March 16, 2020
Dentons has formed a COVID-19 Client Special Situations Team and Client Resources Hub that stands ready to assist contractors in addressing the full range of issues, both in the US and globally, that may arise in connection with the COVID-19 outbreak. This advisory is the latest update in a series of alerts that address various aspects in which the contracting community may be affected. This advisory focuses on the implications of President Trump’s emergency declaration under the Stafford Act and the government’s use of the Defense Production Act and similar authorities to acquire goods and services that may be necessary to combat COVID-19.
On Friday, March 13, 2020, President Trump declared a national emergency relating to the coronavirus (COVID-19) pandemic. This emergency declaration makes available billions of dollars in federal disaster relief funds to state and local governments pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 42 U.S.C. ch. 68. Federal Emergency Management Agency (FEMA) administers the funds, pursuant to specific federal regulations, and generally makes them available to state and local governments in the form of grants. The state and local governments will further administer the funds for specific programs through subgrants and procurement contracts to support the COVID-19 response and relief effort.
In addition to the funds made available under the Stafford Act, contractors also should be cognizant of the fact that the federal government might exercise its authority under the Defense Production Act of 1950, 50 U.S.C. §§ 4501 et seq., which is implemented by the Defense Priorities and Allocations System (DPAS), 15 C.F.R. § Pt. 700, to rapidly respond to the COVID-19 pandemic. Under DPAS, the government has the authority to prioritize government contracts for goods and services over competing customers, to allocate or control the general distribution of materials, and to offer incentives within the domestic market to enhance the production and supply of critical materials and technologies when necessary to respond to a national emergency. Contractors that have prime contracts, subcontracts or purchase orders subject to DPAS generally must quickly accept DPAS-rated orders within a short timeframe (10 to 15 days), and may only reject a rated-order in very limited circumstances. Additionally, prime contractors and subcontractors are required to flowdown these rating requirements to suppliers, as necessary to meet delivery requirements. It is therefore important for contractors to be aware of which of their prime contracts, subcontracts and purchase orders are rated.
While it is unlikely that the government would exercise the more extreme authority granted under DPAS and effectively commandeer manufacturing and other types of facilities in order to produce critical medical supplies or to support other emergency relief efforts, contractors should further be mindful that the government could also authorize companies to use certain goods and technology that is patented by other companies without the consent of the patent holder. Specifically, pursuant to the Bayh-Dole Act, 35 U.S.C. ch. 18, or 28 U.S.C. § 1498, the federal government may authorize a company to produce, for example, critical pharmaceutical products, testing equipment or other essential items that are patented by another company to combat CoVID-19. Together, these authorities essentially authorize the US government to license and authorize the practice of patented inventions by industry competitors without regard to whether the patented technology was developed with government funding or exclusively at private expense. While patent holders are not without recourse, a patent holder’s recourse is typically limited to relief from the federal government in the form of royalty payments or damages—not from the companies who have received appropriate authorization and consent to use the patented items. Notably, however, in cases involving subject inventions funded by it, the government, pursuant to the Bayh-Dole Act, may exercise its “march-in” rights that permit the government to require the patent holder to license the invention to third parties. If the patent holder fails to do so, the Bayh-Dole Act permits the government to directly license the patented technology to non-patent holders upon terms that are reasonable under the circumstances. This may presumably include the payment of reasonable royalties to the patent holder, but the relevant provision of the Bayh-Dole Act (35 U.S.C. § 203) does not specifically require the payment of such royalties, creating risk that the patent holder may not receive the compensation that might normally be due. While the Bayh-Dole Act and its implementing regulations in the Federal Acquisition Regulation (FAR) apply to small businesses and non-profit organizations, the Act authorizes the government to extend the Act’s requirements to all contractors. See 35 U.S.C. § 210(c); FAR Subpart 27.3. In this regard, the Department of Defense has extended these requirements, among others, to large contractors through a specific clause, Defense Federal Acquisition Regulation Supplement (DFARS) 252.227-7038, which includes the government’s march-in rights. See DFARS 252.227-7038(h). Therefore, contractors of all sizes should be aware of the government’s ability to exercise these rights.
The national emergency surrounding COVID-19 creates a situation in which the government may utilize its vast national security powers and emergency resources to combat the virus. Contractors must be aware of the unique issues that may arise under these circumstances as the consequences of noncompliance may be drastic.
Please contact any of the authors if you require additional guidance on specific issues.