In our first installment and podcast, we discussed antitrust enforcement in the COVID-19 era. Now, we’d like to discuss price gouging, which in many ways is the polar opposite of antitrust law. Antitrust laws are based, at least partly, on the principle that fair and open competition allows resources to be allocated most efficiently. It further assumes that fair and open competition allows goods and services to be priced efficiently, by the forces of supply and demand. Price gouging laws, on the other hand, seek to limit price increases even when those prices are being determined by fair and open competition and by the forces of supply and demand. While price gouging and other consumer protection laws certainly protect the public from the effects of hoarding and other predatory behavior during public emergencies, they also capture price increases that are a result of sharply increased demand or supply shortages that are not occasioned by any malfeasance.
In the COVID-19 era, governments at all levels have mobilized efforts to combat price gouging. State attorneys general are conducting investigations and filing suits; governors have issued executive orders declaring emergencies and expanding enforcement; the Federal government has invoked the Defense Production Act to handle problems traditionally addressed by price-gouging statutes. Companies must conduct a careful state-by-state analysis to fully appreciate the impact of these laws on their business.
States serve as the primary price-gouging enforcer, but not every state has a price-gouging statute. Price-gouging violations are serious matters—the statutes typically provide criminal penalties, including jail time, fines and civil penalties. Absent a price-gouging statute, state courts in Ohio and elsewhere have read similar protections into unfair trade practices statutes. In the COVID-19 era, some governors, such as California’s Gov. Newsom, have supplemented existing law with executive orders that expanded existing price-gouging statutes; others, such as Michigan’s Gov. Whitmer, have created price-gouging bans simply by executive fiat.
The state patchwork of laws and executive orders creates an administrative nightmare for companies that sell potentially covered goods or services on a nationwide basis. While price-gouging statutes vary drastically from state-to-state, each one has four basic elements:
- the existence of a declared state of emergency;
- covered goods and services;
- a price increase; and
- a look-back period against which to benchmark the increased price.
With few exceptions, the statutes’ price controls are triggered only by a declared state of emergency. The main differences lie in the other three elements.
Each statute defines the goods and services subject to the price controls. Some states, such as Indiana, only cover fuel prices. Other states, such as California, cover a broader swath, such as household goods, food items, medical supplies, emergency cleanup services and construction services. Every company must analyze whether it provides goods or services subject to price-gouging statutes in the states in which it operates. In light of the inclusion (or likely inclusion) of price-gouging in many states’ unfair competition laws, to be conservative, even if the goods and services are not among those listed in price-gouging statutes, companies should be careful about increasing prices, especially those deemed to provide “essential” services.
The amount the price has to increase before a price gouging law is triggered differs among the states in a couple different ways. Some statutes ban variances that exceed a set percentage above previous prices. That percentage varies, but 10 percent and 15 percent price variances are the most common. Other states define the price variance vaguely, banning emergency prices that “grossly exceed” previous prices.
The look-back period also varies in similar ways, with some states comparing the current prices to prices “immediately preceding” the state of emergency and others looking at the price a set number of days in the past, either as an average or as the price on that certain date. Seven-day and 30-day look-back periods are the most common.
The various price-gouging statutes also diverge in the defenses available. Some states, including California, provide for a defense that the price during the look-back period was discounted or reduced compared to ordinary prices. In these states it is not entirely clear whether industries that price off independent indices are liable for market-based fluctuations in the relevant index.
Importantly, most statutes allow for the accused to show that the price increase correlates to increased costs associate with the goods or services. But some do not. Where increased costs are not a defense, companies in the middle of the supply chain might be both victims and perpetrators of price-gouging if their vendors raise prices of key components, and then the company passes along those increased costs.
States that lack an existing price gouging statute may still attack the issue under their unfair competition laws (e.g., Ohio) or via a governor’s executive order (e.g., Michigan). Other states are contemplating enacting such legislation now, including Maryland and New York.
No federal legislation deals directly with price gouging, although the Defense Production Act contains provisions that provide the federal government with enforcement mechanisms. To that end President Trump issued an executive order, addressing hoarding and price gouging related to critical supplies. Attorney General Barr assigned a lead prosecutor in each of the Department of Justice’s field offices to investigate and prosecute “persons accumulating material either in excess of reasonable demands of business, personal, or home consumption, or for purpose of resale at prices in excess of prevailing market prices.” The Department of Justice recently took action against an Brooklyn resident for hoarding personal protective equipment, so the threats are not hollow.
Federal consumer protection enforcement rests with the Federal Trade Commission, which has been active since the pandemic started. For example, invoking its Section 5 authority, the FTC sent warning letters to companies making unsubstantiated claims that their products can treat or prevent COVID-19. The letters followed other letters sent to VoIP service providers warning against routing and transmitting robocalls COVID-19-related scams. The FTC has noted a jump in COVID-19-related complaints from consumers.
Most states do not provide a direct private right of action for price-gouging, but again, such a right has been read into other statutes in many states. Notably, Texas and California provide for a private right of action. Companies can expect civil litigation to follow attorneys general investigations. In Florida, for instance, consumers recently filed suit against Amazon for price gouging, even though the Florida’s price gouging statute explicitly provides that no such right exists.
As mentioned before, some companies could themselves be victims and therefore, plaintiffs. Just recently, 3M brought a federal lawsuit against a New Jersey-based company claiming it used 3M trademarks to “perpetrate a false and deceptive price-gouging scheme” by pretending to be a legitimate 3M vendor of its now famous respirator masks.
There is sparse case law interpreting and applying price-gouging statutes. States that are regularly confronted with natural disaster emergencies, such as Florida and California, have more well-developed case law. This crisis is unprecedented, though, and it is reasonable to question how much reliance companies should place on prior precedent and interpretations that arose in situations that are significantly less pressing than the current emergency. As the old saying goes, bad facts can lead to bad law.
Information about COVID-19 and its impact on local, state and federal levels is changing rapidly. This article may not reflect updates to news, executive orders, legislation and regulations made after its publication date. Visit our COVID-19 resource page to find the most current information.