March 25, 2020
Let’s assume you are a business owner who is struggling to keep the doors open in the face of the new coronavirus. Tomorrow morning your email beeps and you receive a purchase order from the United States Department of Health and Human Services (DHHS). DHHS has ordered 10,000 widgets from you and directed that you provide them within X days. The purchase order contains the following language. “This is a rated order certified for national defense use, and you are required to follow all the provisions of the Health Resources Priorities and Allocations System regulation at 45 CFR part 101. This rated order is rated ‘DO’ and must be accepted or rejected within fifteen days of receipt of this order.”
Welcome to the brave new world of the Defense Production Act of 1950 (DPA). The DPA is a statute that gives the president of the United States broad powers to require, prioritize and accept contracts for materials and services necessary to promote the national defense. The government does this by issuing what are called “rated orders” to various companies to require them to produce goods or services to help preserve the national defense. President Trump has invoked the DPA to help combat the spread of COVID-19. So once you receive a rated order like the one in this example you have become a government contractor—whether you like it or not.
And, importantly, following the maxim of “stuff flows downhill,” note that there is a waterfall effect throughout the supply chain such that when the government issues a rated order to Supplier A, Supplier A’s own suppliers (say Suppliers B, C and D) become subject to Supplier A’s rated orders for the materials they supply to Supplier A to enable A to produce the items for which Supplier A has received the rated order from the government.
Certainly, you will have many questions. Probably you have never heard of anything called a “rated order.” What does it mean if an order is rated “DO?” Do I have to accept the rated order? I don’t want to do business with the government—can it make me? Do I have to change my production schedule to meet this offer? Can I just decline the order?
This alert is an attempt to provide specific answers to some of the real-world questions contractors will have if they should receive a rated order. Pursuant to an executive order, President Trump has delegated the power to issue rated orders for medical supplies or services to the director of DHHS. In turn, the director has delegated this power to a number of DHHS employees. As a result, there are a large number of DHHS employees who can issue rated orders and thus become your customer.
What are my obligations when I receive a rated order?
The default position when you receive a rated order is that you must accept it. Further, you cannot charge a premium or impose conditions on the rated order that you do not impose on nonrated orders.
Are there circumstances under which I can decline a rated order?
Yes, but they are limited. You can decline a rated order if:
What does it mean when the rated order is classified as “DO?” Are there other classifications of which I need to be aware?
There are three classifications of rated orders: “DO,” “DX” and “emergency.” If you receive a rated order with a classification of DO, you must respond to the customer within 15 business days and either accept or reject the order as set forth above. A rated order with a classification of DX requires that you respond within 10 business days. A rated order that is issued on an emergency basis requires a response within 2 calendar days (not business days). If you decline the rated order, you must specify the basis for the rejection, which must be based on one of the six reasons set forth above.
My ordinary suppliers can’t provide what I need in a timely manner. What are my options?
The whole point of a rated order is that it is necessary for national defense or a national emergency. Therefore, all parties in the supply chain must give preference to filling rated orders before nonrated orders. When you place an order for supplies to fill a rated order, you must issue your own rated orders to your suppliers. That requires your suppliers to fill your orders first, even if other customers have placed orders to your supplier that were ahead of you. In turn, as noted above, your suppliers must issue rated orders to their suppliers and subcontractors to obtain the necessary supplies and services so that you can complete your rated order in a timely manner. If your suppliers cannot meet your needs, you are required to use whatever parts or supplies that you have in inventory. You can then replenish your inventory by issuing rated orders.
I can’t fill the rated order and also fill the nonrated orders for which I have contracts in the time required. This is going to cause me to breach my contracts with several of my nongovernment customers. What’s going to happen?
The good news is that you cannot be found liable for breach of contract with your other customers because you had to comply with the terms of the DPA. But if during the course of your production other bad things happen—such as OSHA violations, workers’ compensation incidents, torts committed that injure third parties and similar issues, the DPA will not protect you from any of those matters.
By and large these are uncharted waters. However, as the famous baseball executive Branch Rickey observed, “Luck is the residue of design.” There are three steps you can take to minimize the negative impact of a rated order issued under authority of the DPA.
First: Think about how you will respond if you receive a rated order for one of your products. Speak with your production team to see how you can prepare for this eventuality.
Second: If you receive a rated order, open the lines of communication with the customer immediately. Find out everything you can about what is needed, when it is needed and why your company received the rated order. Remember, you are the expert in this field. It may be that you can suggest a course of action that the government has not considered.
Third: Reach out to your lawyer for guidance.