We recently blogged here about the FTC and states combating scams, price gouging and deceptive ads, and our antitrust group issued an alert on navigating antitrust issues in the wake of COVID-19. Today, we write to provide updates about the recent focus on price gouging and how you can set prices in these difficult times while avoiding exposure for price gouging, price fixing or other antitrust violations.

On March 23, 2020, President Trump signed Executive Order 13910 aimed at preventing price gouging and hoarding of crucial medical and health supplies needed to fight COVID-19.[1] The Executive Order invokes the Defense Production Act and for certain items designated by the U.S. Department of Health and Human Services, such as personal protective equipment (PPE) and ventilators, makes it a misdemeanor for individuals and companies to accumulate these items either (1) in excess of reasonable needs or (2) for the purpose of selling them in excess of prevailing market prices.[2] U.S. Attorney General William Barr has said that the government’s crackdown was aimed at “people hoarding these goods and materials on an industrial scale for the purpose of manipulating the market and ultimately driving windfall profits. If you have a big supply of toilet paper in your house, this is not something you have to worry about. But if you are sitting on a warehouse with masks, surgical masks, you will be hearing a knock on your door.”[3] It remains to be seen what “in excess of prevailing market prices” means in this context.

Price Gouging and Price Fixing

As prices of masks, gloves, medical supplies and disinfecting products skyrocket, the internet is filled with allegations of price gouging and sometimes price fixing. Given increased demand, combined with increased costs caused by the crisis, increased prices on some essential items should be expected and are not necessarily the result of price fixing or price gouging; however, those selling essential products should expect government and public scrutiny of price increases during this crisis. Thus, it is important to understand what it means to price fix or price gouge and what businesses should do to avoid such scrutiny.

Generally, under the antitrust laws, companies are free to price their goods and services as they see fit if those decisions are made independently. Agreements among two or more horizontal competitors about what prices to charge are considered price fixing, and companies and individuals can be prosecuted criminally under federal antitrust laws and some state antitrust laws for such conduct. Price fixing can take many forms, including agreements among competitors to fix components of price such as emergency surcharges or agreements to eliminate discounts.

Price gouging occurs when a supplier of essential goods or services increases prices to exorbitant amounts to capitalize on an emergency, such as a natural disaster or global pandemic. While there is no federal price-gouging law, at least 36 individual states do have laws by which they can trigger protections against price gouging. More state price-gouging laws are in the works due to the COVID-19 crisis. Usually, price-gouging laws are activated only when the governor declares a state of emergency, and they prohibit some level of price increases for essential products. Price-gouging laws vary greatly among states and are often opaque, and enforcement of those laws can be applied selectively. At their core, price-gouging laws seek to prohibit profiteering in times of crisis, but the laws take various approaches to price limitations. For example, in New Jersey, the governor’s formal state of emergency triggers consumer safeguards including an explicit ban against price increases of more than 10% compared to the price of the same product “immediately prior to the state of emergency.”[4] Iowa, on the other hand, which has also declared a state of emergency, prohibits the charging of “excessive pricing” not justified by a seller’s costs.[5] Since allegations of price gouging have increased across the country, hard-hit states in particular are not wasting time taking action.

Unfortunately, there is no “safe harbor” price increase that will ensure that a business avoids a state’s cease-and-desist letter or federal prosecution, but recent examples of price-gouging enforcement are instructive. For example:

• The New York AG has already sent over 550 cease-and-desist orders and imposed $275,000 in fines for gouging.[6] Two of those cease-and-desist letters went to a hardware store in Manhattan selling hand sanitizer at a 300% increase (from about $20 to $79.99) and a grocery store in Queens for selling disinfectant at a 150% increase (from about $6 to $14.99).[7]
• The Office of Consumer Affairs in New York City fined two businesses $5,000 each for price gouging on protective masks.[8] One was selling N95 masks at 100 times their wholesale value, and another was selling them for $5 a piece from a box of 20, a nearly 900% increase from the normal price.
• At the federal level, anti-hoarding and price-gouging concerns have already led the FBI to the door of one person and resulted in his arrest. On March 30, a Brooklyn man was arrested by FBI special agents and charged by complaint with assaulting a federal officer and making false statements.[9] The man was under federal investigation for hoarding scarce medical resources including N95 face masks and attempting to sell them at a markup of 700%.[10] The criminal charges against the man included assault for coughing on the arresting agents while claiming to have COVID-19.

Given that businesses across the country may be struggling financially, it may also be tempting to talk to competitors and others within your industry as to how to cope with these unfamiliar times, but such discussions can veer too close to price fixing and lead to unnecessary antitrust exposure.

Takeaways: Reducing Antitrust Price-Gouging and Price-Fixing Risk During COVID-19

Businesses selling PPE, masks, ventilators, disinfectants and other products that might be considered essential to the fight against COVID-19 should expect to face pricing scrutiny. When deciding how to set prices on essential products, it is important to seek advice from counsel and to follow these tips:

• Tie pricing decisions to market factors, including actual costs; limit duration of increased prices on an as-needed basis; and re-evaluate periodically.
• Memorialize pricing decisions with backup data for later use if needed.
• Make independent pricing determinations.
• Do not discuss with competitors any intention to charge emergency or other surcharges or to eliminate discounts.
• Avoid “benchmarking” or discussing future pricing (maximum or minimum) with competitors.
• Enhance antitrust compliance. Desperate times often call for desperate measures, and antitrust collusion is often born of business desperation, so it is more important than ever for companies to ensure they have thoughtful antitrust compliance programs and reporting and audit functioning in place.

As we continue to navigate the uncertainties associated with the current pandemic and businesses struggle to price essential products during spikes in demand, it is important to know the applicable laws and to discuss any issues with trusted counsel.

[1] The White House, “Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19” (March 23, 2020), available at: https://www.whitehouse.gov/presidential-actions/executive-order-preventing-hoarding-health-medical-resources-respond-spread-covid-19/
[2] Department of Health and Human Services, “Notice of Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures Under Executive Order 13910 and Section 102 of the Defense Production Act of 1950” (March 25, 2020), available at: https://www.hhs.gov/sites/default/files/hhs-dfa-notice-of-scarce-materials-for-hoarding-prevention.pdf; see also Department of the Attorney General, “Memorandum for All Heads of Department Components of Law and Enforcement Agencies” (March 24, 2020), available at: https://www.justice.gov/file/1262776/download.
[3] Law.com, “‘You Will Be Hearing a Knock on Your Door’: William Barr Warns Coronavirus Profiteers” (March 23, 2020), available at: https://www.law.com/nationallawjournal/2020/03/23/you-will-be-hearing-a-knock-on-your-door-william-barr-warns-coronavirus-profiteers/
[4] Edwin Torres, “New Jersey Declares State of Emergency to Curb Price Gouging,” NewsRoom (March 11, 2020), N.J. Spotlight, available at: Westlaw.com 2020 WLNR 7173389.
[5] Iowa Stat. 61–31.1(714).
[6] ABC11, “$10 Toilet Paper? Price Gouging Violations Surge Across Country” (April 1, 2020), available at: https://abc11.com/business/$10-toilet-paper-coronavirus-gouging-complaints-surge-/6028383/
[7] Id.
[8] Candice Ferrette, “Nassau Fines Businesses for Price Gouging on Masks” (March 10, 2020), available at: https://www.newsday.com/long-island/politics/coronavirus-price-gouging-nassau-manhattan-1.42739060.
[9] United States Attorneys’ Office, District of New Jersey, “Brooklyn Man Arrested for Assaulting FBI Agents and Making False Statements About His Possession and Sale of Scarce Medical Equipment” (March 30, 2010), available at: https://www.justice.gov/usao-nj/pr/brooklyn-man-arrested-assaulting-fbi-agents-and-making-false-statements-about-his.
[10] Id.