Defense Production Act

The COVID-19 pandemic has affected all sectors of society in serious ways, and supply chains are no exception. With rising needs for hospital and medical equipment, and a public rush to purchase items like face masks, the Federal government stepped in to designate certain resources as “scarce”, which puts restrictions on their purchasing and accumulation. 

Laws to uphold these restrictions are already in place. In August 2020 a Georgia man, Milton Ayimadu, was found to be hoarding over 200,000 face masks, and is now faced with charges under the Defense Production Act. Milton had purchased the masks at a low price from overseas, and was selling them for an inflated price on his baby clothing website.

Milton is just one of several individuals who have been caught stockpiling masks and gloves, and engaging in price gouging; while these individuals had clearly set out to conduct unfair business practices, honest businesses can get caught up in the Defense Production Act too.

If you are in the business of medical supply sale, or deal with medical supplies as a part of your organisation, you may have been subject to a notice under the Defense Production Act. It’s critical to know what the law is, and what you are allowed to do (and what you are not), as a charge under this section can have real consequences. You need to be aware of your obligations and rights, and speak to a lawyer if you have been warned already.

What Does the Law Say?

The Defense Production Act sets out in 50 US Code. § 4512 that it is an offense to accumulate:

  1. in excess of the reasonable demands of business, personal, or home consumption; or 
  2. for the purpose of resale at prices in excess of prevailing market prices

“materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation.”

This is to prevent hoarding of goods, and price gouging. The problem is that this part of the US Code has not been litigated frequently, which makes it difficult to know how it will be interpreted by the courts, and which kinds of behaviour are permitted (and which are not). 

The penalty for non-compliance with these provisions can be a fine of up to $10,000 or imprisonment for up to one year. In addition, any materials deemed to be captured by this provision can be seized by the Federal government. Finally, there are also state-specific laws against price gouging, and the entire framework of these laws is patchwork and complex. This makes it much harder to comply, and there is risk and liability involved if you are operating with essential goods.

What Materials are Scarce Materials?

To know which materials have been designated as “scarce materials” or materials that are not allowed to be accumulated, this will be published in the Federal Register. 

In response to the COVID-19 pandemic, the Department of Health and Human Services (HHS) issued a Notice under the Defense Production Act to designate a list of materials as scarce materials. The materials that were included in this notice were:

N-95 Filtering Facepiece Respirators Medical gowns or apparel
Other Filtering Facepiece Respirators
(e.g., those designated as N99, N100,
R95, R99, R100, or P95, P99, P100)
Personal protective equipment (PPE)
Powered Air Purifying Respirator (PAPR) Elastomeric, air-purifying respirators
and appropriate particulate filters/cartridges
PPE surgical masks Portable Ventilators
PPE face shields PPE gloves or surgical gloves
PPE face masks Sterilization services for any device
Ventilators, anesthesia gas machines
modified for use as ventilators,
and positive pressure breathing devices modified for use as ventilators
Drug products containing
chloroquine phosphate or hydroxychloroquine HCl
as the active ingredient
Disinfecting devices for clinical settings Ventilator tubing connectors, and ventilator accessories

How Much Can I Stock?

It can be hard to know how to comply with these provisions, particularly when it comes to the provision concerning price gouging. There is a fine line between making sales at a profit and price gouging, and a lot depends on the definition of “prevailing market prices”. There are questions around whether the “market price” is set by the government, or set by the free market in non-emergency times. 

The definition of “in excess” also varies from state to state. Whether or not a price or amount of stock is excessive will be determined usually by a percentage increase comparison to a pre-emergency period average. Courts will also consider what your business is usually involved in, or whether you have expanded your business to resell these products only during a time of emergency. 

If you are involved in the sale of medical or essential supplies, make sure that you:

  1. Keep clear records of all purchases, market prices, and resale rates so you can show that your prices were not “in excess of prevailing market prices”.
  1. Keep records of stock and trade agreements, so that you can show you tried to maintain stock that was not “in excess of reasonable demands”.
  1. Maintain competitor pricing information and business details where possible, to illustrate your position in the market and what you have based your stock and pricing on.
  1. Document any information that changed the way you price your products, such as increases in labor costs or supply costs. 

The Federal government has set out to create a task force to deal with clearer definitions of these concepts, but as of yet they are not available.  

What to Do if You Have Been Charged or Warned under the Defense Production Act

If you have received a warning under the Defense Production Act for price gouging or hoarding behaviour, it is important that you know what you can do. 

  1. First, contact a lawyer straight away.
  1. Next, gather all of your pricing and stock records to show how you calculated stocks and sale prices.
  1. Collect information on any reasoning behind why your prices changed at any point.
  1. Collect evidence on market prices, your usual business purposes, and any efforts that you made to comply with the law.

Call Stechschulte Nell For Help 

If you have been charged or warned under the Defense Production Act for price gouging or hoarding of scarce materials, the law office of Stechschulte Nell can advise you. Don’t wait. Call our top-rated Florida law firm at (813) 280-1244 to speak to an experienced federal defense attorney. We’re available 24/7 to take your call.


Updated 13 August 2020

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