Insights
Corporate Alert: The Defense Production Act - Incentivizing Production in the Private Sector
By Brian D. Merklin & Daniel L. Silfani on March 23, 2020
The spread of COVID-19, or the novel coronavirus, has sparked an increase in demand for medical supplies and equipment. In fact, this pandemic has caused shortages in protective medical gear, and is likely to result in a shortage of ventilators and other supplies and equipment needed to treat patients suffering from the virus. President Trump, along with Congress, has contemplated the use of several different tools necessary to fight this national emergency.
What is the Defense Production Act?
On Friday, March 20, 2020 President Trump invoked the Defense Production Act (“DPA”). The DPA was first enacted during the Korean War and allows the President to ramp up and accelerate production of certain goods and supplies required in war or during a national emergency. To meet these needs, the DPA empowers the Federal Government to incentivize production in the private sector, and prioritization of the Government’s needs. Under the DPA, the Government can achieve these goals by requiring prioritization of its orders for goods and supplies, making direct loans or guarantees to purchase such goods, and subsidizing production of goods and supplies to meet critical needs. The Government may also control the allocation of resources and supplies, but may only employ price and wage controls with a joint act of Congress.
In the instant case, this would allow private manufacturers to switch gears to produce much needed ventilators and medical supplies to aide in the coronavirus pandemic response.
What effect could the DPA have on manufacturers?
In the event that President Trump utilizes the powers of the DPA, the potential effects on manufacturers may be wide-ranging and unpredictable. For example, manufacturers may be required to prioritize Government contracts over their own customers. Additionally, manufacturers which do not produce medical supplies could potentially be pushed to change their production line or facility and begin producing medical supplies and equipment. For some manufacturers, this may be a great and expensive undertaking. However, the needs of the country in its fight against the pandemic may justify the use of the provisions of the DPA.
The DPA could also potentially bring advantages to manufacturers who position themselves to meet the Government’s needs. The amount of medical supplies and equipment will likely be immense. Therefore, the opportunity to produce and sell supplies to meet this increased demand offers manufacturers the ability to purse profits despite the potential shutdown of nonessential businesses. As a result, it may prove beneficial for manufacturers to fulfill orders on Government contracts made pursuant to this Act.
What is the Defense Production Act?
On Friday, March 20, 2020 President Trump invoked the Defense Production Act (“DPA”). The DPA was first enacted during the Korean War and allows the President to ramp up and accelerate production of certain goods and supplies required in war or during a national emergency. To meet these needs, the DPA empowers the Federal Government to incentivize production in the private sector, and prioritization of the Government’s needs. Under the DPA, the Government can achieve these goals by requiring prioritization of its orders for goods and supplies, making direct loans or guarantees to purchase such goods, and subsidizing production of goods and supplies to meet critical needs. The Government may also control the allocation of resources and supplies, but may only employ price and wage controls with a joint act of Congress.
In the instant case, this would allow private manufacturers to switch gears to produce much needed ventilators and medical supplies to aide in the coronavirus pandemic response.
What effect could the DPA have on manufacturers?
In the event that President Trump utilizes the powers of the DPA, the potential effects on manufacturers may be wide-ranging and unpredictable. For example, manufacturers may be required to prioritize Government contracts over their own customers. Additionally, manufacturers which do not produce medical supplies could potentially be pushed to change their production line or facility and begin producing medical supplies and equipment. For some manufacturers, this may be a great and expensive undertaking. However, the needs of the country in its fight against the pandemic may justify the use of the provisions of the DPA.
The DPA could also potentially bring advantages to manufacturers who position themselves to meet the Government’s needs. The amount of medical supplies and equipment will likely be immense. Therefore, the opportunity to produce and sell supplies to meet this increased demand offers manufacturers the ability to purse profits despite the potential shutdown of nonessential businesses. As a result, it may prove beneficial for manufacturers to fulfill orders on Government contracts made pursuant to this Act.
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