In response to the growing COVID-19 pandemic, President Trump announced that the federal government will invoke the Defense Production Act to obtain necessary medical equipment and supplies from private industry. In this post, some of the most frequently asked questions about the DPA will be addressed.
Originally conceived during the Korean War, the DPA allows the president to divert goods and supplies from civilian use to promote the national defense. This authority is not limited to sourcing aircraft parts or ammunition, or to supporting active military operations. The text of the Act expressly extends to matters involving “national economic security and national public health or safety.”
The Defense Priorities and Allocations System regulations in 15 C.F.R. Part 700 implement the Defense Production Act. The DPAS regulations provide detail about how the government will issue rated orders and what contractors and commercial suppliers must do to respond.
The government specifies the relative priority for specific supplies by issuing a “rated order,” which may be designated “DX” or “DO.” A DX order has the highest priority. It must be fulfilled before any other DO-rated or unrated order. A DO-rated order must be fulfilled before an unrated order. A rated order must be fulfilled first, even if it means the contractor must divert items either already in process or ready for delivery under another contract.
The DPAS regulations require a contractor to accept a rated order unless one of the listed exceptions applies. A contractor would not have to accept a rated order that it cannot perform. A contractor would also not have to accept a rated order that conflicts with another similar or higher rated order. But even when performance would be impossible, the contractor is expected to propose another delivery date that it could meet.
Contractors might also be able to stop delivery of good specified in a rated order if they won’t be paid. The decision in In re Daedalean, Inc., 193 B.R. 204, 210 (Bankr. D. Md. 1996), reaches this conclusion in the context of a preference action brought to recover payments that the debtor made to a manufacturer of fire suppression equipment needed for the 1991 Persian Gulf War. The defendant manufacturer sought to avoid the preference claim by arguing that the DPA required goods to be shipped to the debtor without regard to the timeliness of the debtor’s payments. The court rejected that argument because the applicable DPAS regulation “explicitly reserves the right for a manufacturer to refuse shipping priority rated goods where regularly established terms of sale or payment have not been met.” Id. (citing 15 C.F.R. § 700.13(c)(1)).
To comply with a rated order, a contractor must do everything possible to ensure timely delivery. This includes making sure subcontractors and suppliers will provide everything the contractor needs to perform the contract.
The contractor should use inventoried production items to fill the order where possible. A contractor that will not meet the deadline specified in a rated order should give the government immediate notice of the delay and provide a new shipment date.
The express purpose of the DPA is to require private industry to prioritize some orders over others in order to protect national security. It is possible that a commercial enterprise will be required to breach an existing contractual commitment in order to fulfill a rated order. But this does not mean that they will face breach-of-contract liability every time they fill a rated order. The DPA provides contractors with immunity from breach liability when meeting the requirements of a rated order is the cause of the breach. The Fifth Circuit’s decision in Eastern Airlines, Inc. v. McDonnell Douglas, 532 F.2d 957 (5th Cir. 1976), cites this immunity in support of its decision to reverse a $25 million judgment in a case involving late delivery of more than 90 commercial aircraft.
Failure to comply with DPAS regulations or to timely deliver goods specified in a rated order carries stiff penalties and may expose responsible individuals to criminal liability. Under 15 C.F.R. 701.6, willful violations of the DPA carry fines of up to $10,000 and one year in prison. These penalties are in addition to ordinary contract remedies that might be available and the potential that the contractor will face default termination.
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