On 18 March 2020, pursuant to the provisions of the Defense Production Act of 1950 (“DPA”), President Donald Trump signed an Executive Order that, among other things, authorized the Secretary of Health and Human services to direct private sector production of goods and resources in response to the COVID-19 pandemic. An immediate consequence of this action is that companies like Ford, General Motors, and Tesla are now making ventilators.
One important question that arises from the President’s power is whether companies, in complying with a DPA order, are also conferred with immunity when their actions infringe the intellectual property rights of others. We believe companies are immunized provided they take care to limit the use of others’ intellectual property only to the extent necessary to comply with a DPA order.
The purpose of the DPA is to ensure that domestic industries supply materials and services for the national defense and to prepare for and respond to military conflicts, natural or manmade disasters, or acts of terrorism within the United States. The President has a number of tools to accomplish this goal, including:
- requiring companies to accept government contracts and orders for goods and services
- requiring companies to give priority to government contracts over all others
- preventing hoarding of designated scarce materials
- providing guaranteed loans for businesses
- setting wage and price controls
- requiring installation of equipment in industrial facilities
- preventing certain mergers, acquisitions, and takeovers
The scope of the authorization and any immunity flowing from it is particularly important in the context of manufacturing, where the manufacture and sale of an item as directed could infringe the patent rights of a third party.
The DPA is silent on the treatment of intellectual property rights, and it does not include any specific provisions regarding licensing, royalties, claims for infringement, etc. However, 28 U.S.C. §1498 may provide a safe harbor for the company acting under government orders pursuant to the DPA. Specifically, section 1498(a) provides that whenever the United States, or any person or company working with the authorization or consent of the United States, infringes a patent owned by another party, that party must bring suit against the United States in the US Court of Federal Claims. In other words, according to 28 U.S.C. §1498, the proper patent infringement defendant is the U.S., not the company.
However, this does not mean that a manufacturer is free to infringe a patent under any circumstances. Whether the government has “authorized” patent infringement will likely depend on the specific provisions of the DPA contract issued to the company. Moreover, despite the protections of §1498, it is possible that the contract may require the manufacturer to indemnify the government against damages for infringement. If it is ambiguous whether infringement is authorized, a manufacturer should make efforts to avoid infringement. These efforts may include developing design arounds or seeking a license from the patent owner.
Another important provision of the DPA is the President’s power to procure and install equipment industrial facilities without consent of the owners. Specifically, the President is authorized to procure and install equipment in federally owned and privately owned facilities, to provide for the modification or expansion of privately owned facilities, and to sell or transfer equipment to privately owned facilities. This section raises obvious concerns.
For example, an equipment manufacturer may ordinarily prohibit the distribution of its equipment outside of its authorized channels, particularly if the equipment contains proprietary parts or software. An equipment owner who is subject to a DPA order must comply. However, although the equipment manufacturer may likely seek recovery from the U.S. of damages for infringement, it cannot prevent use of the equipment by competitors or other parties who are the subject of a DPA order.
Nonetheless, if a facility owner is required to install and use equipment pursuant to a DPA order, it should keep in mind that it is likely protected from infringement of intellectual property associated within the equipment only to the extent that the use is necessary to comply with the government’s orders. Use of the equipment outside the scope of the contract may shift liability for infringement from the U.S. government to the facility owner.
Note also that the limited immunity above is for infringement claims. Manufacturers and others may still be liable for personal injury and other type of damages resulting from activities undertaken in compliance with a DPA order.
In summary, while the DPA provides some protections for companies acting pursuant to an order, there does not appear to be bright line rule, so whether a company can avoid liability will likely depend on the specific government contract and the unique facts surrounding the manufacturer and the goods. Therefore, owners of intellectual property should take care to limit the proprietary or confidential elements of any goods or services that they are required to provide pursuant to a DPA order. Similarly, manufacturers should take care to limit the use of others’ intellectual property only to the extent necessary to comply with an order. In either case, companies subject to a DPA order should carefully document their activities in complying with the order in case they end up becoming a party in a lawsuit once the COVID-19 pandemic is over.
