Government Mandatory Orders of Company Products and Services During COVID-19 Emergency

Can the government compel your company to sell its products to the government, even if committed to commercial customers? In the last few days, many companies have received their first “rated order” under the Defense Product Act of 1950 (DPA), or their employees are seeing rated orders for the first time. Here is what you need to know about the DPA and rated orders. 

This LawFlash provides basic information on the following:

• What is the DPA?
• What does the DPA require?
• What do you do when a rated order is received?
• When can DPA orders be rejected?
• What are the consequences of failure to perform a lawful rated order?

What is the DPA?

The DPA is a wartime statute passed in 1950 at the outset of the Korean War to compel the domestic production and delivery of supplies and services necessary to support the war effort.

Doesn’t the DPA just apply in wartime?

No. Although the statute’s name suggests a close connection to national defense in a military context, the Defense Priorities and Allocations System (DPAS), administered by the US Department of Commerce, Bureau of Industry and Security, also implement the priorities and allocations authority of the DPA to support emergency preparedness activities pursuant to Title VI of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 USC 5195 et seq.) (the Stafford Act). On March 13, 2020, President Donald Trump issued a determination of emergency under the Stafford Act.

Am I subject to the DPA if I am not a government contractor or currently hold no government contracts?

Yes. The DPA is intended to compel allocation of necessary supplies and services, including commercial items, to the government, even where not previously sold to the government.

Am I subject to the DPA if I am a foreign supplier?

All companies in the United States must comply with the provisions of the DPAS regulation. Persons in the United States, including any state, territory, or possession of the United States and the District of Columbia, receiving a priority rated order must give the rated order preference over all unrated orders as necessary to meet required delivery dates. A foreign supplier without a US presence cannot be required to comply with a rated order.

As a practical matter, how does the government exercise DPA authority over my company?

Through issuance of a rated order.

What are rated orders?

A rated order is prime contract, a subcontract, or a purchase order in support of an approved program issued in accordance with DPA requirements as implemented. Rated orders are assigned one of two levels of priority established by regulation, identified by the rating symbols “DO” and “DX.” As set forth in the regulation, all DO rated orders have equal priority with each other and take preference over unrated orders. All DX rated orders have equal priority with each other and take preference over DO rated orders and unrated orders. A “Directive” issued by the Commerce Department takes preference over any DX rated order, DO rated order, or unrated order.

In practical terms, what does this mean to my commercial contractual commitments?

If you are in receipt of a proper rated order, you must provide the government with the supplies or services set forth in that order before you fill preexisting commercial contractual commitments. This may mean that your company finds itself unable to meet commercial commitments in a timely manner.

What happens if filling a rated order means I have to breach a commercial or other government contract?

The DPA implementing regulations provide that a person shall not be held liable for damages or penalties for any act or failure to act resulting directly or indirectly from compliance with any provision of this part, or an official action.

Can I refuse a rated order?

Yes, but only in limited circumstances. The purpose of the DPA is to permit government issuance of non-refusable priority orders.

Mandatory rejection. Under the regulation, unless otherwise directed by the Commerce Department:

1. A person shall not accept a rated order for delivery on a specific date if unable to fill the order by that date. However, the person must inform the customer of the earliest date on which delivery can be made and offer to accept the order on the basis of that date. Scheduling conflicts with previously accepted lower rated or unrated orders are not sufficient reason for rejection under this section.
2. A person shall not accept a DO rated order for delivery on a date that would interfere with delivery of any previously accepted DO or DX rated orders. However, the person must offer to accept the order based on the earliest delivery date otherwise possible.
3. A person shall not accept a DX rated order for delivery on a date that would interfere with delivery of any previously accepted DX rated orders, but must offer to accept the order based on the earliest delivery date otherwise possible.
4. If a person is unable to fill all the rated orders of equal priority status received on the same day, the person must accept, based upon the earliest delivery dates, only those orders that can be filled, and reject the other orders. For example, a person must accept order A requiring delivery on December 15 before accepting order B requiring delivery on December 31. However, the person must offer to accept the rejected orders based on the earliest delivery dates otherwise possible.

Optional rejection. Unless otherwise directed by the Commerce Department, rated orders may be rejected in any of the following cases as long as a supplier does not discriminate among customers:

1. If the person placing the order is unwilling or unable to meet regularly established terms of sale or payment
2. If the order is for an item not supplied or for a service not performed
3. If the order is for an item produced, acquired, or provided only for the supplier's own use for which no orders have been filled for two years prior to the date of receipt of the rated order. If, however, a supplier has sold some of these items, the supplier is obligated to accept rated orders up to that quantity or portion of production, whichever is greater, sold within the past two years
4. If the person placing the rated order, other than the US Government, makes the item or performs the service being ordered
5. If acceptance of a rated order or performance against a rated order would violate any other regulation, official action, or order of the Department of Commerce issued under the authority of the Defense Production Act or the Selective Service Act and related statutes [See § 700.75]

What is my deadline for accepting or rejecting a rated order?

In general, a person must accept or reject a rated order in writing (hard copy), or in electronic format, within 15 working days after receipt of a DO rated order and within 10 working days after receipt of a DX rated order. If the order is rejected, the person must give reasons in writing or electronically for the rejection.

If a rated order is placed for the purpose of emergency preparedness requirements and expedited action is necessary or appropriate to meet these requirements, a person must accept or reject the rated order and transmit the acceptance or rejection in writing or in an electronic format within the time specified in the rated order, if the order includes the following language: “This rated order is placed for the purpose of emergency preparedness. It must be accepted or rejected within [Inserted time limit]].” The minimum times for acceptance or rejection that such orders may specify are six hours after receipt of the order if the order is issued by an authorized person in response to a hazard that has occurred, or 12 hours after receipt if the order is issued by an authorized person to prepare for an imminent hazard.

How is pricing established under rated orders?

By regulation, the recipient of a rated order is not permitted to discriminate against rated orders in any manner such as by charging higher prices or by imposing different terms and conditions than for comparable unrated orders. A recipient of a rated order is permitted to reject the order if the person placing the order is unwilling or unable to meet regularly established terms of sale or payment.

What do I do if, to fulfill a proper rated order, I need supplies or services from downstream suppliers?

The recipient of a rated order is required to issue a rated order to downstream suppliers with the same rating for the following:

1. Items that will be physically incorporated into other items to fill rated orders, including that portion of such items normally consumed, or converted into scrap or byproducts, in the course of processing
2. Containers or other packaging materials required to make delivery of the finished items against rated orders
3. Services, other than contracts of employment, needed to fill rated orders
4. Maintenance and repair and/or operating supplies needed to produce the finished items to fill rated orders

Can any federal agency issue a rated order for any necessary supply or service?

No. The Department of Commerce has delegated authority to exercise DPA priorities and allocation authority under specific programs to specific other agencies.

Is the DPA priorities and allocation authority limited in scope?

Yes. For example, a proper rated order under the Stafford Act authority to support emergency preparedness activities is an order for supplies or services deemed necessary for such support. The president’s Stafford Act declaration and the related use of the government’s DPA authority does not make every supply and service suddenly subject to the DPA priority and allocation requirements for every government purpose.

What constitutes “emergency preparedness”?

The term “emergency preparedness” is defined by regulation at 15 CFR 700.8 as follows:

Emergency preparedness. All activities and measures designed or undertaken to prepare for or minimize the effects of a hazard upon the civilian population, to deal with the immediate emergency conditions which would be created by the hazard, and to effectuate emergency repairs to, or the emergency restoration of, vital utilities and facilities destroyed or damaged by the hazard. Emergency preparedness includes the following:

1. Measures to be undertaken in preparation for anticipated hazards (including the establishment of appropriate organizations, operational plans, and supporting agreements, the recruitment and training of personnel, the conduct of research, the procurement and stockpiling of necessary materials and supplies, the provision of suitable warning systems, the construction or preparation of shelters, shelter areas, and control centers, and, when appropriate, the nonmilitary evacuation of the civilian population)
2. Measures to be undertaken during a hazard (including the enforcement of passive defense regulations prescribed by duly established military or civil authorities, the evacuation of personnel to shelter areas, the control of traffic and panic, and the control and use of lighting and civil communications)
3. Measures to be undertaken following a hazard (including activities for firefighting, rescue, emergency medical, health and sanitation services, monitoring for specific dangers of special weapons, unexploded bomb reconnaissance, essential debris clearance, emergency welfare measures, and immediately essential emergency repair or restoration of damaged vital facilities)

What should I do when I receive a rated order?

Recipients of rated orders should do the following:

• Ensure that the order contains the elements required by regulation:
  • The appropriate priority rating and program identification symbol (e.g., DO-A1, DX-A4, DO-N1)
  • A required delivery date or dates. The words “immediately” or “as soon as possible” do not constitute a delivery date
  • The written signature on a manually placed order, or the digital signature or name on an electronically placed order, of an individual authorized to sign rated orders for the person placing the order. The signature, manual or digital, certifies that the rated order is authorized under this part and that the requirements of this part are being followed
  • A statement that reads in substance: “This is a rated order certified for national defense use and you are required to follow all the provisions of the Defense Priorities and Allocations System regulations (15 CFR part 700).”
• Evaluate whether your company can meet the order date, or, if not, the earliest date the order can be filled, considering the priority assigned to the order
• Ensure that your company formally accepts or rejects the order within the required period
• Ensure that your company issues any required downstream rated order necessary to meet the requirements of your own rated order

What are the penalties for knowingly failing to comply with a proper rated order?

Willful violation of the provisions of the DPA is a crime and upon conviction, a person may be punished by fine or imprisonment, or both. The maximum penalty provided by the Defense Production Act is a $10,000 fine, or one year in prison, or both. The government may also seek an injunction from a court of appropriate jurisdiction to compel compliance with the DPA and related regulations.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp