COVID-19 and the US Defense Production Act: Latest Developments

This week brought further developments in the use of the Defense Production Act, 50 U.S.C. § 4501 et seq. (“the DPA”), to address the COVID-19 pandemic in the United States. As discussed below, President Trump delegated use of DPA Title III authority to the International Development Finance Corporation (“DFC”) to support domestic industry. In addition, the Federal Emergency Management Agency (“FEMA”) issued an interim rule, effective immediately, detailing how it is implementing its DPA authorities.

As we have explained previously, the DPA has been used in response to the COVID-19 pandemic in a variety of ways. The president has invoked the DPA to facilitate the supply of materials for production of ventilators and to acquire N95 respirators. The DPA has been used both for acquisitions by the federal government and to enable third parties to obtain needed supplies that other entities (including the government) may use.

Title III of the DPA

Use of the DPA includes the authority noted under Title III of the Act.

• The DPA confers on the president “an array of authorities to shape national defense preparedness programs and to take steps to maintain and enhance the domestic industrial base.” Title III of the DPA provides authority to ensure the timely availability of essential domestic industrial resources to support national defense and homeland security requirements through the use of highly tailored economic incentives. Authorized incentives include loans, loan guarantees, direct purchases and purchase commitments, and the authority to procure and install equipment in private industrial facilities.
• The Coronavirus Aid, Relief and Economic Security (“CARES”) Act enhanced the potential for use of these authorities by removing what many view as outdated restrictions. For example, as described in our discussion of the CARES Act, although Title III loans and loan guarantees normally require that an appropriations act provide advance budget authority for the cost of the loans or loan guarantees and limit the amount of the loan or the principle that can be guaranteed, the CARES Act waives such requirements for a two-year period. Further, the CARES Act removes the restriction for two years on the amount that may be used for purchases or purchase commitments for critical or emerging technologies without specific congressional approval.

May 14, 2020 Executive Order

On May 14, 2020, President Trump issued an executive order (“EO”) delegating authority under Title III of the DPA to the DFC to make loans, make provisions for purchases and commitments to purchase, and take additional actions to create, maintain, protect, protect, expand, and restore domestic industrial base capabilities, including in the supply chain in the United States and its territories (the “domestic supply chain”), to respond to the COVID-19 pandemic.

The DFC was created less than two years ago to bring together the capabilities of the Overseas Private Investment Corporation (“OPIC”) and USAID’s Development Credit Authority while introducing financial products to bring private capital to the developing world. The DFC partners with the private sector to develop solutions to critical challenges faced in the developing world. Despite the international focus of the DFC, the EO indicates that the Trump administration wants to bring the DFC’s finance capabilities to bear on the domestic supply chain relevant to the response to the COVID-19 outbreak.

The EO provides that the Chief Executive Officer of the DFC may use authorities under Title III in consultation with other agencies, such as the Department of Defense (“DoD”) and the Department of Health and Human Services (“HHS”), for the domestic production of strategic resources needed to respond to the COVID-19 outbreak or to strengthen any relevant domestic supply chains. Authority to make loans under Title III of the DPA is limited to loans that create, maintain, protect, expand, and restore domestic industrial base capabilities supporting (i) the national response and recovery to the COVID-19 outbreak and (ii) the resiliency of any relevant domestic supply chains. By its terms, the EO will be effective for two years.

Over the past month, DoD has been providing some funding under its pre-existing Title III authorities to enhance domestic manufacturing capability for materials, such as personal protective equipment (“PPE”), to respond to the COVID-19 outbreak. Based on the EO, the DFC will play an active role in supporting, including through loans, the development of domestic manufacturing capability for resources, such as PPE, used in the COVID-19 response. Among other purposes, this initiative would enable the United States to replenish and enhance the Strategic National Stockpile (“SNS”). The SNS is the nation’s supply of pharmaceuticals and medical supplies for use in a public health emergency that is severe enough to cause depletion of local supplies. HHS is authorized to maintain 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).)

Industry can expect that the DFC will provide loan assistance for enhancement of the domestic industrial base in the coming months as the demand for items such as PPE continues. Moreover, even when the current pandemic subsides, such resources will still be needed to reduce the prospect of a lack of domestic capability in the event of another global pandemic in the future.

FEMA and Priorities and Allocation System

On May 13, 2020, FEMA issued its anticipated interim final rule, effective May 13, 2020, establishing how the agency will exercise the authorities it was previously delegated under the DPA. The rule “sets new standards and procedures by which FEMA may allocate materials, services, and facilities to promote the national defense under emergency and nonemergency conditions.” To do that, it establishes the Emergency Management Priorities and Allocations System (“EMPAS”), which will be part of the federal regulatory scheme known as the Federal Priorities and Allocations System (“FPAS”) by which DPA decisions are implemented. For companies developing or making products necessary to combat the COVID-19 threat (or making goods in the supply chains of such products), these regulations will be important to understand.

The president delegated his DPA authority related to “Health and Medical Resources to Respond to the Spread of COVID–19’’ to the DHS secretary, who, in turn, delegated that authority to FEMA. The interim final rule provides the regulatory framework for how the delegated DPA authority will be used, and the EMPAS regulations “have two principal components: Priorities and Allocations” under Title I of the DPA:

• Priorities concern how businesses must accept and give priority to orders from FEMA that the agency deems necessary for the COVID-19 response—and must give such orders priority over other contracts and orders they receive to facilitate expedited delivery to promote the US national defense.
• Allocations authority provides FEMA the ability to mandate how materials, services, and facilities will be used to promote the national defense (with “national defense” being defined broadly to include matters that FEMA deems part of “critical infrastructure protection and restoration, emergency preparedness and response, and recovery from man-made disasters”).

FEMA’s rule largely tracks regulations issued by other agencies, such as the Department of Commerce’s Defense Priorities Allocations System, which has been used more than other FPAS regulations, to implement Title I.

FEMA’s new regulations contemplate the use of rated orders to “facilitate sales to third parties.” FEMA explained in its preamble to the new rule that, due to the “unique circumstances faced on the COVID-19 pandemic,” it may be necessary or appropriate for FEMA to use its priority rating authority to help third parties obtain critical health and medical resource supplies to respond to COVID-19. Such third parties may have no direct relationship to the government. According to the preamble, FEMA contemplates a similar scenario (regarding facilitation of sales to third parties) may arise for other emergency situations. In other words, if the supply of products necessary to respond to COVID-19 are constrained, FEMA has assumed the ability to select which purchasers (e.g., hospitals in different states requiring PPE or therapeutics) may receive supplies.

According to FEMA, although the regulations set forth in the interim final rule have been issued in response to the COVID-19 crisis, they will be used in the future for both emergency and nonemergency situations. Unlike a prior FEMA rule regarding exports of PPE that we addressed previously, these regulations will remain in effect after the COVID-19 pandemic slows or ends.

FEMA’s issuance of the regulations reflects an expectation that FEMA will play a more active role in future uses of the DPA.

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