By Gretchen Jankowski, John Cunningham and Melissa Ihnat

Law360 (May 5, 2020, 4:57 PM EDT )

Gretchen Jankowski

John Cunningham

Melissa Ihnat

Because there is currently no federal price-gouging statute, price-gouging enforcement is primarily within the purview of the states.[1] In the past, state price-gouging enforcement has been effective in responding to natural and man-made emergencies where the impact is isolated to a specific locality and/or is relatively short-lived.

But the COVID-19 pandemic is different in scope and duration. Indeed, COVID-19 has exposed the gaps in existing state laws and in enforcement of those laws during a crisis of this nature.

To address these gaps and respond to the country's concerns about the impact that supply shortages are having on essential goods needed by first responders (and by the American people), Congress is currently considering several price-gouging bills. If Congress is successful, many businesses currently not subject to price-gouging and hoarding regulations may find themselves in violation of one or more new federal laws.

Current State Laws Vary in Scope and Content

A majority of states have price-gouging laws,[2] although there is no uniformity among these state laws. While state price-gouging laws are typically triggered when a state declares an emergency[3] or experiences a major market disruption,[4] these price-gouging laws differ, for example, in scope and content.

Some state price-gouging statutes are broad,[5] prohibiting any business from raising prices on all goods during the state of emergency, while others target only essential goods being sold to consumers.[6] There are a few state price-gouging laws that only regulate fuel and oil prices.[7] The majority of state price-gouging laws focus on direct retail sales to consumers of necessary goods.[8]

More than any other recent national emergency, COVID-19 has demonstrated that a federal scheme is necessary to eliminate hoarding and shortages of essential goods — and also prevent price-gouging of consumers and first responders in their search for essential goods and materials. Indeed, as comprehensive as a state statute might be, it cannot expand its reach to regulate sales of products to consumers and first responders outside of the state.

Federal Efforts in the Wake of COVID-19

Recognizing the severity that price-gouging and hoarding is having on this country, the federal government is looking for ways to address national shortages and significant price increases for essential goods like ventilators, personal protective equipment, masks and disinfectants.

Executive Order 13910: Prosecuting Hoarders to Prevent Price-Gouging

On March 23, President Donald Trump issued Executive Order 13910, Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19.[9] EO 13910 invokes Section 102 of the Defense Production Act, which defines hoarding to include "materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation."

EO 13910 addresses situations in which significant quantities of designated materials[10] are withheld from the marketplace with the purpose of creating or exacerbating a shortage to raise prices. EO 13910 may be an effective tool for discouraging price-gouging, but it is not available for actual price-gouging enforcement.

Coordination by Federal Agencies

The Federal Emergency Management Agency and the U.S. Department of Health and Human Services have been working with medical supply companies to allocate personal protective equipment and supplies[11] and ensure timely delivery of supplies of PPE[12] to hot spots designated by the Centers for Disease Control and Prevention.

To participate, medical supply companies apply for permission through an expedited process established last month by the U.S. Department of Justice and Federal Trade Commission to allow collaboration between competitors without violating antitrust laws.[13] The voluntary coordination and allocation of such supplies by these companies removes buyer competition and the potential up-bidding for supplies between buyers.

The allocation process may prevent price-gouging by removing up-bidding and desperation, circumstances that enable and foster price-gouging of PPEs and other supplies — but does not itself regulate price-gouging.

Moreover, the National Center for Disaster Fraud,[14] the DOJ and the Federal Bureau of Investigation are coordinating with a variety of states to assist with the investigation and prosecution of a variety of COVID-19-related issues. The NCDF, established in the wake of Hurricane Katrina, coordinates available law enforcement and prosecutorial resources and is able to field and organize complaints. The coordination is allowing states to manage an often overwhelming number of complaints and assist in the investigation and enforcement of those complaints.

While the NCDF is busy with organizational tasks, the FBI and DOJ are teaming with U.S. attorneys' offices and state agencies to create task forces[15] to address a variety of complaints during the pandemic, including price-gouging. These federal efforts supplement and otherwise enhance the ability of states to both respond to and track price-gouging complaints.

Focus on Gaps in State Coverage

The gaps in coverage for price-gouging result from the division of regulatory authority over commercial activities between the state and federal governments. The federal government has exclusive control over interstate commerce, and the states, through their police power, may regulate sales within their boundaries.

Indeed, state laws that impose restrictions or burdens on commercial activities outside their boundaries risk being struck down as unconstitutional. The most prominent gaps that exist from the absence of a designated federal price-gouging statute relate to state procurement, interstate commercial activities, business-to-business commerce and states with no price-gouging regulatory scheme.

State Procurement

Gov. Andrew Cuomo of New York recently highlighted the significant issue of states bidding against one another, resulting in purchases at excessive prices. Neither the New York nor the California price-gouging statutes could be applied to negotiations to restrict pricing without exceeding each state's authority and interfering with interstate commerce.

As such, any federal price-gouging statute enacted by Congress should consider the extent to which state procurement of essential goods should be regulated nationally.

Interstate Commercial Activities

As with state-to-state procurement, transactions occurring between businesses in different states is generally governed by federal law, whereas retail sales to consumers within a single state are often within the scope of state law. Therefore, it is likely that a state prosecuting an out-of-state business for pricing offered to an in-state business would be deemed as interfering with interstate commerce.

This is one primary reason why the majority of active state price-gouging laws are limited to retail sales. As a result, there is currently a significant gap in the regulation of price-gouging between companies in different states. Accordingly, federal price-gouging legislation should seek to address interstate activities such as these and thereby fill the void that prevents states from constitutionally regulating interstate commerce.

Business-to-Business Commerce

Because the majority of state price-gouging statutes regulate retail consumer transactions, state regulation of business-to-business transactions is less prevalent. The limited number of states governing wholesale or supply transactions also creates a significant gap in enforcement.

Federal Legislation Aimed at Filling the Gaps

Despite the above-referenced federal efforts at enforcement, price-gouging persists because most relevant state laws are not designed to protect the purchase or procurement of critical goods like PPE by hospitals, medical facilities and offices, assisted living entities, and other types of institutions.

Recognizing that a pandemic of this magnitude requires a multifaceted approach, Congress is presently undertaking to address price-gouging, particularly as it pertains to business transactions not currently covered by state laws. Ultimately, the federal government hopes to fill the gaps in regulation and remedy the lack of uniformity in current state laws.

To date, four bills[16] have emerged from Congress (all within the past month) to combat price-gouging. Given the number of proposals and the difficulties presented by the current legal and commercial landscapes, it is possible that one of these bills will be fast-tracked by integrating it into one of the COVID-19 financial support bills under consideration.

While each of the proposed bills addresses the most serious price-gouging issues related to COVID-19, none of these proposed bills preempts current state price-gouging laws. Without preemption, companies operating on an interstate basis and seeking to comply with a litany of diverse state statutes face continued compliance challenges, for which preventive measures will prove particularly useful.

Preventive Measures for Businesses

Price-gouging laws and regulations are being primarily enforced at the state level. As federal efforts at legislation continue, and state enforcement surges, businesses should be cognizant of current gaps in applicable state laws, monitor federal efforts to seal those gaps, and implement (or enhance) preventive measures to deter, detect, avoid, and, if necessary, effectively respond to gouging and hoarding enforcement actions.

Familiarize yourself with applicable state laws.

None of the proposals in Congress to establish price-gouging and/or hoarding laws and regulations will displace current state laws. And even if a federal statute were enacted that preempted one or more state laws, state price- gouging laws have been active and enforceable since the COVID-19 crisis unfolded.

Maintain strong messaging from leadership.

COVID-19 has indisputably created challenges for all businesses attempting to move forward in a business environment rife with uncertainty. Nevertheless, leadership, whether through the board, the C-suite, management personnel, or a combination of all three, should step forward, as resources permit, to maintain strong messaging with employees on the importance of following key guidelines, policies and procedures.

Be proactive and act now.

Do not wait for Congress to pass a federal bill. Because a company's current prices will be compared to its prepandemic pricing, its pricing activity from the start of the pandemic will be subject to scrutiny under any of these federal bills. Conduct regular oversight over your pricing models and keep your compliance and legal teams in the loop.

Report and memorialize pricing changes.

Be prepared to justify and appropriately memorialize the legal and economic rationale for any actual or proposed price increases. Generally, an increase in price reflecting current market circumstances — for example, growing shipping costs, limited labor supply, burgeoning material costs and supply chain price increases — potentially a defense to price-gouging allegations.

Update relevant policies and procedures.

A review of almost all federal and state enforcement and regulatory agency guidelines reveals that one of the keys to maintaining a robust compliance program, particularly at a time like now where more infrequent risks such as price-gouging and hoarding become amplified, is to appropriately update pertinent policies and procedures.

Remain vigilant in business partner engagements.

Remember, antitrust laws still apply. If you plan to cooperate with competitors in response to state or federal requests, be sure to seek and obtain permission from the FTC and DOJ. Any unapproved communications with competitors makes a company potentially vulnerable to conspiracy allegations in violation of antitrust laws, putting the company at further risk for attention by federal regulators.

No news is not necessarily good news.

Just because your company has not yet been notified about a suspicious price increase or hoarding allegation does not mean that you are immune to a potential enforcement action or inquiry. It is likely that a significant portion of price-gouging inquiries will take place after the pandemic since most courts are currently unable to assemble grand juries for criminal indictments and state and federal law enforcement resources are stretched thin.

Maintain price discipline and oversight throughout the pandemic and set applicable compliance policies to avoid future brush-ups with either federal or state enforcement agencies.

Do not hesitate to seek help and guidance.

These are extremely challenging times for companies of all types, and particularly those involved in the purchase or sale of PPEs and other materials that are less available as a result of the pandemic. There are documented instances (since the outbreak of COVID-19) of agencies and regulators — including the DOJ, FEMA, DOJ, HHS, the U.S. Securities and Exchange Commission and relevant state entities — providing skillful guidance to companies that need assistance in complying with applicable gouging and hoarding expectations and requirements.

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Gretchen L. Jankowski is a shareholder and co-chair of the litigation section at Buchanan Ingersoll & Rooney PC.

John P. Cunningham is a shareholder at the firm.

Melissa M. Ihnat is an associate at the firm.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The federal government does, however, work closely with certain states to team on enforcement issues.

[2] A list of state price gouging statutes can be found here.

[3] E.g. California (CA Penal Code § 396); Georgia (GA Code § 10-1-393.4); Pennsylvania (73 Pa. Stat. § 232.4).

[4] E.g. Maine (10 ME Rev Stat § 1105); New York (GBS § 396-r); North Carolina (N.C. Gen. Stat. § 75-38).

[5] E.g. Alabama (Ala. Code §§8-31-1 thru 8-31-6); Mississippi (MS Code § 75-24-25); Oklahoma (15 OK St. §§ 777.1 thru 777.5).

[6] E.g. California; Florida (FL Stat § 501.160); New York; Rhode Island (RI Gen L § 6-13-21); Texas (Tex. Bus & Com. Code §17.46(b)(27)).

[7] E.g. Illinois (Ill. Admin. Code tit.14, §§ 465.10 thru 465.30); Indiana (IN Code § 4-6-9.1-2); Vermont (9 V.S.A. § 2461d).

[8] Alaska, Arizona, Colorado, Delaware, Maryland, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Puerto Rico, South Dakota, Washington and Wyoming do not currently have price gouging laws.

[9] EO 13910,"Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19" is available here.

[10] A list of designated materials is available here.

[11] A description of allocation efforts are available here.

[12] A description of FEMA's COVID-19 Supply Chain Task Force: Supply Chain Stabilization to deliver supplies is available here.

[13] See March 24, 2020 Joint Antitrust Statement Regarding COVID-19.

[14] A description of National Center for Disaster Fraud's efforts are available here.

[15] Nevada, Kentucky, Virginia, and West Virginia have each launched joint task forces.

[16] H.R. 6472, the "COVID-19 Price Gouging Prevention Act" sponsored by Representatives Janice Schakowsky, Frank Pallone, David Cicilline, and Jerrold Nadler; H.R. 6264, titled ''Preventing Pandemic Profiting Act" sponsored by Representatives Jason Smith and Josh Gottheimer ; S.3574, entitled "Ending Price-Gouging During Emergencies Act," sponsored by Senator Thom Tillis; and H.R.6450, titled the "Price Gouging Prevention Act" sponsored by Congressmen Joe Neguse and Ted Lieu.

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