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:
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.
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.
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.
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.
Through issuance of a rated order.
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.
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.
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.
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:
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:
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.
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.
The recipient of a rated order is required to issue a rated order to downstream suppliers with the same rating for the following:
No. The Department of Commerce has delegated authority to exercise DPA priorities and allocation authority under specific programs to specific other agencies.
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.
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:
Recipients of rated orders should do the following:
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.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Stephen Ruscus, a partner in our government contracts practice, or any of the following Morgan Lewis lawyers: