The DPA, enacted in 1950 as a response to the Korean War, allows the president to shape the domestic industrial base for national defence preparedness, which includes emergency preparedness activities. The three key powers under the DPA are prioritisation, allocation and incentives.
First, the DPA authorises the president to require businesses to accept and prioritise contracts (either with the US government directly or with a higher tier contractor supporting the US government) for materials and services necessary for national preparedness. This is typically accomplished by issuing rated orders under the Defence Priorities and Allocations System.
Second, the DPA allows the president to allocate materials, services and facilities as deemed necessary and appropriate by, for example, ordering the domestic industrial base to increase the production and supply of specifically designated scarce or critical materials. Further, the president can use the authorities in the DPA to prohibit hoarding and price gouging of scarce or critical materials.
Third, to support these efforts, the DPA authorises the president to provide incentives, such as loans, loan guarantees and purchase commitments.
Critically, many conditions of the DPA are waived in national emergencies. As President Trump declared COVID-19 a national emergency on 18 March 2020, he now has even broader authority to use the DPA.
Most authorities under the DPA can be delegated. In the case of the COVID-19 national emergency, the president has delegated certain authorities to the secretary of the Department of Health and Human Services (DHHS) and the secretary of the Department of Homeland Security (DHS) through the course of several executive orders (EO) and statements.
How has the administration used the DPA in response to the COVID-19 crisis?
With regard to the DPA and COVID-19, the president has issued the following EOs, memoranda and statements.
EO 13909
On 18 March 2020 the president issued EO 13909 (Prioritising and Allocating Health and Medical Resources to Respond to the Spread of COVID-19). The EO states that 'health and medical resources', including personal protective equipment (PPE) and ventilators, meet the criteria of 'critical and strategic materials' under the DPA.
EO 13910
On 23 March 2020 the president issued EO 13910 (Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19). The EO authorises the DHHS to take action to prevent the hoarding of PPE and sanitising and disinfecting products. Specifically, the DHHS can limit the accumulation of these commodities and designate any material as a 'scarce material' to prevent hoarding and price gouging.
Under the authority of the EO, the DHHS issued a notice on 30 March 2020 (but effective 25 March 2020) designating 15 categories of health and medical commodities as scarce materials.
EO 13911
On 27 March 2020 the president issued EO 13911 (Delegating Additional Authority under the Defence Production Act with respect to health and medical resources to respond to the spread of COVID-19), which delegates authority to the DHHS and the DHS to make and guarantee loans and other financial incentives to expand the domestic industrial base to supply medical resources. In addition, the DHS is delegated with prioritising the allocation of medical resources, including "controlling the distribution of such materials in the civilian market".
Orders
On 27 March 2020 the president issued an order under the DPA directing the DHS "to require [company] to accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate".
On 2 April 2020 the president issued an order under the DPA directing the DHS through the Federal Emergency Management Agency (FEMA) to use the authority of the DPA to obtain the number of N95 respirators that FEMA deems necessary from a specific company.
Also on 2 April 2020, the president issued an order under the DPA directing the DHHS in consultation with the DHS to use the DPA "to facilitate the supply of materials to the appropriate subsidiary or affiliate of the following entities for the production of ventilators: [specified companies]".
On 3 April 2020 the president issued a memorandum (Allocating Certain Scarce or Threatened Health and Medical Resources to Domestic Use), which authorises the DHS through FEMA to use the authority of Section 101 of the DPA to "allocate to domestic use as appropriate" five of the scarce materials identified by the DHHS in its 25 March 2020 notice.
What is the impact of the administration's DPA-related orders and memoranda?
Countries worldwide are restricting the export of medical PPE under local laws and regulations. The goods subject to these restrictions are generally the same items that the DHHS has now designated as scarce materials. To date, the United States has not implemented similar regulatory measures.
However, as noted above, the US administration is taking actions through the DPA in relation to scarce materials that ultimately may mirror other countries' export restrictions.
Hoarding and price gouging
The president's issuance of EO 13902 and the actions of the DHHS mean that Section 102 of the DPA is in effect. This provision provides that:
no person shall accumulate (1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices, materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation.
In other words, hoarding or price gouging in resale (domestic or export) for PPE that has been designated scarce by the DHHS is illegal.
Use of DPA to restrict exports
The administration has not officially used the DPA to restrict exports in any published order or EO. However, the possibility looms and other countries have expressed concerns. On 4 April 2020 Canadian Prime Minister Justin Trudeau stated that "it would be a mistake to create blockages or reduce the amount of back-and-forth trade of essential goods and services, including medical goods, across our border". Trudeau's concern stems from the fact that Canada does not manufacture any of its own N95 masks.
FEMA can allocate PPE to domestic use as appropriate
While the DPA does not directly address exports of domestic production, Section 101 thereof does allow the president "to allocate materials, services, and facilities in such manner, upon such conditions, and to such extent as he shall deem necessary or appropriate to promote the national defense". Further, under the act, the president can control the distribution of specified materials in the civilian market if essential to national defence and the requirements for national defence cannot otherwise be met. The president delegated this authority to the DHS and the DHHS in his 27 March 2020 EO.
The president's 3 April 2020 EO authorised the DHS through FEMA to use its delegated authority under Section 101 of the DPA to "allocate to domestic use as appropriate" five of the scarce materials.(1) On 3 April 2020 DHHS Secretary Alex Azar issued the following statement regarding this use of the DPA:
President Trump's latest orders under the [DPA] support HHS and FEMA's efforts to ramp up ventilator production and ensure supplies of PPE that have been the target of hoarders—especially N95 respirators—go to America's heroic healthcare workers rather than being exported.
Thus, it is clear that the DHS through FEMA now has the authority to allocate to domestic use the five scarce resources, imposing an effective US export control on those items (although it is still unclear how this control will be implemented). At the time of writing, the DHS had not issued a broad order of this nature and it was unclear whether it may decide to use its authority in a more narrow fashion.
If exports of PPE are restricted under the DPA, DPA penalties apply to violations of those restrictions, rather than penalties under the Export Administration Regulations and the Export Control Reform Act (ECRA). Violations of the DPA are financially weaker than those of ECRA, but all penalties are criminal – willful violations of the DPA may result in a fine of $10,000 or one year's imprisonment.
In a memorandum dated 24 March 2020, the Office of the Attorney General indicated that the Department of Justice (DOJ) is responsible for enforcing the DPA as it applies to hoarding or price gouging items identified as scarce or threatened materials by the DHHS. In the same memorandum, the DOJ created the COVID-19 Hoarding and Price Gouging Task Force to address enforcement issues, and enforcement actions are already underway. For example, on 2 April 2020 the DHHS and the DOJ announced that the task force had uncovered a case of PPE and other medical supplies hoarding in New Jersey. As part of that operation, the DHHS redistributed the medical supplies to the New Jersey Department of Health, the New York State Department of Health and the New York City Department of Health and Mental Hygiene. In its announcement, the DHHS indicated that it will pay fair market value to the owner of the medical supplies.
While the DOJ is responsible for enforcing hoarding and price gouging, it is unclear whether it will also be responsible for enforcing export violations under the DPA. However, assuming such violations are criminal, the DOJ will be involved. The DOJ regularly partners with US export and import agencies on criminal enforcement actions. In the event of export restrictions under the DPA, enforcement will likely fall, at least in part, to Customs and Border Protection (CBP). CBP has broad authority to seize merchandise that is being exported in violation of the law.
What does this all mean for exporters?
Manufacturers, resellers, distributors and brokers of medical supplies identified as scarce by the DHHS and subject to US jurisdiction should tread carefully in the export of any of these materials.
The following takeaways should be kept in mind:
- The DPA prohibition on the hoarding and price gouging of PPE is already in effect and violations can evidently lead to confiscation and redistribution of the PPE in question.
- While most companies are not currently legally prohibited from exporting the PPE, they should prepare for a possible prohibition on export in the near future. The administration has set the stage for future export restrictions on PPE and other designated medical supplies.
- Going forward with exports of PPE and medical equipment may draw the attention of the DHHS and the DHS, as well as the president, potentially spurring an entity direct order under the DPA or triggering broader restrictions on export.
- Finally, given the totality of the COVID-19 pandemic, companies may be risking adverse publicity from continuing exports of designated medical equipment.
Ultimately, parties must wait and see what further transpires under the DPA in relation to export restrictions.
For further information on this topic please contact Marwa M Hassoun at Arent Fox LLP's Los Angeles office by telephone (+1 213 629 7400) or email ([email protected]). Alternatively, contact Kay C Georgi, Regan K Alberda or Travis L Mullaney at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email ([email protected], [email protected] or [email protected]). The Arent Fox LLP website can be accessed at www.arentfox.com.
Endnotes
(1) The five scarce resources are:
- N95 filtering facepiece respirators, including devices that are disposable half-facepiece non-powered air-purifying particulate respirators intended to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates;
- other filtering facepiece respirators (eg, those designated as N99, N100, R95, R99, R100, P95, P99 or P100), including single-use, disposable half-mask respiratory protective devices that cover the user's airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level as per 42 CFR 84.181;
- elastomeric air-purifying respirators and appropriate particulate filters and cartridges;
- PPE surgical masks, including masks that cover the user's nose and mouth and provide a physical barrier to fluids and particulate materials; and
- PPE gloves and surgical gloves, including those defined at 21 CFR 880.6250 (exam gloves) and 878.4460 (surgical gloves) and such gloves intended [sic].
