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Price Gouging Concerns Rise During the COVID-19 Pandemic

by Lauren (Kramer) Sujeeth and Joshua M. Deitz

With the COVID-19 pandemic disrupting supply lines and causing shortages of medical equipment and household supplies, there is increasing pressure on both the federal and state governments to address and prevent price gouging.

Although there is currently no federal law directly on point, Congress is considering new legislation to address the issue of price gouging.  Nonetheless, the Department of Justice has created a “COVID-19 Hoarding and Price Gouging Task Force” to prevent hoarding and price gouging of healthcare and medical items during the pandemic.  There have also been calls for the FTC to use its investigating authority to protect consumers from unconscionable price inflation.  In a related effort, President Trump issued an Executive Order on March 23, 2020, pursuant to the Defense Production Act of 1950 (50 U.S.C. 4501 et seq.), to prevent the hoarding of health and medical resources necessary to respond to COVID-19.

In contrast, forty states and territories already have laws on the books banning price gouging in emergencies.  At least 33 state attorneys general have asked large retailers to rigorously monitor, flag, and remove heavily marked-up products and warned of potential prosecution for non-compliance with consumer protection laws.  In response to these efforts, retailers have begun to restrict sales of certain healthcare products and have banned sellers who appear to be increasing prices unreasonably.

 

What constitutes price gouging?

There is no generally agreed-upon definition of price gouging.  Some states measure price gouging by considering the price increase between pre-emergency and post-emergency prices, with limitations on the permissible percentage difference.  The maximum permissible increase generally varies between 10% (California, New Jersey) to 20% (Minnesota, Pennsylvania), with some states going as high as 25% (Alabama).  Other states use a more flexible and fact-specific definition, examining whether the price increases are unreasonable in context (North Carolina, Wisconsin) or unconscionable (Florida, Virginia).  Recently, California has introduced new legislation targeted at new entrants to the market, prohibiting sellers with no prior sales from exceeding the market price for goods by 10% based on the three months prior to the emergency declaration.  Maryland passed new price gouging legislation affecting both health supplies and necessities on March 19.  Michigan’s price gouging law does not define price gouging as a percentage, but Governor Whitmer issued an executive order on March 15 prohibiting increases of over 20%.  Other states and localities are issuing new price gouging rules and legislation, which require careful monitoring.

 

What goods are subject to price gouging restrictions?

Pursuant to section 102 of the Defense Production Act (50 U.S.C. § 4512) and Executive Order 13190 of March 23, 2020 (Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19), HHS has designated “scare materials or threatened materials” that are subject to price gouging restrictions.  These materials include: N-95 and other filtering facepiece respirator masks, certain air-purifying respirators, portable ventilators, food sterilization services and disinfecting devices, medial gowns and other PPE, and drugs containing active ingredient chloroquine phosphate/hydroxychloroquine HCl.  The Secretary may designate additional scarce materials or threatened materials at a later time.

State laws widely vary in what items are governed by price-gouging restrictions, through nearly all provide that items directly related to the response to the emergency are covered, so while hand sanitizer may be subject to price gouging complaints, virtual reality headsets are not.  Maryland’s new price gouging law covers health supplies, food, fuel, and energy, among other products and services, and provides that the government may publish a list of additional goods and services as necessary.  California’s law is similarly expansive, covering both emergency goods and services as well as transportation, hotel rates, and storage services.  However, many state laws are limited or require the state government to provide a list of covered goods and services in an emergency.  For example, Illinois’ law only explicitly covers petroleum products, but Illinois Governor Pritzker included a price-gouging provision for health-related items in his Gubernatorial Disaster Proclamation and handed enforcement to the state attorney general.  State laws and relevant executive orders vary in scope but tend to protect healthcare-related items at the very least.

This variance in state laws requires sellers to be vigilant about compliance, particularly if they are operating in multiple states.

 

What enforcement mechanisms exist and have been exercised?

Federal involvement in investigating and mitigating price gouging has historically been limited.  Recently, however, the U.S. Attorney’s Office for the Eastern District of New York announced that it filed a criminal case under the Defense Production Act.  The complaint relates to the hoarding of N-95 masks and personal protective equipment and includes allegations that the defendant marked up the prices by 59% to 1,328% for resale.  HHS has reported the seizure of other hoarded medical supplies but indicated that the owner would be compensated at fair market value for the goods.

Many states moved quickly to issue price gouging alerts and set up complaint forms for consumers to report suspected price gouging, and have reported receiving tens of thousands of complaints within weeks.  California’s Attorney General issued an alert on March 4, 2020, warning of price gouging during the pandemic and encouraging consumers to report suspected price gouging, and has issued additional warnings to manufacturers, wholesalers, and online marketplaces to halt and report suspected price gouging.  New York City issued an emergency rule making price gouging illegal for personal and household goods related to the pandemic on March 16 and has already issued over 1,000 citations.  It continues to announce additional price gouging investigations and violations.  The New Jersey Attorney General reported sending over 700 cease-and-desist letters and 90 subpoenas to businesses suspected to have engaged in price gouging.

State Attorneys General have also begun to file enforcement actions in state court. The Texas Attorney General filed a lawsuit to stop price gouging by an online auction site on March 26, 2020.  On April 13, 2020, the Vermont Attorney General filed a state court action related to the resale of masks to healthcare providers at a price exceeding 4,000% of market price.  The next day, the Ohio Attorney General announced a civil enforcement action regarding the online sale of N-95 masks at a 1,700% markup.

Private enforcement has begun as well.  3M has started warning suppliers that it will shut down price gouging if possible, and has filed multiple lawsuits against distributors under state laws governing price gouging and unfair business practices.  Consumer class actions have also been filed against supermarkets for increases in food prices in California and against Amazon for increases in toilet paper and hand sanitizer under Florida’s price gouging laws.

Although we have not yet seen price gouging-related action from the FTC, we may soon.  The FTC has broad authority to investigate and bring enforcement actions regarding “unfair or deceptive acts or practices in or affecting commerce.”  15 U.S.C. § 45(a).  Although the FTC does not traditionally wade into the area of price gouging, it was specifically directed by Congress to investigate price gouging in the gasoline market after Hurricane Katrina.  The FTC’s resulting report found indications that certain refineries had raised prices beyond acceptable limits.  Nonetheless, this finding did not lead to any sustained or ongoing action by the FTC related to price gouging.  Recent calls from certain members of Congress for investigations and enforcement of price gouging related to the pandemic have been vociferous and may produce similar legislative directives in short order.

 

What are the penalties?

The maximum penalty provided by the Defense Production Act is a $10,000 fine, or one year in prison, or both.  Injunctive relief is also available.

State penalties for price gouging generally include both criminal fines and jail time and civil penalties for each instance of price gouging.  California allows for fines up to $10,000 and a year imprisonment, and civil penalties of $2,500 per violation.  California contractors also face suspension of state licenses if they are convicted of price gouging.  Texas provides for civil penalties of up to $10,000 per violation, with additional penalties of up to $250,000 for price gouging affecting senior citizens.

 

How we can help

Our White Collar Criminal Defense and Retail Industry Trade Regulation teams can work with you to ensure compliance with all relevant laws and regulations related to price-setting.  We have vast experience analyzing discrete issues of business practices for our retail and supplier clients, advising them on the effect of federal, state, and local laws on their sales and operations in California and nationwide.  And, with decades of experience both in and out of government, our white collar criminal defense team is prepared to defend civil enforcement actions and investigations.  For compliance advice or defense of claims, please contact attorneys Lauren Sujeeth (lsujeeth@rjo.com) or Josh Deitz (jdeitz@rjo.com).

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