Angela Styles at Akin Gump Strauss Hauer & Feld and Robert Tompkins at Holland & Knight. Courtesy photos

This article was updated on Wednesday, March 25 with new information.

President Donald Trump issued an executive order last week under the Defense Production Act of 1950 empowering the federal government to require manufacturers to allocate their output of surgical masks and antiviral respirators, ventilators and other medical equipment to combat the growing COVID-19 pandemic, citing a national security emergency.

Hospitals and health care providers are warning of a dire  shortage of personal protective equipment and ventilators.

The executive order's authorities mean the federal government can compel a company to provide products and services to the government ahead of its preexisting commercial obligations, and even its preexisting nonemergency governmental obligations, said Robert Tompkins, partner in Holland & Knight's Washington, D.C., office and co-chairman of the national government contracts practice.

It is now up to the Department of Health and Human Services to implement the order, which starts with Secretary Alex Azar issuing a directive and guidance so that contracting officers and other officials have the authority to use the DPA, he said.

The HHS secretary has to make a plan with findings before they can require companies to start allocating or producing products such as ventilators, said Angela Styles, government contracts partner at Akin Gump Strauss Hauer & Feld in Washington, D.C.

Tompkins said, "The executive order delegates to HHS the authority to direct the allocation and prioritization of products and services that the government deems necessary to respond to the current national emergency."

Essentially the order gives the federal government the power to jump the line and place orders ahead of anyone else at a manufacturer. It also extends limited relief from liability for manufacturers that do so from claims by those whose orders have been de-prioritized to accommodate the government's demands, contract lawyers said. The DPA also allows for federal loans and guarantees in some circumstances to make such fulfillments possible.

The executive order gives the president the authority to expedite contracts and orders other than employment contracts to promote the "national defense" over performance of any other contracts or orders. It delegates that authority to the HHS secretary, in consultation with the Secretary of Commerce and other department heads, to "establish nationwide priorities and allocation of all health and medical resources" for responding to the spread of COVID-19, the novel coronavirus, within the United States.

As yet, the White House has resisted calls from state officials and some members of Congress to pull the trigger and actually use the DPA's powers, however, saying that manufacturers have been offering to ramp up and allocate production voluntarily. On Tuesday, March 25, Lizzie Litlow, spokeswoman for the Federal Emergency Management Agency said "At the last minute we were able to procure the test kits from the private market without evoking the DPA,"  after earlier in the day FEMA Administrator Peter Gaynor told some media outlets that they were going to use the act to get 60,000  test kits.

General counsel for medical supply manufacturers and others that make, or potentially could make, medical supplies such as face masks, surgical gowns, respirators and ventilators and possibly pharmaceuticals should take note of the requirements under the act, which was passed initially under President Harry Truman in the lead-up to the Korean War and has been reauthorized and amended periodically, most recently last year.

Several medical supply companies contacted for comment on how this might affect them did not respond to requests for comment. But a spokesman for Honeywell International Inc., a major manufacturer of N95 respirators, whose senior vice president and general counsel is Anne Madden, responded with the following company statement:

"As a longstanding national security partner and government contractor, Honeywell is very familiar with meeting the demands of the Defense Production Act and is fully committed to supporting the COVID-19 response efforts. We have been in active discussions with the Administration about increasing production of our safety gear, including adding capacity in the U.S. for N95 face masks. We have already increased production at multiple facilities globally to address the growing demand for personal protective equipment."Over the weekend, Honeywell announced that it was stepping up production of N95 respirators  and safety glasses at its Smithfield, Rhode Island plant that will be delivered to HHS for emergency and health workers.

Tompkins said that once a company receives a "rated order," the company has the same power as the government to impose that rated order on their subcontractors, so it works its way down the supply chain. Four other agencies besides HHS—the Defense Department, Homeland Security, including the Federal Emergency Management Agency, Department of Energy and Department of Transportation—also have the authority to issue "rated orders" under the DPA to buy emergency-related products and services.

One potential snag, however, is that it isn't clear if the DPA covers U.S. companies whose products are sourced from factories abroad or applies to distributors who don't make the items, Styles said.

U.S. manufacturers offshored much of their production of masks and respirators over the years. It isn't clear how the DPA can apply in that instance, Styles said, and more regulatory action may be needed for that.

Also, other countries where U.S. medical supplies are made could similarly claim production for their own domestic use from any facilities located in those countries as the COVID-19 pandemic has spread to nearly every continent. For instance, White House trade adviser Peter Navarro said last month that China had restricted exports of N-95 respirators to deal with its outbreak, which now reportedly appears to be leveling off. If this is a reason the order can't be fulfilled, the contractor should advise the agency contracting officer and if the contractor believes the foreign supply chain could inhibit their ability to perform they should consider rejecting the order on this basis, Tompkins said.

Another emerging problem is manufacturers falling behind on government contracts because of shelter-in-place orders in some states and other epidemic-related obstacles to workers reporting to production lines, lawyers said.

Government contract lawyers said that manufacturers of medical supplies and equipment, or those who could produce such equipment if they had to "need to think about what they can do. If they had to put everything else and shove it to the side, what could they do, and how much would they want for it?" Styles said.

They said the federal government's order provides an opportunity for contractors but also brings risks, because of the need to comply with the federal equal employment and other laws governing federal contractors that carry severe penalties for noncompliance. Holland & Knight said that a company with a line of business susceptible to rated orders should designate someone in the legal department, or contracting department, to be the lead person for those contracts.

Here are some other considerations for in-house counsel who may be affected by the presidential order:

1) "The first question a company should ask is whether it is a rated/priority order or an allocation order," because the regulations are very broad, said Styles. A rated/priority order is generally used when a company has contracted with the federal government before and is like any other federal contract, but it will require the company to give priority to the federal government over other orders, she said. An allocation order is a much broader authority that could allow the government to use the facility or any of its products. "So, for example, under an allocation order, the federal government could require a hotel to be used as a quarantine facility or a hospital," she said.

The executive order authorizes both "Priorities and Allocation of Medical Resources," this doesn't mean HHS will definitely use both, but it is authorized to do so. Historically, the priorities approach has been much more commonly used, Tompkins said. The allocation approach is more severe and actually involves the government actually taking control of the production process, he said.

2) Be prepared to negotiate, or fight. "You might have prior commitments to other companies and other governments and it pays to be specific about what that is going to cost," Styles said. The government pays a fair market rate when it orders supplies, so they will give you the funds if you need three lines to do it, but if you say you can't do it, there's a risk of bad publicity versus negotiating what you can do and when you can do it, she said.

3) Companies that manufacture other products now but could make the in-demand supplies will be the last place the government approaches for help, but if they are already a defense contractor, "they may ask, can you repurpose and how long would it take" or "do you have any other idle facilities? It would be nice to have them think ahead about if they could help in some way," Styles said. News reports have said that some automakers are in discussions with the White House about making ventilators.

Further, Holland & Knight government contract attorneys said vendors fulfilling a rated order should have a definite priority rating, a specific delivery date and quantity, a statement that identifies the governing federal regulations and a valid contracting officer's signature to certify the rated order.

"I do believe the executive has broad powers with respect to responding to crises like this," said Jason Klitenic, a partner in Holland & Knight's Washington, D.C., office, where he leads the firm's national security, defense and intelligence team. He joined the firm earlier this month from his former position as general counsel for the Office of the Director of National Intelligence. He added, "throughout our country's history government and industry have worked together when faced with crisis, catastrophe and attack."

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