skip to main content

March 26, 2020

Stroock Special Bulletin

By: Chris Griner, Shannon Reaves, Gregory Jaeger, Christopher R. Brewster, Erin Bruce Iacobucci

COVID-19 May Reframe CFIUS Analysis for Years to Come

On March 18, 2020, in response to the spread of COVID-19, the President signed an executive order authorizing the United States Department of Health and Human Services (“HHS”) to use Defense Production Act (“DPA”)[1] authorities to issue priority contracts and orders for, and to allocate, health and medical resources necessary to meet “surge capacity and capability.” Relevant resources include items such as personal protective equipment (“PPE”) and “ventilators,” and may expand to other items identified by HHS.[2] At this writing, the President has yet to formally invoke the use of the DPA, reportedly choosing instead to rely upon voluntary action by U.S. manufacturers to meet current needs. In that regard, it is worth noting that, on March 24, 2020, the Federal Emergency Management Agency (“FEMA”) announced it was going to use the DPA to procure testing kits and protective masks, before retracting its statement later in the day.[3] Thus, although the administration has yet to invoke the DPA, the prospect remains, and commercial contractors in the health care sector, as well as in other industries with capabilities relevant to the COVID-19 pandemic, should assess the requirements of the DPA, and how to address potential DPA compliance issues.[4]

The COVID-19 pandemic has also served to highlight the critical nature of the health sector in matters of national security. Foreign investors as well as U.S. businesses in the health care sector seeking foreign investment must take into account the prospect of additional scrutiny under other DPA authorities, most importantly the Foreign Investment Risk Review Modernization Act (“FIRRMA”),[5] which undergirds reviews by the Committee on Foreign Investment in the United States (“CFIUS”). In this respect, the dependency of U.S. companies on foreign supply chains to meet the nation’s COVID-19 demands, as well as the potential demands of future health care crises, will undoubtedly become an area of intense focus by the various DPA authorities, including HHS and CFIUS. Although HHS and the health agencies are not members of CFIUS, the President can and does appoint member agencies to assist in the review of discrete cases as and when their expertise is required.[6] Of particular concern in such cases will be the U.S.’s dependency on China and other non-allied countries for medical equipment and pharmaceuticals, and how sources of supply could be exacerbated or compromised by foreign acquisitions.[7] Indeed, even acquisitions and significant investments by investors organized in allied countries can be expected to receive heightened attention to determine how such investments could affect the nation’s ability to respond to a health crisis. In any event, the crisis can be expected to support efforts by relevant government agencies, including the Department of Defense, to identify U.S. businesses that are critical, not only to a U.S. COVID-19 response, but also to the nation’s ability to respond to future health care crises. As non-traditional manufacturers gear up to make medical equipment, a company’s history as an alternative source of supply could also figure in such analyses.

For years, CFIUS has been expanding its reviews beyond the traditional defense sector to reach, among other things, “critical infrastructure,” a term that encompasses the health sector. Under CFIUS regulations, foreign investments into critical infrastructure receive heightened scrutiny. The term is defined by CFIUS regulations to include “systems and assets […] so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”[8] This broad definition is plainly intended to allow CFIUS to adapt to changing conditions. There is little question in the current crisis that the nation’s supply of ventilators, PPE, respirators and other devices, as well as pharmaceuticals, not to mention the domestic supply chains required to produce those items, would be viewed by CFIUS as “critical infrastructure.” Indeed, to the extent there was ever any question whether U.S. “critical infrastructure” extended to the production of even mundane medical supplies, the current crisis may remove all doubt. Accordingly, as noted above, covered transactions involving health care companies can be expected to face increased attention by CFIUS for the foreseeable future.[9] Foreign investors considering acquisitions in these or related sectors will need to be mindful of CFIUS requirements.

If you operate in an industry that would be potentially affected by the use of the DPA and its related regulations, and have questions about how the DPA could create potential procurement/compliance issues affecting your business, or how the DPA can affect your ability to seek foreign investment in the future, including questions concerning potential CFIUS review, please do not hesitate to contact us.

__________________________________________

For more information:

Chris Griner

Shannon Reaves

Gregory Jaeger

Tatiana O. Sullivan

Christopher R. Brewster

Erin Bruce Iacobucci

[1] Public Law 81-774, or 50 U.S.C. §§ 4501 et seq.

[2] Executive Order of March 18, 2020, “Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of COVID-19,” and 45 C.F.R. § 101.20. (“Health resources” includes drugs, biological products, medical devices, materials, facilities, health supplies, services, and equipment required to diagnose, mitigate, or prevent the impairment of, improve, treat, cure, or restore the physical or mental health conditions of the population.)

[3] “FEMA: Defense Production Act no longer needed to secure thousands of test kits,” Politico, Mar. 24, 2020, available at: https://www.politico.com/news/2020/03/24/trump-administration-defense-production-act-146070.

[4] In the interests of national defense (which includes emergency preparedness), the DPA authorizes the President and delegated agencies to prioritize contracts and orders (“rated orders”) and allocate goods and services, and prevent hoarding (“allocation orders”). These authorities are implemented through the Federal Priorities and Allocation System and will require compliance by any person capable of performance (“recipients”). HHS issues rated and allocation orders through the Health Resources Priorities and Allocation System (“HRPAS”). Failure to comply with HRPAS requirements is punishable by fine or imprisonment, or both.

[5] “Foreign Investment Risk Review Modernization Act of 2018,” Title XVII, Subtitle A of P.L. 115-232 (Aug. 13, 2018).

[6] Also, the Treasury Secretary has the ability to consult with any other Federal department or agency during a review, as he or she deems appropriate.

[7] Congressional Research Service, IF11434, Version 4, March 2, 2020, “COVID-19: U.S.-China Economic Considerations,” available at: https://crsreports.congress.gov/product/pdf/IF/IF11434.

[8] 31 CFR § 800.214.

[9] Stroock Special Bulletin, “New Decade, New CFIUS: New Rules Expand CFIUS Reach Into Non-controlling Investment and Real Estate,” Jan. 22, 2020, available at: https://www.stroock.com/news-and-insights/new-decade-new-cfius/; Appendix A to 31 C.F.R. Part 800—Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure, 85 Fed. Reg. 3112 (Feb. 13, 2020), available at: https://www.federalregister.gov/documents/2020/01/17/2020-00188/provisions-pertaining-to-certain-investments-in-the-united-states-by-foreign-persons.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.