By Bryan Koenig

Law360 (March 19, 2021, 9:22 PM EDT ) New York City authorities have unconstitutionally imposed excessive COVID-19 price-gouging fines without due process on "potentially tens of thousands of individuals and businesses" that sell face masks and other pandemic supplies, according to a proposed $50 million class action filed in federal court.

Union Square Supply Inc. said in a complaint filed Thursday that New York's Office of Administrative Trials & Hearings, or OATH, under a declaration of emergency has approved price-gouging fines often running into the tens of thousands of dollars based on an undisclosed list of acceptable rates. Some targets were denied a chance to defend themselves after being issued summons to a closed building, according to the complaint.

Enforcement targets, according to the complaint filed in the Southern District of New York, have no way of knowing exactly what prices are acceptable for goods used to combat the COVID-19 epidemic — including masks, hand sanitizer and cleaning supplies — because the Department of Consumer and Worker Protection, or DCWP, won't disclose the "secret list" that its inspectors have said they refer to when going inside a store.

"Critically, DCWP has not only failed, but has continued to refuse to produce this secret standard list of maximum potential prices, or as an alternative, state what the maximum prices for these emergency goods are permitted," Union Square said.

The fines are excessive in part because city officials have since rescinded an initial $3,000 cap on fines, making for frequent penalties that can exceed $15,000 based on a $350 penalty for every item in a box, according to the complaint.

Union Square also took officials to task for allowing merchants to raise prices if their own costs rise but only to the extent that the dollar value of their profit doesn't change. According to the complaint, the city's rule interpretation "is unconstitutionally vague and fails to put plaintiff and the class members on notice of what activity is permitted."

"The failure to apprise plaintiff and the class members of the change in definition from a percentage increase a fixed dollar profit, is further exacerbated by the method in which the rule is prosecuted," Union Square said.

"Because the rule defines price gouging as an increase in price of 10 percent or more over that which 'could have been obtained by a buyer in the City of New York,' brick-and-mortar shops, with overhead, rent, and other costs, now have to compete with online vendors, who are not subject to any such overhead expenses," it continued. And that competition doesn't consider whether the items were in stock at the online merchant, according to the complaint.  

Union Square itself says it was fined $21,000. But according to the complaint, that fine came after a tortured process in which the company's owner tried to show up to a summons for a hearing in September only to discover that "in-person hearings were not being held at that time" because of the pandemic. The summons neither informed the owner that he needed to check OATH's website nor did it say he had to request a hearing be held by telephone. But that did not stop him from being held in default for failing to show up, the complaint said.

According to the complaint, which also names Mayor Bill de Blasio, DCWP inspectors and OATH have failed to account for what prices were before an inspection, cost increases for the merchants themselves, or whether goods were in fact available for purchase.

Originally established on a temporary basis, DCWP has since made its price-gouging rule permanent for health, safety and welfare-essential products during declared emergencies.  

An attorney for Union Square, Robert J. La Reddola of La Reddola Lester & Associates LLP, told Law360 that the peril for companies had become particularly acute since the $3,000 fine cap was lifted. But details on the lift, like the master price list, have remained out of reach, with the complaint noting a public records request and follow-up lawsuit filed demanding information on both, which has so far been met with a response that La Reddola can expect to hear back in August of 2022 or "significantly longer."

"Unless they go and publish the prices, the best thing that stores can do is to not sell these products," La Reddola said in an interview. He also argued that if the reference list of prices were made public, there would be no violations at all.

An OATH spokesperson said Friday that the agency was reviewing the complaint.

"As an independent administrative court, OATH continues to apply the law in all cases, including those involving price gouging allegations filed by the Department of Consumer and Worker Protection, in a fair and impartial manner," the spokesperson said in a statement.

Representatives for the mayor's office and DCWP did not immediately respond to press inquiries Friday.

New York City itself says it has issued many thousands of individual violations, although the number of merchants fined may be less given the treatment of every item as a unique violation. In a Nov. 9 release, DCWP counted more than 12,000 price-gouging complaints received and over 15,000 violations issued. The agency said that the neighborhoods with the most price-gouging complaints were poorer communities with majority Black and Hispanic populations that have been hardest hit by the pandemic.  

Price-gouging is generally untouched by federal law, although federal prosecutors have been able to go after the sale of certain "essential" products, such as disinfectants and protective gear, priced above market under former President Donald Trump's March 2020 invocation of the Defense Production Act. Without federal rules, most price-gouging enforcement has been left up to states and some municipalities, whose various emergency declaration-triggered statutes have been criticized for creating a "patchwork" that online and national merchants must navigate.

Union Square Supply is represented by Robert J. La Reddola of La Reddola Lester & Associates LLP.

Counsel information for the defendants was unavailable Friday.

The case is Union Square Supply, Inc. v. De Blasio et al, case number 1:21-cv-02390 in the U.S. District Court for the Southern District of New York.

--Editing by Peter Rozovsky.

For a reprint of this article, please contact reprints@law360.com.