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FEMA Rules Prohibit Exports of PPE Needed for US Response to COVID-19

4/15/2020 (Updated 4/22/2020)

FEMA exercised the authority recently granted to it by Executive Orders and pursuant to the Defense Production Act to regulate and redirect respirators, surgical masks, gloves, and other personal protective equipment (PPE) designated as scarce or threatened materials that are prepared for export. FEMA and CBP will work together to identify “commercial quantities” of these items to be redirected for domestic use.

On April 10, 2020, the US Department of Homeland Security’s (DHS) Federal Emergency Management Agency (FEMA) issued its “temporary final rule” (the temporary rule) restricting the export of five (5) specified types of “personal protective equipment” (PPE) “without explicit approval by FEMA.” The temporary rule is immediately effective and will remain in force for at least 120 days – through August 8, 2020.

The restricted items consist of N95 and other “Filtering Facepiece Respirators,” surgical masks, PPE gloves and surgical gloves, and certain types of respirators. The rule mandates that all domestically produced items are “allocated to domestic use” and may not be exported without specific FEMA approval. However, the rule includes some important exceptions to these broad restrictions, and the administration has granted further exemptions in the few days since the rule was published. In addition to limiting the temporary rule’s application to “commercial quantities,” US Customs and Border Protection (CBP) issued updated guidance on April 9 that identified a number of additional exclusions, described below.

FEMA’s new rule relies on the federal government’s emergency powers emanating from the Defense Production Act of 1950 (the DPA) and the recent group of executive orders issued pursuant to the DPA, including Executive Order 13909, 85 FR 16227 (Mar. 23, 2020); Executive Order 13910, 85 FR 17001 (Mar. 26, 2020); and Executive Order 13911, 85 FR 18403 (Apr. 1, 2020). That authority forms the nucleus (but by no means the sole authority) of the federal response to the coronavirus (COVID-19) emergency actions, enabling almost every federal agency to play its role in the response to the pandemic.

As a result of this new rule, all proposed exports of covered products will be subject to additional scrutiny and likely delays as FEMA and CBP devise processes to make determinations and implement the requirement to prioritize domestic allocations.

BACKGROUND AND LEGAL AUTHORITY UNDER THE DPA

President Trump’s April 3, 2020, presidential memorandum ordered DHS, through FEMA and in consultation with the Department of Health and Human Services (HHS), to use any and all authority available under Section 101 of the Defense Production Act of 1950 (the DPA), 50 U.S.C. 4511, to allocate to domestic use certain PPE designated by HHS under Section 102 of the DPA as scarce or threatened materials essential for national defense.

The DPA provides the US President a broad set of authorities to require domestic industries to act in the interest of national defense. Under section 101 of the DPA, the President can require US businesses to accept new government contracts – rated orders – for goods determined to be scarce and critical material essential to the national defense.

Under this authority, US Government agencies can also demand, through rated orders or directives, that contractors accelerate performance and prioritize their rated orders on manufacturing production lines before non-rated orders and non-government customer orders. Section 101 of the DPA also authorizes the President to allocate or control the general distribution of materials, services, and facilities in the manner, under the conditions, and to the extent that he deems necessary or appropriate to promote the national defense. The President delegated his prioritization and allocation authority under Section 101 of the DPA to DHS on March 27, 2020, via Executive Order 13911. Having declared a national emergency, and with support from all corners, there has been little, if any, pushback regarding whether fighting the pandemic falls within the rubric of the “national defense.”

PPE SUBJECT TO THE EXPORT BAN

On March 25, 2020, HHS published a Notice of Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures, designating 15 categories of health and medical resources necessary to respond to the spread of COVID-19 that HHS determined are “scarce” or the supply of which would be “threatened by excessive accumulation.” FEMA’s rule applies to five (5) of the categories in the HHS designation (covered materials):

  1. N95 Filtering Facepiece Respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates
  2. Other Filtering Facepiece Respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, 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
  3. Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges
  4. PPE surgical masks, including masks that cover the user’s nose and mouth and provide a physical barrier to fluids and particulate materials
  5. PPE gloves or surgical gloves, including exam gloves and surgical gloves and such gloves intended for the same purposes

Additional materials could be added to the export ban if FEMA determines it necessary to ensure adequate domestic supply. However, in the few days after the rule issued, FEMA and CBP have actually expanded the available exceptions, taking into account reported feedback from private industry and other agencies. The original temporary rule excepted from the ban, and need for FEMA review, shipments that met two conditions:

  1. The shipment is made by or on behalf of a US manufacturer with continuous export agreements with customers in other countries since at least January 1, 2020; and
  2. At least eighty percent (80%) of the manufacturer’s domestic production of covered materials, on a per item basis, was distributed in the United States in the preceding 12 months.

As of April 15, the CBP and FEMA have identified several additional exclusions to the rule, some for purely practical reasons, and others for policy reasons:

  1. Exports to Canada or Mexico
  2. Exports to US Government entities such as US military bases overseas
  3. Exports by US Government agencies
  4. Exports by US charities
  5. Exports by critical infrastructure industries for the protection of their workers
  6. Exports by the 3M Company
  7. Express or mail parcels that do not meet the commercial quantity definition above
  8. In-transit shipments

PROCEDURE AND POTENTIAL EXEMPTION

Not surprisingly, as an emergency action, implementation of this temporary rule is subject to much uncertainty. The temporary rule warns that “before any shipments of such covered materials may leave the United States, CBP will detain the shipment temporarily, during which time FEMA will determine whether to return [it] for domestic use, issue a rated order for [the items], or allow the export of part or all of the shipment.” FEMA, lacking significant experience with regulating these items, much less their export, promises only that it will make the required decisions “within a reasonable time of being notified of an intended shipment.” Thus, a key inflection point will be how long it takes CBP to get the information to FEMA, in addition to how long it takes FEMA to make its decision. While we expect that the process will smooth out as the agencies gain experience, exporters should anticipate and factor into their commercial activities the following hiccups:

  1. Temporary detention by CBP (neither the temporary rule nor CBP’s guidance indicates whether parties may be charged detention fees; however CBP’s internal guidance indicates that 19 USC § 1595a(d) seizures and forfeiture will not generally apply to these detentions)
  2. If FEMA determines that the items will be subject to a rated order, consignment of the goods to FEMA
  3. Delays while CBP determines whether a shipment meets one of the enumerated exceptions
  4. AES-related delays as the system “catches up” with the new rules and exceptions

FEMA’s determination whether to subject the PPE articles to a rated order and effectively seize them will take into account at least the following factors:

  1. The need to ensure that scarce or threatened items are appropriately allocated for domestic use
  2. Minimization of disruption to the supply chain, both domestically and abroad
  3. The circumstances surrounding the distribution of the materials and potential hoarding or price-gouging concerns
  4. The quantity and quality of the materials
  5. Humanitarian considerations
  6. International relations and diplomatic considerations

Ultimately, FEMA’s mandate is to make all decisions consistent with promoting the national defense in the context of the COVID-19 emergency. See 44 CFR 328.102(b).

PENALTIES FOR NONCOMPLIANCE

Covered materials may not be exported unless they either fall within the scope of the exemptions in the temporary rule or in CBP’s subsequent guidance, or if FEMA, upon review, determines that a rated order will not be applied to the goods.

Since all properly identified goods will be subject to the FEMA temporary rule, noncompliance will most likely arise in the form of misclassification, intentional or otherwise. Thus, in addition to the penalties available under the DPA, as implemented through FEMA’s rules (45 C.F.R. § 101.74), exporters may find much more vigorous enforcement of other export laws applicable to these activities.

DPA Penalties: The DPA establishes the penalties available for violations of the export ban. Those penalties are repeated in the relevant FEMA regulations: Willful violations are punishable by a fine of up to $10,000 or imprisonment up to one year, or both. Neither the DPA nor FEMA’s regulations suggest what constitutes a violation, and thus whether a single shipment might result in multiple violations.

FEMA also has the authority to conduct investigations and issue requests for information to identify noncompliance with the DPA and temporary rule, or to seek an injunction if a company is about to engage in any acts or practices that may violate the DPA or temporary rule.

Other potential penalties: Violations of the temporary rule could also be subject to other types of violations, some of which carry more severe consequences. These include various violations that would arise if an exporter thought misclassifying PPE as something else might be a way to avoid the impact of the temporary rule, including:

  1. Under 18 U.S.C. § 554, any attempts to smuggle merchandise out of the United States with knowledge that the export violates US law or regulation can result in up to 10 years’ imprisonment, a fine, or both; and
  2. The Foreign Trade Regulations provide for fines of $10,000 per violation for failing to file or knowingly filing false information in the Automated Export System as well as imprisonment up to five (5) years. Willful AES violations also subject the merchandise to forfeiture under 15 C.F.R. § 30.71(a)(3).

EXPECT DELAYS; ANTICIPATE THE NEED TO ENGAGE

Although FEMA states that it will endeavor to minimize disruptions to the supply chain by making determinations within a “reasonable time” of receiving CBP’s notification, PPE exporters, and exporters of products that CBP might mistake for PPE, should expect shipment detentions and delays while both agencies develop their internal processes and allocate staffing.

The temporary rule provides that FEMA may make additions to the list of covered materials. As the COVID-19 supply chain adjusts, exporters should expect that the export ban may also adjust to meet changing needs. Manufacturers with products being used to treat or prevent COVID-19, particularly health and medical resources that were among those designated by HHS on March 25, but are not yet covered by the export ban, should anticipate that these other products may also become subject to the export ban.

Manufacturers and exporters of products identified by HHS should consider proactively engaging with FEMA to minimize later effects if the ban is expanded. For example, for companies that believe their exports would meet the conditions of the exemption, consideration should be given to reaching out to FEMA and/or CBP to establish whether their goods would be covered (if there is any doubt).

Similarly, producers of other HHS covered products should proactively address terms and conditions under the assumption that their products might be subject to the temporary rule. This would help insulate such exports from commercial claims if and when the rule is expanded.

Unfortunately, neither the temporary rule nor CBP’s guidance provides readily discernible criteria for determining what is in or outside the categories covered by the rule. Some products will clearly be within the rule; some will not. Thus, parties may wish to engage with CBP to determine whether Harmonized Tariff Codes will eventually dictate the scope of covered merchandise, or whether FEMA or CBP can provide other guidance.

EXEMPTION UPDATE (EFFECTIVE APRIL 17, 2020)

FEMA recently announced 10 additional exemptions to the temporary rule, as follows:

  1. Shipments to US commonwealths and territories
  2. Exports by nonprofit or nongovernmental organizations solely for donation to foreign charities or governments for free distribution (not sale)
  3. Intracompany transfers by US companies from domestic facilities to company-owned or affiliated foreign facilities
  4. Exports solely for assembly in medical kits and diagnostic testing kits destined for US sale and delivery
  5. Sealed sterile medical kits and diagnostic testing kits where only a portion of the kit is made up of one or more covered materials that cannot be easily removed without damaging the kits
  6. Declared diplomatic shipments from foreign embassies and consulates to their home countries
  7. Shipments to overseas US military addresses, foreign service posts (DPOs), and embassies
  8. Shipments in transit through the US with a foreign shipper and consignee
  9. Shipments for which the final destination is Canada or Mexico
  10. Shipments by or on behalf of the US federal government, including the military

For items 2, 3, 4, 8, and 9 above, FEMA will require a letter of attestation to be submitted to FEMA via CBP’s document imaging system and placed on file with CBP, certifying to FEMA the purpose of the shipment of covered materials. The letter must contain a description of the exemption, sufficient supporting details to confirm applicability of the exemption, and a statement certifying that the provided information is true and accurate to the best of the exporter’s knowledge and that the exporter is aware that false information is subject to prosecution under the DPA.

In light of the overlap of the exemption for shipments to Canada and Mexico with the exemption for such shipments in the CBP guidance, it is unclear whether the latest notice by FEMA supersedes the CBP guidance or if CBP field offices will continue to exempt the additional categories of shipments in the guidance memo (e.g., exports by critical infrastructure industries). We anticipate that CBP will conform its guidance to the new FEMA exemptions.

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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
Katelyn M. Hilferty