New York AG Proposes New Price Gouging Rules

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Earlier this month, New York Attorney General Letitia James issued a Notice of Proposed Rulemaking aimed at setting greater guardrails against price increases during emergencies. The action comes exactly one year after James first initiated the rulemaking process by seeking comment regarding potential price gouging during the COVID-19 pandemic.

After amending the price gouging statute to expand its scope, in 2020 the New York legislature granted James rulemaking authority. In March 2022, James launched the first rulemaking process with an Advance Notice of Proposed Rulemaking, which sought public comment on whether and how the attorney general might provide regulatory guidance in the area of price gouging. Advocacy groups, consumers, industry representatives, and academics submitted comments, which have informed James’s proposed rules. The proposed rule tightens the screws on companies the AG believes are taking unfair advantage of market disruptions.

The Statute

The current price gouging law, New York General Business Law 369-R, provides that, “[d]uring any abnormal disruption of the market,” no business “within the chain of distribution” may charge an “unconscionably excessive price” for “goods or services vital and necessary for the health, safety and welfare of consumers or the general public.”

“Abnormal disruption of the market” is defined as “any change in the market, whether actual or imminently threatened, resulting from stress of weather, convulsion of nature, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, or other cause of an abnormal disruption of the market which results in the declaration of a state of emergency by the governor.”

Moreover, the statute provides only loose guidance as to what constitutes an “unconscionably excessive price.” It provides that a violation should be based on whether the amount of the excess in price is “unconscionably extreme,” whether there was an exercise of “unfair leverage or unconscionable means,” or a combination of the two.

Additionally, the statute states that prima facie proof of a price gouging violation includes evidence that (1) the price represents a “gross disparity” between the price charged and the price at which the good or service was offered immediately prior to the abnormal market disruption, or (2) the price charged grossly exceeded the price at which the same or similar goods were readily obtainable in the trade area.

Finally, the statute provides for an affirmative defense with a showing that (1) the price increase preserves the profit margin that the defendant received for the goods or services prior to the abnormal market disruption, or (2) additional costs not within the defendant’s control were imposed on the defendant.

The Proposed Rules

James proposed seven rules that seek to add clarification and guardrails to the existing price gouging statute. In summary, the rules are:

  • Presumptive Cases of Gross Disparity. A presumptive case of a “gross disparity” in price exists where the price increase for a good or service is greater than 10% of the price at which such good or service was offered for sale immediately prior to the abnormal market disruption.
  • Costs Not Within the Control of the Defendant. With respect to the affirmative defense, “additional costs not within the control of the defendant,” the proposed rule provides that such costs include “only actually incurred costs attributable to the production, purchase, storage, distribution, taxation, labor, and sale of the specific good or service, and a directly attributable percentage of the overhead costs of the business.” Under the rule, such costs do not include “a decline in sales of other goods or services, costs related to past debts or expenses, projected future costs, internal charges…or costs related to planned or speculative future expenditures. Moreover, costs are to be calculated over the period of the market disruption.”
  • New Products. It is not a defense under the price gouging statute that a product or industry did not exist prior to the abnormal market disruption. Additionally, profit margins for a new product that are higher in percentage terms than a comparable product may be used as evidence of unconscionably extreme pricing. The AG does not seem concerned that this provision of the rule would chill incentives to innovate and to develop new products to meet new problems.
  • Presumptive Cases of Unfair Leverage. Under the rule, “unfair leverage or unconscionable means” includes but is not limited to the use of unequal bargaining power, high-pressure sales techniques, and confusing or hidden language in an agreement or in price setting. This provision seems more akin to attempting to rework economic behavior the AG disfavors than preventing price gouging.  
  • Unfair Leverage. There is no de minimis percentage price increase that creates a presumption of illegal price increases caused by unfair leverage. Unfair leverage will be presumed when (1) a seller with at least 30% market share raises prices, or (2) a significant competitor (a company with over 10% market share) in a market with five or fewer significant competitors raises prices for such goods or services. Such sellers, however, can rebut this presumption with the affirmative defense provided. Again, this provision appears to be an effort by the AG to punish large firms without meeting the requirements for proving an antitrust violation.
  • Application of Price Gouging Prohibition to Parties Within the Chain of Distribution. Under the rule, all parties within the chain of distribution, including manufacturers, suppliers, wholesalers, distributors, or retail sellers of goods, are subject to the statute with respect to products sold in New York.
  • Dynamic Pricing. Where sellers use dynamic pricing, the pre-disruption price for such sellers can be determined using the median price for the same good or service at the same time one week prior to the abnormal market disruption. Sellers who would be liable under this rule can use the affirmative defense that the aggregate profit divided by the aggregate units sold is the same as the aggregate profit divided by the aggregate units sold a week prior during the same time period. The AG’s interpretation here makes using dynamic pricing in the context of a “disruption” challenging.

James has stated that “[t]he rules proposed by my office will bolster our efforts to crack down on price gouging and ensure that large corporations do not take advantage of New Yorkers during difficult times.” Since the start of the pandemic, the AG’s office has issued a flurry of warnings to both consumers and retailers against price gouging. The proposed rules indicate a continued effort from James’s office to monitor price hikes and control pricing during disruptions. Whether those efforts have the effect of exacerbating or creating shortages does not seem to be a concern.

The public comment period on the proposed rules is open for 60 days.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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