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As the task of rebuilding from Hurricane Katrina begins, the federal government has invoked an unusual tool that requires American businesses to accept the government’s contracts and prioritize its projects above those of other customers — under threat of fines and prison. The Federal Emergency Management Agency determined in August that certain items needed for recovery operations after Katrina are “essential civilian needs supporting national defense.” Based on this determination, combined with the authority delegated by the Department of Commerce, FEMA invoked the little-known Defense Production Act (DPA) to make hurricane recovery a national priority. Within certain limits, private companies must now accept these Katrina-related contracts and can be directed to bump the government’s order to the head of their production line. This apparently marks the first time that the authority granted under the DPA has been used to respond to a domestic crisis that was not attributable to a military conflict. Presumably, this power could be similarly used in the future to provide medical services not just after a bioterrorism attack but also in response to a flu pandemic. ESSENTIAL ITEMS The DPA grants broad powers to ensure that an adequate inventory of essential items is available to the government to promote national defense. These powers are intended to assure that productive capacity exists after an attack on the United States as well as that essential mobilization requirements can be met. Under the DPA and its implementing regulations, the president is authorized to (1) require acceptance of contracts or orders to promote the national defense; (2) require prioritization of government-placed contracts or orders to promote the national defense over performance of any other contracts or orders; (3) allocate materials, services, and facilities as deemed necessary or appropriate to promote the national defense; and (4) control under certain circumstances the distribution of scarce and critical materials in the civilian marketplace that are critical to the national defense. This authority has been delegated to various agencies, including the Department of Defense, the Department of Health and Human Services, and the Department of Commerce. Other government agencies and friendly foreign nations may apply for special rating authority in support of authorized programs, which means that U.S. businesses could be required to prioritize their contracts, as well. If a company fails to comply with the government’s direction under the DPA, it may be subject to civil and criminal penalties. Any person who willfully performs any act prohibited, or willfully fails to perform any act required, by the DPA or its implementing regulations may be subject to a $10,000 fine or imprisoned for up to one year or both. In the past the authority granted by the DPA has been used to ensure the availability of essential items for the national defense. In 1998, for example, a government contractor that produced flat-panel displays decided to close its manufacturing plant and leave the market. But the government issued a directive requiring the contractor to continue making the displays to support certain military systems in the Apache attack helicopter, F-16 aircraft, and M-1 Abrams tank. Similarly, the government could invoke its authority under the DPA to ensure that vaccine manufacturers continue to produce and stockpile certain vaccines even if a company wished to stop production of the vaccines. SETTING PRIORITIES The Defense Priorities and Allocations System (DPAS) implements the authority granted under the DPA. The DPAS seeks to ensure timely availability of industrial resources to meet national defense requirements and supports rapid industrial response in times of national emergency. The DPAS also may be used to support preparation for emergencies. In particular, the DPAS establishes priority ratings for government contracts; identifies private industry’s responsibilities under the rating system; defines the rules used by the government to ensure timely delivery of industrial products, materials, and services necessary for defense program requirements; and establishes compliance procedures for industry to implement. The DPAS gives the government significant flexibility to prioritize and accelerate deliveries under its contracts in a national emergency as well as during times of military conflict. The government’s authority to issue priority orders is not boundless, however. For example, the government may not use the DPAS to obtain delivery on a date earlier than needed, a greater quantity of an item than needed, or items related to the development of chemical or biological warfare capabilities or the production of chemical or biological weapons unless such development or production has been authorized by the president or the secretary of defense. In addition, items that are commonly available in the commercial marketplace and items used for administrative purposes are exempt from the DPAS. The DPAS establishes two industrial priority ratings: DX and DO. The rating of DX is given to those programs of the highest national priority. A DO rating is assigned to vital programs. Those contracts and orders that are rated DX have equal priority and take preference over contracts and orders that are rated DO. Contracts and orders that are rated DO also have equal priority to each other and take preference over unrated orders. In addition, the Commerce Department may issue a directive mandating that a contractor or supplier (1) accept a rated order, (2) rearrange its production or delivery schedules, or (3) improve shipments under specified rated orders. Orders placed under such a directive will take precedence over all rated and unrated orders. PUSHING TO THE FRONT The DPA and DPAS apply to the full spectrum of companies, partnerships, or other organizations that produce goods or services essential to the national defense or required to support emergency preparedness. As noted, under the DPAS the government may compel a contractor to prioritize certain work, bumping lower-priority and commercial orders. For example, if a company is awarded a contract with a DO rating and a delivery date of Jan. 15, 2006, the company must arrange its production schedule to meet that delivery date even if it delays the previously scheduled production or delivery of an unrated order. Further, a company is obligated to accept a rated order as long as the company makes the item, the order includes the normal terms of sale associated with the item, and the company can meet the delivery dates that the government requires. In addition to providing priority scheduling, the government’s prime contractors are required to incorporate the DPAS rating into their subcontracts that support the rated order. For example, pharmaceutical companies need many different components to produce vaccines. If the government determined that increased production of smallpox vaccines was necessary for the national defense and ordered delivery of these vaccines on a priority basis, the manufacturers would be obligated to incorporate the priority rating in their orders to their suppliers. Those suppliers similarly would be obligated to give preferential scheduling to the rated orders. Because the number of companies that produce vaccines and vaccine components is limited, the volume of smallpox vaccines in production would increase, but the production of other vaccines would be delayed. And the drug industry would have little choice but to comply. LIMITED RIGHTS Under certain circumstances a contractor may reject a DPAS order. For example, a contractor may reject a rated order if it is not capable of producing or supplying the item or if it has not sold the item for at least two years before receiving the order. A contractor may also reject an order if it will interfere with the delivery of any previously accepted rated order that is rated at the same or higher priority. Instead the contractor must offer to accept the new order based on the earliest delivery date otherwise possible. A contractor cannot reject a rated order simply because it has previously accepted a lower-rated or unrated order. Rather the contractor must reschedule the lower-rated or unrated order. Any rejection must be timely conveyed, in writing or electronically, to the government. The contractor must inform the government of the reasons for its rejection. Under certain circumstances it must provide the earliest date on which delivery could be made and make an offer to accept the order under terms that would permit it to deliver the item at that date. But a company may not reject a rated order simply because it has not previously conducted business with the government. Sometimes, performing a government contract on a priority basis may cause the company to breach another contract with a nongovernment customer. While the government is not obligated to compensate the company for any lost business, the DPA provides a defense if the nongovernment customer sues. The DPA states that a person (including a corporation, partnership, or association) may not be held liable for damages or penalties for any act or failure to act that results directly or indirectly from that person’s compliance with any provision of the DPA or the DPAS. In sum, the government powers under the DPA are unique and wide-ranging. Many companies are completely unaware that these powers exist, and they may learn about the DPA only when they receive a priority order after a national emergency.
Joseph D. West, a partner in the D.C. office of Gibson, Dunn & Crutcher, is co-chair of the firm’s government and commercial contracts practice group. Mary Ita Snyder, of counsel in the D.C. office, is also a member of that group.

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