Rarely Invoked Price-Gouging Statutes Are Now Front and Center Due to COVID-19

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Almost as soon as the COVID-19 outbreak began, public officials and media outlets raised concerns over price gouging. While price-gouging statutes and regulations are not new, they are invoked rarely because they apply only in the event of emergency or abnormal market disruption. Now, with the nation facing the COVID-19 crisis and the federal government and all 50 states declaring states of emergency, price-gouging regulation has come to the forefront, and federal authorities have leaned on their power to halt hoarding to stop price gouging. In one recent example, the Department of Justice and the Department of Health and Human Services (HHS) reportedly seized 192,000 N95 respirator face masks, 589,000 gloves, and 130,000 other types of personal protective equipment and disinfectant from an individual alleged to be hoarding them. The need for critical supplies due to COVID-19 may lead not only to significant government enforcement, but also to follow-on civil action. With costs rapidly rising and demand increasing, companies operating in this economic climate must consider the impact of price-gouging regulation on their own pricing decisions.

State Action

Although the federal government has condemned price gouging in these unprecedented times, state action likely will be the key to enforcement. While no federal law directly prohibits price gouging, the majority of U.S. states have enacted such statues, including Alabama, Arkansas, California, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. Many of these states’ laws contain a private right of action such that private plaintiffs, as opposed to the government, may file cases (likely class actions) on behalf of consumers. In addition, a number of states (including some states that do not have explicit price-gouging statutes) have prohibited price gouging in executive orders issued in response to the COVID-19 outbreak. These states include Arkansas, California, Connecticut, Delaware, Hawaii, New Mexico and Tennessee. Even states without express price-gouging statues may attempt to punish price gouging under more general provisions of their state code or consumer protection laws.

To trigger state price-gouging statutes, there must be an emergency, such as a declared state of emergency or abnormal market disruption. For states that forbid price gouging, however, the precise prohibited conduct varies. Generally speaking, the laws prohibit excessive price increases above that which existed before a declared emergency (e.g., no more than 10 to 20 percent increases) on critical consumer goods, such as food, gas and medicine. Some state price-gouging laws apply more broadly to cover all retail products, which may include, among many other things, building supplies, electronic devices, energy resources and internet services. Additionally, some laws allow resellers of goods to impose greater increases, recognizing customary resale markups.

These state price-gouging laws typically provide for enforcement through fines. For example, New York (which has one of the highest fines) can charge $25,000 dollars per violation. Some states also allow for restitution and injunctions.

Many states already have taken steps to enforce their price-gouging laws in the wake of COVID-19. Several state attorneys general have issued statements about their intent to penalize violators and have ratcheted up the available mechanisms for reporting violations. For example, on March 4, California Attorney General Xavier Becerra issued a consumer alert on price gouging, reiterating that it is illegal under California law and urging California residents to report infractions by immediately filing a complaint through his office’s website, calling in or contacting their local police department or sheriff’s office. Similarly, Pennsylvania Attorney General Josh Shapiro has created a special email address for consumers to report price gouging. As of March 27, the Pennsylvania AG had received almost 2,900 complaints. A group of 33 attorneys general from U.S. states and territories also have called on large companies like Amazon, eBay, Walmart and Craigslist to help prevent price gouging.

Federal Action

The absence of a federal law directly prohibiting price gouging has not stopped the federal government from getting involved. On March 23, President Trump issued a statement announcing that he “will not tolerate the price gouging and hoarding of critical supplies.” This release also stated that the “[Department of Justice] is prioritizing the detection, investigation, and prosecution of fraudulent activity and price gouging related to medical resources needed to respond to the coronavirus.”

The President issued an executive order the same day on “Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19.” Through this executive order, President Trump delegated his authority to prohibit hoarding under 50 U.S.C. 4512 to the HHS Secretary. He also delegated his authority under 50 U.S.C. 4555 to the HHS Secretary to enable HHS to gather information about how supplies of medical resources are being distributed throughout the United States. HHS has leveraged this order to take actions against hoarding and price gouging.

On March 25, HHS designated certain materials as scarce and subject to COVID-19 hoarding prevention measures under executive order 13910 and section 102 of the Defense Production Act of 1950. The designation seeks to prohibit the accumulation of certain medical items, including, but not limited to, N95 filtering face piece respirators, personal protective equipment, face masks, sterilization services, disinfecting devices and ventilators, in excess of reasonable demands for the purpose of reselling in excess of prevailing market prices.

The U.S. Department of Justice also is taking action to enforce this HHS notice. A national task force spearheaded by New Jersey U.S. Attorney Craig Carpenito will leverage the investigatory powers of federal and state law enforcement to seek out violators that are manipulating the market, hoarding or price gouging. The task force is encouraging reporting of potential misconduct to the National Center for Disaster Fraud hotline. Attorney General William Barr has warned that “If you are sitting on a warehouse full of masks, you will be getting a knock at your door.” On April 2, reports stated that the DOJ and HHS had seized significant medical product from someone engaged in illegal hoarding, including 192,000 N95 respirator face masks, 589,000 gloves, and 130,000 other types of personal protective equipment and disinfectant.

Takeaways

Federal and state government actors are focused on curbing price gouging in the wake of the COVID-19 outbreak, especially with respect to critical medical supplies. As a result, dormant state price-gouging laws are now front and center for many federal and state enforcement agencies. Businesses should become familiar with state price-gouging statutes governing their enterprises and focus on compliance efforts to avoid fines and other penalties.

Notably, this rise of federal and state attention paid toward price gouging in light of the COVID-19 situation also may have lasting consequences for private litigation, including litigation beyond the COVID-19 crisis. While cases alleging price gouging have been few and far between (and mostly in the antirust context), the current enforcement measures have the potential to create a body of case law on the subject of price gouging that has never existed before. This case law may become the backbone for private actions against companies whether pursuant to the state price-gouging laws with private rights of action or other consumer protection state statutes, such as unfair competition laws. Companies should be mindful of these enforcement actions and the precedents, if any, that flow from them. As with all pricing decisions, entities making or selling products that may fall within the scope of price-gouging statutes should memorialize in detail the business decision-making and lawful economic basis underlying any significant price increases.

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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