Does California Need a Defense Production Act for Medical Supplies?

Gov. Gavin Newsom called the scramble for supplies "the wild, wild, west"— a months-long free-for-all by state and local governments to purchase protective equipment, ventilators and testing supplies needed on the front lines of the fight against COVID-19.

A lack of coordination by the federal government left states like California on their own to negotiate contracts for goods desperately needed to protect health care workers and safeguard the reopening of businesses as the world attempts to respond to a global pandemic.

Into that void stepped some suppliers who charged sky-high prices for masks. Other deals fell through entirely.

"We all took off on a plane that we were building as we were flying," Newsom said on May 6.

But another path may have been possible: the enactment of a state-level Defense Production Act, allowing California to marshal its enormous economy to mandate the production, and control the costs, of much-needed supplies.

The move would have been a challenge, but not impossible. The concept of a state-level act raises logistical and legal challenges that may have posed problems in the middle of an emergency.

The federal Defense Production Act, enacted in 1950 during the Korean War, gives the U.S. president wide powers to mobilize industry in order to prevent supply shortages.

Under the act, the president can require businesses to prioritize government contracts above other orders, redistribute supplies to where they are most needed and even direct companies to produce vitally needed goods.

President Trump has been widely criticized for not using the law's full authority in addressing a nationwide shortage of tests and protective equipment. As the coronavirus pandemic worsened and health care workers and epidemiologists pleaded for more masks and testing supplies, Trump told state officials they were responsible for procuring the goods they need.

In California, this led to a rush by the Newsom administration to secure contracts with manufacturers across the globe, while encouraging companies based in the Golden State to pitch in.

In early April, the administration launched a website to request donations and solicit offers for medical supplies.

A handful of companies voluntarily converted their production to meet the state's needs, such as Bloom Energy, a San Jose-based fuel cell generator company that switched to refurbishing ventilators.

But the state largely focused on striking deals with existing suppliers of personal protective equipment, including many outside California. State legislators have pushed the governor for more transparency into some of the larger deals, like the $1 billion purchase of protective masks from a Chinese car company disclosed on May 6.

Other deals for equipment fell apart entirely, including a half-billion dollar payment for medical supplies to a company now under federal investigation, first reported by CalMatters.

"There were some larger contracts that didn’t cost the taxpayers a penny but were cautionary tales," Newsom said when pressed about the deal this week.

Facing this cutthroat marketplace, some governors have longed for the certainty that could come from a state-level Defense Production Act: the potential to strong-arm suppliers within state lines and avoid an international bidding war.

"If I had a Defense Production Act in the state, I would use it," New York Gov. Andrew Cuomo said last month. "I don't have that tool, the federal government does."

The U.S. Constitution gives the federal government the power to regulate the national economy under the Commerce Clause. States have historically been prevented from taking actions that interfere with interstate business by a legal doctrine known as the Dormant Commerce Clause.

However, the idea of a state-level Defense Production Act could pass legal muster. "California or other states could do something very much like the Defense Production Act," said Stanford Law School professor Bernadette Meyler.

"The principal aspects [of the DPA] that have been relevant on the federal level are price controls and trying to make sure that people aren't exploiting the emergency by raising the price of particular needed goods or essential items," Meyler said. "The states could also do the same thing."

Instead of competing in a marketplace against other states and nations all desperate for the same supplies, California would be able to ask suppliers within its borders to place the state at the front of the line for orders, or even require manufacturers to shift their production lines to create swabs, medical glass and masks.

But any attempt by the state Legislature to create these new economic powers would likely face legal challenges from the Trump administration.

Attorney General William Barr has warned states that his office is already on the lookout for any encroachment on the federal government's oversight of the economy.

"We do have a national economy which is the responsibility of the federal government. So it is possible that governors will take measures that impair interstate commerce," Barr said on the Hugh Hewitt Show last month. "And just where that line is drawn, you know, remains to be seen.”

But the Dormant Commerce Clause has not been understood to automatically override a state's interest in protecting public safety, said John Yoo, a law professor at UC Berkeley.

"Just because a state does something that may impact interstate commerce does not mean it's automatically unconstitutional," said Yoo, who worked in the Department of Justice during the George W. Bush administration. "Generally, what the courts have done is to say the state can't pass a law which on its face discriminates against out-of-staters," such as only allowing California residents to participate in a certain industry.

"There's no reason why the state couldn't enact a law that allows it to purchase emergency products and to require that manufacturers prioritized state emergency needs first," Yoo added.

California would still have to pay companies a fair price to produce goods for the state. Costs could be contained by the state's existing laws against price gouging, already activated by the governor's emergency declaration — prevent manufacturers from raising prices on medical supplies by more than 10% of their pre-disaster cost.

As Meyler, the Stanford law professor said, "If the states were able to provide just compensation, they could and should go ahead and mandate production of essential items."

Still, the idea of a California Defense Production Act seems to have made little headway at the state Capitol, though not for legal reasons.

California's much-touted status as the world’s fifth-largest economy belies the reality that the state's manufacturing base has declined dramatically from the mid-20th century, when California factories churned out battleships, ammunition and canned food to power the military during World War II.

"I just don't think that the loss of manufacturing that we've had in the state of California really lends itself to the type of manufacturing that we're looking for here," said state Sen. Bill Dodd, D-Napa.

Dodd, who chairs the Senate Governmental Organization Committee, overseeing disaster response, said California companies such as 3-D printing manufacturers have come forward, willing to help contribute to the state's effort to produce more protective equipment.

"The reality is, while it's very generous and every mask helps, it's really not able to be done at a scale that really makes a difference," Dodd said.

For his part, Newsom acknowledged that avenue was considered, but ultimately passed over, in the early weeks of the outbreak — as the state rushed to establish supply chains for protective gear and ventilators.

As coronavirus hospitalizations climbed in March and early April, state leaders felt they couldn't wait for a reshaping of the state's economy to provide the kind of large-scale production of equipment that was already being produced elsewhere.

"We considered it, but we felt there were a lot of things already happening, and the necessity to move quickly required us to use more of these traditional supply chains," Newsom said.

"These very large-scale procurements of masks ... are in the tens of millions, hundreds of millions when we’re done with all of this," he added. "We felt that was a better way of going to meet the immediate needs because of the time delay of getting these other companies up and moving."

Dodd said California's struggle to purchase emergency supplies has exposed the state and country's reliance on international markets — and could lead state leaders to reconsider the question in the future.

"When you're in a global pandemic, everybody needs the same thing you have and when you don't manufacture it at home, there are problems," Dodd said.

"That said, the demand for these items are not 365 days a year for 50 years straight, so it's a little more difficult," he added. "But we need to be thinking about how we do this in the future."