On April 1, 2020, the Washington Post reported that the stockpile reserves of personal protective equipment (such as masks) already are nearly depleted.

An HHS website explains the procurement approach used to acquire materials for the SNS, including reference to the Federal Acquisition Regulation (“FAR”) and non-FAR based approaches, such as broad agency announcements (“BAAs”). The CARES Act provides that HHS may use the $27 billion through September 30, 2024.

Biomedical Advanced Research and Development Authority

The CARES Act specifies that not less than $3.5 billion shall be available to the Biomedical Advanced Research and Development Authority for “necessary expenses of manufacturing, production, and purchase . . . of vaccines, therapeutics, diagnostics, and small molecule active pharmaceutical ingredient, including the development, translation, and demonstration at scale of innovations in manufacturing platforms.” Among other things, the legislation specifies that these funds “may be used for the construction or renovation of U.S.-based next generation manufacturing facilities, other than facilities owned by the United States Government.” Accordingly, funds from this appropriation appears to permit HHS to provide substantial funding to U.S. companies to assist with the updating of their factories and manufacturing facilities to assist with COVID-19 response efforts.

Public Health and Social Services Emergency Fund

A total of $375 million is appropriated (in two sub-paragraphs in the legislation) to this fund for, among other things, prevention, preparation for, and response to the coronavirus (domestically and internationally). Up to $100 million of these funds may be used to reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Amounts within these appropriations are further broken down among anticipated recipients, e.g., the Ryan White HIV/AIDS fund, Rural Health, Native American tribes, reimbursement of spending on these needs prior to enactment of the legislation.

Additional Funding

In addition, the CARES Act appropriates $250 million for grants to or cooperative agreements with grantees and subgrantees under the Hospital Preparedness Program. It also provides a $1.5 million appropriation for HHS to enter into an agreement with the National Academies of Science, Engineering, and Medicine to prepare a report the security of the United States’ medical product supply chain. 

Fair and Reasonable Pricing

In regard to the $27 billion available to HHS under this section, the CARES Act provides that products purchased with these funds by the federal government “shall be purchased in accordance with Federal Acquisition Regulation guidance on fair and reasonable pricing.” The Federal Acquisition Regulation (“FAR”) contains detailed instruction to contracting officials regarding how to determine whether a proposed price is “fair and reasonable.” See FAR 15.404-1.

The FAR explains that contracting officials can use a variety of different approaches to determine whether a price is fair and reasonable. Pursuant to FAR 15.404-1(b), the Government may use various price analysis techniques and procedures to ensure a fair and reasonable price. The FAR lists examples of such techniques, including:
(i) Comparison of proposed prices received in response to the solicitation ( “adequate price competition” normally establishes that pricing is fair and reasonable price); (ii) comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items (e.g., for commercial items); (iii) parametric estimating methods or rough yardsticks; (iv) comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements; (v) comparison of proposed prices with independent Government cost estimates; and (vi) comparison of proposed prices with prices obtained through market research for the same or similar items, among others.

Contracting officials have discretion to determine what price is fair and reasonable. The FAR explains that the first two techniques listed above are “preferred.” If the agency determines that information on competitive proposed prices or previous contract prices is not available or is insufficient to determine that the price is fair and reasonable, the contracting officer may use any of the remaining techniques as appropriate.

Reduced Restrictions on HHS’ Use of “Other Transaction” Authority

During the last several years, there has been substantial public debate regarding agencies’ increasing use of “other transaction” authority, i.e., agreements that are not covered by the Federal Acquisition laws and regulations (commonly called “OTs”). The reason many in the procurement community support expanded use of OTs is that these contracting vehicles will purportedly allow agencies to work with new potential suppliers and field technologies more quickly and efficiently. However, OTs raise concerns among many within the federal procurement community because these transactions are effected via agreements that are not subject to the strictures of the FAR, and (among other things) are not subjected to the same degree of competition.

Under the heading of “Innovation,” Section 3301 of the CARES Act removes the cap on OTs in which the Public Health Service engages. Under the applicable statute, OTs have previously been limited to $100 million, though that amount could be exceeded “upon a written [and non-delegable] determination by HHS’ Assistant Secretary for Financial Resources that the use of such authority is essential to promoting the success of the project.” 42 U.S.C. § 247d-7e(c)(5)(A). The CARES Act left that limitation in the law for the post-pandemic period, but Section 3301 of the law inserted a new subpart of the statute providing broader “authority during a public health emergency.” The new provision makes clear that the Secretary (and thus HHS) “shall, to the maximum extent practicable, use competitive procedures when entering transactions to carry out projects under this subsection for purposes of a public health emergency.” But it omits any financial cap on OTs.

Section 3301 of the CARES Act requires that, after the public health crisis is over, HHS must submit a report to House and Senate committees regarding the use of any funds under the unrestrained authority. Among other things, HHS is required to explain “any outcomes, benefits, and risks associated with the use of such funds,” as well as a “description of the reasons for the use of such authority for the project or projects.” The opportunity for oversight regarding this potential spending—albeit after-the-fact—is thus provided by the new law.

Important Changes to DoD’s Ability to Use OTs

Section 13006 of the CARES Act modifies the rules applicable to the use of OTs by the Defense Advanced Research Projects Agency (“DARPA”) and DoD. For “any transaction related to the national emergency for the Coronavirus Disease,” the authority to engage in OTs “may be delegated to such officials in [DoD] as the Secretary of Defense shall specify.” (Previously, 10 U.S.C. § 2371b(b)(3) did not permit delegation of OT authority beyond the DARPA senior procurement executive or director or the Under Secretaries of Defense.) Section 13006 also removed the statutory requirement for advance notice to Congress for such transactions and, instead, permits after-the-fact “notice “as soon as practicable after the commencement of the carrying out of such transaction.”

It is not clear how "related" a transaction must be to be viewed as related to the "current emergency." For example, is this authority limited to health-related issues or available to be used for acquisition of more traditional defense systems if there is a claim that the acquisition is relevant to national security? Will this authority be limited to "prototypes" as provided in the statute or used to acquire commercial products that are sold in the commercial market place? Significant transactions may be effected by DoD under these expanded authorities, and neither Congress nor the public may learn about them until they have been completed. The use of such authorities by DoD officials delegated the authority to make use of them will require substantial scrutiny.

Looking Ahead

The measures discussed above will be implemented over the coming weeks and months. Some of the funding will be expended over the course of years. Entities that sell to the federal government (or are interested in doing so) should remain alert for further developments as the federal government uses the new tools and funds to respond to
COVID-19.