The coronavirus pandemic has continued to spur shortages of and price increases for necessities such as medical equipment, cleaning supplies and paper products. Prosecutors and regulators at the federal, state and local levels have responded with lawsuits and enforcement actions. To give just two examples, by early May, Florida Attorney General Ashley Moody had contacted 6,300 businesses about price-gouging allegations concerning products such as protective masks and cleaning supplies, leading to nearly $500,000 in refunds to consumers.1 Meanwhile, federal prosecutors in New York recently charged a business owner who hoarded personal protective equipment and price-gouged customers seeking to purchase hand sanitizer, disposable gloves and N95 respirators with violating the Defense Production Act.2
Yet, as described in our previous client alert, most price-gouging laws cover only sales to retail consumers—and these and nearly all enforcement actions have involved such offers and transactions. Comparatively little attention has been paid to sales to nonconsumer end users such as government and institutions, or to business-to-business sales among manufacturers, wholesalers and distributors, even though price increases for these sales ultimately can lead to consumers paying more if the retailers’ increased costs are passed through to consumers, as is often the case.
On Wednesday, two developments—both in New York—changed these dynamics. First, in the morning, New York Attorney General Letitia James filed a price-gouging lawsuit against a grocery wholesaler, alleging that it unlawfully increased its wholesale prices of Lysol disinfectant products to grocery and discount stores in New York. Later that afternoon, the New York State Legislature passed a bill that expands the scope of New York’s price-gouging law to include products beyond consumer goods and targets entities further upstream in the supply chain. Both developments are significant, as they signal the New York attorney general is ready and willing to play a more active role in cracking down on upstream price gouging, and soon may have more tools with which to do so. These developments are important not only to entities doing business in New York but also to other states—because their legislatures or attorneys general may follow suit.
I. Attorney General’s New Lawsuit Attacks Price Gouging up the Supply Chain
The New York attorney general’s complaint3 alleges Quality King Distributors, Inc. (Quality King), a wholesaler, and its CEO, Glenn Nussdorf, unlawfully increased the prices Quality King charged its customers—neighborhood grocery and discount stores in New York—for Lysol disinfectant products.4 According to the complaint, between January and April 2020, as the pandemic dramatically boosted demand for disinfectant products, Quality King more than doubled the price it charged its retailer customers for Lysol Disinfectant Spray, even though the prices charged by its suppliers hardly increased.5 Quality King thus increased its margins for this product from approximately 20% pre-crisis to nearly 100% for March 2020.6 Quality King’s retailer customers then passed along the higher prices to consumers.7 The retail price of a can of Lysol, previously $5 to $8, jumped to as much as $16.99, allegedly in response to the higher prices Quality King charged.8 According to the complaint, New Yorkers shopping at these stores complained to the attorney general, who established a price-gouging hotline; the office commenced an investigation, through which it discovered Quality King’s pricing practices.9
New York’s general price-gouging statute defines price gouging as the sale of “consumer goods” for “an unconscionably excessive price.”10 The law, which prohibits price gouging by any “party within the chain of distribution of [certain] consumer goods or services” during an emergency, gives the attorney general authority to seek a civil penalty of up to $25,000, in addition to restitution.11 In her complaint, the attorney general alleges Quality King violated the state’s price-gouging law and another provision that “prohibits repeated and persistent illegal acts by business”; she seeks a permanent injunction preventing Quality King from engaging in the alleged unlawful price gouging, a requirement that Quality King provide an accounting, and an order directing Quality King to disgorge its profits and to pay restitution to the consumers who paid high prices for these products, as well as a civil penalty and costs.12
II. Legislature Passes Legislation to Expand Scope of Price-Gouging Law and Attorney General’s Enforcement Powers
A few hours after the attorney general filed her complaint, the New York State Legislature passed legislation that significantly expands the scope of the state’s price-gouging law and strengthens the attorney general’s ability to punish the practice.13
The legislation, which would take effect immediately upon signing by the governor, makes four key changes.
First, the state’s current price-gouging law applies only during a period of emergency to goods or services that are “vital and necessary for the health, safety and welfare of consumers.”14 The end user must be a “consumer,” a term that generally is limited to individuals in a retail context.15 The new bill would remove this limitation by expanding the scope to instances where the end users are “consumers or the general public.”16
Second, while the current law limits the application of the statute to goods and services used or bought for use by an individual or household,17 the bill expands the breadth of products covered by the law to include both “essential medical supplies and services used for the care, cure, mitigation, treatment or prevention of any illness or disease,” as well as the very open-ended “any other essential goods and services used to promote the health or welfare of the public.”18 As the bill gives the attorney general rulemaking authority to enforce the provisions of this law, the attorney general may use such authority to clarify these terms.19
Third, the legislation also clarifies and increases the maximum penalty—adding a treble damages provision. Under the current law, a civil penalty cannot exceed $25,000;20 the new bill clarifies that the penalty can be the greater of $25,000 per violation (which could be as broad as each individual sale) or three times the gross receipts for the goods or services at issue.21
Fourth, in a defendant-friendly move, the bill adds an additional prima facie defense. Under current law, a defendant can rebut allegations of price gouging with evidence that additional costs outside the defendant’s control were imposed on the goods and services at issue.22 The new bill expands on the current law’s provision and states that a defendant can also rebut these allegations with evidence showing the increase in the amount charged for a good or service preserves the same margin of profit that the defendant received for that good or service before the disruption in the market occurred.23
III. Why These Developments Are Significant to Companies Doing Business in New York and Other States
Last week’s developments demonstrate both the willingness of state attorneys general who have the authority to police non-retail transactions for price gouging to utilize it, and that of state legislatures to bestow additional powers upon law enforcement to attack the practice. They underscore how—depending on the applicable state law—businesses throughout the supply chain that offer a broad array of goods and services, whether to retail consumers or to other end users, can find themselves subject to an investigation or enforcement action should they raise prices during a crisis.24
Companies that sell goods or services in the health care sector in New York—including to hospital or government purchasers—should pay particular attention to these developments. Governor Cuomo, who is likely to sign the legislation, has complained frequently that the state has been “price gouged” by manufacturers and suppliers of personal protective and medical equipment the state has sought to purchase to respond to the pandemic.25 With the stroke of a pen, he may give the attorney general additional powers to punish price gouging in state procurement.
Companies anywhere within the emergency goods and services supply chain should carefully consider pricing strategies and price increases. Those increasing prices for any goods or services that could come within the scope of price-gouging laws should retain documentation of supply chain impacts, increased internal costs and added upstream costs. Given the focus on Quality King’s profit margins in the attorney general’s complaint, and the bill’s establishment of profit margin maintenance as an affirmative defense, they also should consider the impact a price increase will have on their margins. In addition, companies should review contracts with upstream vendors and downstream customers to ensure that appropriate pricing and diligence provisions, such as representations and warranties, are in place.
As significant as these dual events are, they are not entirely aberrational. The California attorney general advertises the fact that its powers to address price gouging extend beyond consumer transactions;26 Maryland passed legislation on March 23 that allows the state’s attorney general to crack down on retail price gouging;27 and Massachusetts Attorney General Maura Healey issued an emergency regulation pursuant to the state’s consumer protection law banning price gouging of essential products and services during the pandemic.28 We may see additional state or federal legislative activity, as the pandemic has exposed limitations in price-gouging laws that are popular but not always effective in protecting consumers from price gouging. One of the legacies of the coronavirus likely will be broader and more aggressive price-gouging enforcement during subsequent emergencies.