Defense Production Act Update: FEMA Exercises Control over PPE Exports

The Federal Emergency Management Agency (“FEMA”) has issued a temporary rule that enables FEMA to regulate exports over shipments of certain personal protective equipment (“the PPE Export Rule” or “the Rule”).

FEMA promulgated the PPE Export Rule under the authority of the Defense Production Act, 50 U.S.C. § 4501 et seq. (the “DPA”), specifically sections 101 (50 USC § 4511) and 704 (50 U.S.C. § 4554), and the Executive Orders of March 23 and 26, 2020, and April 1, 2020, regarding the COVID-19 pandemic.

The DPA gives the US president authority to prioritize federal government orders for products and services (ahead of other customers) and to allocate resources as necessary to promote the national defense. Multiple agencies have been delegated authority to implement the DPA.

The rule is effective upon publication in the Federal Register (which is scheduled for April 10, 2020) and will remain in effect for 120 days.

The PPE Export Rule

The stated purpose of the Rule is to aid the response of the United States to the spread of COVID-19 by ensuring that scarce or threatened health and medical resources (referred to as “covered materials”) are appropriately allocated for domestic use. All shipments of covered materials are allocated for domestic use and may not be exported from the United States without explicit approval by FEMA.

Covered Materials

The items covered by the PPE Export Rule are N95 filtering facepiece respirators, certain other filtering facepiece respirators that cover the user’s airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level, elastomeric air-purifying respirators and filters/cartridges, PPE surgical masks, and PPE gloves and surgical gloves.

The Rule contemplates that additional materials may be added to the covered materials list.

Restrictions

Under the Rule, before any shipments of covered materials may leave the United States, Customs and Border Protection (“CBP”) will notify FEMA of an intended shipment and detain the shipment temporarily, during which time FEMA will determine whether to return for domestic use, issue a rated order for, or allow the export of part or all of the shipment. In making such determinations, FEMA may consult other agencies and will consider factors such as (1) the need to ensure that scarce or threatened items are appropriately allocated for domestic use; (2) minimization of disruption to the supply chain, both domestically and abroad; (3) the circumstances surrounding the distribution of the materials and potential hoarding or price-gouging concerns; (4) the quantity and quality of the materials; (5) humanitarian considerations; and (6) international relations and diplomatic considerations.

The Rule contains an exemption to address certain pre-existing commercial relationships. FEMA will not purchase covered materials from shipments made by or on behalf of a US manufacturer with continuous export agreements with customers in other countries since at least January 1, 2020, provided that at least 80 percent of such manufacturer’s domestic production of covered materials, on a per item basis, was distributed in the United States in the preceding 12 months. If FEMA determines that a shipment of covered materials falls within this exemption, such materials may be transferred out of the United States without further review by FEMA. This exemption, however, is not unlimited as FEMA may waive it and fully review shipments of covered material if necessary or appropriate to promote the national defense.

The Implications

Timing and Process:  The PPE Export Rule makes clear FEMA will rely on CBP for immediate detentions of covered exports at the border, effective April 10, 2020. As a result, there will be detentions at ports across the country, pending a FEMA decision. The Rule does not mandate a specific time for FEMA to decide whether export will be permitted. The Rule only provides that FEMA will make determination “within a reasonable time of being notified” of a detention. Exporters may be in limbo, facing potential breach claims from customers abroad. 

Exemption:  The exemption is critical as it will enable certain exporters to meet customer requirements. Unfortunately, the exemption is limited to companies that can show 80 percent of their production of covered material is for the domestic market. Exporters may need to engage FEMA to get a determination that they are covered by the exemption and (presumably) obtain documentation to prove to CBP officials’ satisfaction at the point of export that the exemption covers the shipment. The Rule does not clarify what evidence is needed for presentation to CBP.

Impact on Foreign Parties:  The Rule also has implications for certain foreign companies. Foreign buyers who have contractual commitments with US PPE suppliers will face uncertainty as to whether and when products will be supplied. The Rule does not address foreign shipments transiting the United States for supply to a third country. The Rule says only “shipments” will be detained at the border. It is unclear if such transiting shipments will be detained.

Other Ramifications: In terms of predictability, the PPE Export Rule may be more problematic than a simple and direct ban. For example, if a shipment is detained for two weeks and then the decision is made to release the goods (or some of the shipment while the remainder is kept), it may be more difficult for the shipper to establish force majeure or to address the prospect of a breach and damages. The Rule does not address the application of the DPA liability protections for US businesses if a rated order is not issued and export is permitted but materially delayed. Finally, it is possible that the Rule may result in foreign retaliation or countermeasures.

Recommendations

Suppliers, brokers, and buyers of covered materials should carefully review the Rule to assess its impact on their supply chain planning, contractual obligations, and mitigation strategies. DPA requirements flow through the supply chain, and suppliers for manufacturers of covered materials must be attendant to the Rule’s ramifications and raise questions promptly. Parties who believe an exemption may apply should engage with FEMA as soon as possible in order to minimize potential commercial uncertainty and disruption.

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And for any legal questions related to this pandemic, please contact the author of this Legal Update or Mayer Brown’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com.”