United States: For Domestic Use Only: FEMA Issues Temporary Final Rule Implementing Export Restrictions Of PPE Under The Defense Production Act

Introduction

In the latest round of Defense Production Act (DPA) developments, the Administration has taken measures to prevent US companies from exporting priority health resources to foreign customers. The authority to implement these export restrictions has been delegated to the Federal Emergency Management Agency (FEMA). On April 7, 2020, FEMA issued a temporary final rule to address the "Prioritization and Allocation of Certain Scarce or Threatened Health and Medical Resources for Domestic Use."¹ This export restriction is novel and does not fall under existing export control authorities or regimes.

Context for the DPA

Our previous Advisory addressed the President's invocation of the DPA to support the COVID-19 response and the Department of Health and Human Services (HHS) regulatory framework for implementing the DPA.² The DPA is a Cold War-era law intended to ensure that the needs of national defense are given priority by US industry. It gives the President a broad set of authorities to manage the US industrial base to provide the government all essential materials and goods needed for the national defense. Through a series of Executive Orders and administrative actions the DPA authority has been delegated through various agencies, including the Department of Defense, HHS, and now FEMA.

The DPA provides two key authorities. The first, which has been used frequently in the defense procurement context, is to issue "rated orders" for supplies critical to national defense, which must (with limited exception) be accepted and prioritized over non-rated orders. The second is to issue "allocation orders" that direct industrial allocation of resources such as materials, services, and facilities.³According to the Congressional Research Service, the US has not invoked the allocation authority since the end of the Cold War.⁴

FEMA Temporary Final Rule

Relying on the DPA allocation authority, FEMA's temporary final rule "allocate[s] for domestic use" specific healthcare supplies. In particular, the rule designates a list of "covered materials," provided in full as an addendum to this Advisory, that may not be exported from the United States without explicit approval by FEMA."⁵The rule explains that FEMA will coordinate with Customs and Border Protection (CBP) to detain exports, and FEMA will determine the necessary action:

In making the determination, FEMA will consult with other agencies and consider the following factors:

Thus, while the rule does not impose an outright export ban on the affected materials, it does give the government the opportunity to divert all or part of the materials to domestic use.

The rule provides an exemption for "export of covered materials from shipments made by or on behalf of US manufacturers with continuous export agreements with customers in other countries since at least January 1, 2020, so long as at least 80 percent of such manufacturer's domestic production of such covered materials, on a per item basis, was distributed in the United States in the preceding 12 months."⁸ Given recent news, the impetus for this exemption appears to have been a confrontation between 3M and the Trump Administration over 3M's substantial role supplying PPE to Canada and Latin America. If FEMA determines this exemption applies, "such materials may be exported without further review by FEMA."⁹ While this particular exemption is express, FEMA retains authority to create additional exceptions, and to waive this exemption if FEMA "determines that doing so is necessary to promote the national defense."¹⁰

The rule emphasizes FEMA's authority to conduct investigations to enforce the Act. Pursuant to the DPA itself, failure to comply with an allocation order carries criminal penalties, including up to one year in prison,¹¹ and the government is authorized to seek an injunction order to prevent violations.¹² Beyond the remedies and penalties specified in the DPA itself, the FEMA rule warns of additional potential liability:

In addition, pursuant to 18 U.S.C. 554, whoever fraudulently or knowingly exports or sends from the United States, or attempts to export or send from the United States, any merchandise, article, or object contrary to any U.S. law or regulation, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise, article, or object, prior to exportation, knowing the same to be intended for exportation contrary to any U.S. law or regulation, faces up to 10 years' imprisonment, a fine, or both, if convicted.¹³

As noted in our prior Advisory,¹⁴ companies receiving DPA orders should keep careful records relating to those orders adequate to demonstrate compliance in the event of a future investigation. In light of FEMA's warning of broader liability for entities involved in the export of covered materials, such entities should consider heightened recordkeeping of all transactions relating to export of covered materials and DPA orders. While there is no particular form of recordkeeping required, records should be adequate to affirmatively demonstrate compliance in the event of future investigations regarding these export restrictions.

Conclusion

FEMA's temporary final rule provides some clarification of how the Administration will implement export restrictions, but as described above, the rule also leaves significant discretion and flexibility for FEMA and others to allow for exemptions and determine the fate of detained products. It is helpful to have the temporary rule, but we will have to wait to see how the restrictions and exemption are enforced in practice to fully understand how the process will work. While the rule is limited to masks and other protective equipment, the rule could be the template for the exercise of DPA allocation authority to other COVID-19 materials in the future. In facing future threatened use of DPA allocation orders such as this one, affected companies should follow 3M's example and engage with the federal government to ensure a more workable and fair order.

Addendum

Footnotes

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