Following the Trump administration’s declaration of a public health emergency at the end of January, numerous states have successively declared states of emergency due to the coronavirus health crisis. These declarations triggered many states’ price gouging laws, which typically outlaw the sale or rental of essential goods and services, for example, water, toilet paper, protective masks, hand sanitizer, fuel, power, etc., at an unconscionable or unreasonably high price. In states without price gouging laws, lawmakers are drafting legislation prohibiting similar acts and are using state consumer protection laws to prosecute price gouging behavior in the interim. Nationwide, state attorneys general are aggressively enforcing price gouging laws. Moreover, on March 25, 33 state attorneys general sent letters to the CEOs of Amazon, Craigslist, and several other online platforms calling on the companies to take measures to prevent price gouging on their online platforms.
While the concept of price gouging is not a new one — many of these laws have been on the books for years and were used to prosecute bad actors after events such as 9/11, hurricanes, and even particularly bad flu years — what is unusual now is the national scope of the coronavirus emergency and the level of involvement of the federal government. On Monday, March 23, the president signed an executive order to prevent hoarding and price gouging of crucial medical supplies. It authorizes criminal prosecution of anyone whose purchases exceed reasonable limits. Attorney General Barr concurrently announced that the Justice Department has already launched hoarding investigations to carry out the order. Add this to the (majority of) states pursuing the issue along with the online platforms, and the risk that accompanies violation of the price gouging laws increases significantly — particularly if you sell medical supplies and equipment.
How might this impact your business?
Failure to comply with the applicable price gouging laws might put you and your company at a significant risk of prosecution. Penalties include criminal and civil consequences.
- Criminal penalties. Criminal penalties include a misdemeanor and imprisonment. The DOJ has indicated it may pursue these matters criminally.
- Civil penalties and fines. Civil repercussions include injunctive relief, restitution, and fines ranging from $1,000 to $40,000 per violation, with some jurisdictions adding up to $250,000 in additional fines if the affected consumers are elderly.
Other laws create a private cause of action to recover for injury or loss, which may expose companies to class action litigation. And in at least one jurisdiction, the mayor may revoke, suspend, or limit the licenses, permit, or certificate of occupancy of any violator. Thus, comprehensive compliance measures are critical.
Sellers, particularly those in the medical supplies, pharmaceutical, and CPG industries, are highly susceptible to price gouging investigations during a public health emergency. Retailers and consumers have highlighted the shortage of N95 respirators and surgical masks, gloves, hand sanitizer, and hygiene supplies. An increased demand for goods coupled with a limited supply customarily leads to price increases throughout the supply chain and distribution channels. Middlemen and retailers may be “squeezed” and unsure what costs may be passed on to consumers when their suppliers raise costs, while manufacturers may be facing other pressures. Thus, to minimize risks, sellers should seek legal counsel before transferring costs downstream.
Actions to take.
- Compile a record of price points for your goods or services during (at least) the 30 days immediately prior to a state’s emergency declaration.
- Keep a record of all costs attributed to your business by upstream suppliers and any costs incurred by your company as a result of the emergency declaration, g., costs associated with preparation for a city-wide lockdown and securing offsite storage for its next shipment of goods.
- Seek legal counsel for a complete review of applicable state laws.
Price gouging basics.
The laws involving price gouging are evolving and inconsistent. Determining and managing where you are selling are critical. State legislators share a general consensus on what goods and services are essential to the health, safety, and welfare of consumers during a state emergency. However, state laws differ in two critical ways:
- Inconsistent standards. States have inconsistent standards for what constitutes an unconscionable price. A price increase may be permissible under one standard but would violate the law in another state. For example:
- In Iowa, a price is excessive if it is not justified by the seller’s actual costs of acquiring, producing, selling, transporting, and delivering the actual product sold, plus a reasonable profit;
- A price can be unconscionable under Florida law under one of several tests, including if the amount charged “grossly exceeds” the average price at which the same or similar commodity was readily obtainable in the trade area during the 30 days immediately prior to a declaration of a state of emergency;
- In California, a price is unconscionable if it exceeds by 10% the price charged immediately preceding the declaration; and
- Under New York law, whether a price is unconscionably excessive is a question of law for the court to determine. The court is instructed to examine whether the increase in price is unconscionably extreme and/or if there was an exercise of unfair leverage or unconscionable means.
- Non-uniform exceptions and coverage. State laws vary concerning the products covered and the circumstances excepted from the law. For example:
- In California, a price increase is allowed if the person can prove that the price increase is “directly attributable to additional costs imposed on it by the supplier of the goods” or “for labor or materials used to provide the services.”
- Florida’s price gouging law does not apply to sales by growers, producers, or processors of raw or processed food products, except for retail sales of such products to the ultimate consumer within the area of the declared state of emergency.
Pending legislation and actions.
As the COVID-19 pandemic continues to develop, price gouging legislation and actions are developing as well. Several states that did not have specific price gouging laws are currently drafting legislation. Washington state has a price gouging bill pending, and Ohio State Attorney General Dave Yost has urged lawmakers to enact an anti-price gouging law.
Other states are expanding or strengthening their laws. For instance, New York has five proposed bills that, taken together, target medical supplies price gouging and price gouging by manufacturers of prescription drugs, create a private right of action, define an unconscionably excessive price, and impose criminal penalties. Similarly, Maryland lawmakers have pending legislation that targets gasoline price gouging.
We can expect heavy enforcement in this area as a result of the coronavirus pandemic. Several state attorneys general have issued statements and news releases on their offices’ commitment to enforcing price gouging laws. And state and federal coronavirus-related task forces have been established to combat price gouging. For example, the California attorney general has a group of investigators who are specifically engaged in finding price gouging, and its district attorneys have also focused on finding price gouging and bringing suit against such activities.
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Because the contours of federal and state price gouging laws vary, a comprehensive understanding of the state laws that may impact your business can only be determined on a state-by-state basis. Companies should consult with legal experts to best understand whether and how applicable state laws and exceptions may apply. To prepare, keep careful records of all prices charged for the 30 days prior to the current public health emergency and track all product input costs, as records will be essential if you are ever challenged under federal or state price gouging laws.