Price Gouging, Potential Class Action, and UDAP Activity

Morgan Lewis
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Morgan Lewis

This LawFlash addresses the potential impact of anti-price-gouging efforts by government enforcement officials on anticipated civil litigation, particularly class actions premised on state unfair and deceptive practices acts. Many parties in the supply chain for food, emergency, and medical supplies, as well as consumer goods, are potentially subject to price-gouging investigations by government officials and each therefore face risk from consumer actions based on the same alleged underlying conduct.

Background Regarding Price-Gouging Laws

At present, there is no federal law related to price gouging[1], but the majority of states have applicable statutes, regulations, or emergency orders in place. While the various state laws differ, generally, price-gouging laws (1) are triggered by an emergency declaration or disruption, (2) apply to goods or services that are considered (or perceived to be) necessary to health and welfare, and (3) analyze whether those products are excessively or unconscionably priced. These provisions typically compare the current price of the product to the product’s price before the emergency or disruption. Some state laws have exceptions, such as a justification for a price increase when there is a corresponding increase in the cost of labor and materials or the cost of doing business.

Recently, US Attorney General William Barr issued a directive to all US Attorneys, requiring them to establish COVID-19 fraud issues as a priority and to take proactive measures. And, many state attorneys general have established hotlines or online portals for consumer complaints. Any complaint or enforcement action may be made public.

Examples of Applicable State Price-Gouging Laws

In general, violators of civil price-gouging laws face substantial fines per violation, as well as other consequences like restitution and injunctions. Some state laws also include criminal enforcement provisions.

For example, Pennsylvania’s Price Gouging Act makes it unlawful to charge an “unconscionably excessive” price for goods or services during a declared state of emergency. Under the act, it is prima facie evidence of an “unconscionably excessive” price when the price of a good/service is 20% higher than the average price of the same good/service in the seven days prior to the declared state of emergency. Violators of the act face fines of up to $10,000 per violation, injunctions, and restitution to aggrieved customers.

Likewise, New York’s law prohibits the sale of certain goods and services at an “unconscionably excessive price” during a state of emergency. “Unconscionably excessive price” means a gross disparity between the current price and the price charged immediately prior to the state of emergency. Violators of New York’s price-gouging law face fines of up to $25,000 per violation and restitution to aggrieved consumers.

Of potentially greater concern, California has a criminal price-gouging statute. For a 30-day period after a disaster or emergency has been declared, “it is unlawful for a person, contractor, business, or other entity to sell or offer to sell any consumer goods or services . . . for a price more than 10 percent above the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency.” The statute makes certain exceptions but carries with it fines of up to $10,000 per violation and/or one year in jail. Moreover, in states like California, individual municipalities often bring actions on behalf of the entire state. As such, even within a single state, a seller can encounter multiple litigants at the government level.

In addition, several other states are reevaluating their price-gouging laws and taking steps to enact emergency legislation, including Maryland, Massachusetts, Michigan, and New York. This legislation generally tracks or enhances those statutes referenced above.

Related Risks From Class Actions/Unfair Deceptive Practices Act Claims

As we have seen in other matters, highly publicized investigations by state attorneys general often are followed by a wave of civil litigation brought under various state unfair deceptive practices acts. Most often, these matters are filed as class actions. Given the nature of the COVID-19 pandemic and the attention of consumers to issues involving product pricing and scarcity, there is a strong risk of class actions being litigated either concurrently with, or shortly after, regulatory investigations. The price-gouging statutes may be viewed as an opportune area for the pursuit of consumer class actions for several reasons.

First, some price-gouging laws have specific pricing standards and terms that may be read to enable private rights of action. For example, a violation California’s law automatically constitutes an unlawful business practice and an act of unfair competition within the meaning of the California Business and Professions Code § 17200. Likewise, with respect to pricing standards, in states where prices may only be raised a certain amount, such as Pennsylvania, we expect that consumers may seek to bring class actions where regulators have found that a seller exceeded those limits. In yet other states such as Massachusetts, the attorney general is authorized under M.G.L. ch.93A to promulgate rules, the violation of which are violations of the statute. The attorney general has issued such a rule on an emergency basis.

Second, even in states without automatic provisions, many consumer protection statutes carry serious penalties and/or the prospect of multiple damages. Under the Texas Deceptive Trade Practices Act, any price gougers may be required to reimburse consumers and may be held liable for civil penalties of up to $10,000 per violation with an additional penalty of up to $250,000 if the affected consumers are elderly. In Massachusetts, willful violations of the consumer protection laws can lead to damages that are triple that which would be compensatory, plus the recovery of attorney fees.

Third, alleged unfair pricing by nature is often a target in litigation. Where sellers offer consistent pricing across the board, consumers may seek to argue that class certification is proper because the supposed wrongful conduct is common to the class. While there are many clear arguments against class certification, sellers certainly face increased risk due to the nature of the crisis.

Practical Considerations

While we believe that consumer class actions based on the various price-gouging laws will be subject to many defenses, there are some steps to consider in order to reduce litigation risk.

Generally, housekeeping steps that may assist in the defense of potential class actions include maintaining historical pricing data; documenting justifications for any price changes; keeping track of increase in the labor and material costs; and implementing a process for the approval, staffing, and real-time evaluations of pricing changes during a time of crisis. Each of these activities will be important if facing a claim brought on behalf of a state or nationwide class as they will assist in defending against claims that prices were unfairly increased without good cause.

When responding to initial government investigations or inquiries, companies should consider potential future consumer claims. For example, companies should be aware that investigations performed by the various state government officials may be public. Thus, information made available to government officials may be made available in future civil litigation. Similarly, positions taken with respect to those enforcement actions should align with defenses that a company will need to take in any follow-up class action. Crafting a long-term strategy at the investigative stage will help a company plan for and better defend against an onslaught of litigation in the future.

How We Can Help

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.

 

[1] However, on March 23, 2020, the president issued an executive order under the authority of the Defense Production Act, 50 U.S.C. §4501, et seq. delegating authority to the secretary of Health and Human Services to prevent hoarding of health and medical resources needed to respond to the spread of the coronavirus (COVID-19). Pursuant to the order, the secretary has authority to “prescribe conditions with respect to the accumulation of such resources” and to designate any material as one that would be “threatened by persons accumulating the material . . . for the purpose of resale at prices in excess of prevailing market prices . . . .” Further, a federal price gouging law is a real possibility. On March 9, 2020, Attorney General William P. Barr announced a commitment to “ensuring that the [justice] department’s resources are available to combat any wrongdoing and protect the public.” As part of that announcement, the US Department of Justice (DOJ) Office of Public Affairs released a statement that “[i]individuals or companies that fix prices or rig bids for personal health protection equipment such as sterile gloves and face masks could face criminal prosecution.”

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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