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Law360 (March 11, 2020, 4:14 PM EDT )
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| Gretchen Jankowski |
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| Melissa Ihnat |
So too does the possibility of product shortages — either from supply chain disruptions or unexpected increases in demand — which raises price-gouging concerns.
Price gouging refers to the practice of raising prices to exploitive and unfair levels on goods and services that are in high demand and limited in quantity during natural disasters or other crises. In general, the government does not involve itself in business transactions, especially pricing.
However, where there is a "temporary imbalance in bargaining power by virtue of an abnormal level of demand, in terms of both the number of consumers who desire the item and the sense of urgency that increases that desire," the government may intervene.[1]
Most states have codified the circumstances under which pricing will be monitored through price-gouging statutes. Consistent with a hands-off approach to government intervention in pricing, many price-gouging statutes are limited in time and in scope.
Even in the absence of a price-gouging statute, states will look to intervene to ensure that consumers are not paying inflated prices during a crisis, as is the case of California and Washington where the attorneys general have stated that they intend to combat any price gouging in their respective states.
California Attorney General Xavier Becerra released a public statement, indicating:
Californians shouldn't have to worry about being cheated while dealing with the effects of coronavirus. Our state's price gouging law protects people impacted by an emergency from illegal price gouging on medical supplies, food, gas, and other essential supplies.[2]
Washington Attorney General Bob Ferguson similarly stated, "My office is investigating price gouging in the wake of the COVID-19 public health emergency. We do not identify the targets of our investigations, but we are taking formal investigative actions."[3]
Other states will likely follow suit.
Price-Gouging Statutes
There is no national price-gouging regulation, although such regulation was considered in the wake of Hurricane Katrina.[4] More than half of the states have some form of a price-gouging statute.[5] While there are some consistent elements to the price-gouging statutes, these statutes vary across states.
For example, California's price-gouging statute makes violations a criminal offense. In contrast, Pennsylvania's statute is civil in nature, subjecting violators to penalties of up to $10,000 per violation as well as authorizing the imposition of injunctive relief and restitution. Pricing decisions therefore require a state-by-state analysis.
When Price-Gouging Regulations Are Triggered
The majority of state price-gouging statutes are triggered by a declaration of emergency from a city or county executive, a governor or the president. In California and Kansas, once a state of emergency has been declared the statute applies for 30 days and can thereafter be renewed. In North Carolina, the statute applies for 45 days. In Florida, it applies for 60 days.
Some states like New York and Maine do not require a declaration of emergency, but rather are triggered by an abnormal disruption that recognizes events (man-made, natural and market forces) without a declaration of emergency. But statutory time frames can be easily overridden, and often are, as in the case of California, which has extended the 30 day period to Sept. 4.[6]
When a Price Increase Qualifies as a Price Gouge
There is no uniform threshold used to determine whether a price increase has become a price gouge. California has determined that an increase over 10% during a state of emergency is price gouging.[7] Other states, including Florida, are less clear, using phrases like "unconscionable"[8] and "excessive."
At least two other states, including Georgia and Mississippi, simply say that any increases made after a declaration constitute price gouging. In states that have not set forth a threshold amount, whether or not an increase is a violation under the statute, becomes an issue to be determined in litigation. The variations that exist make it difficult for businesses increasing prices nationwide to steer clear of price-gouging violations.
The calculation of an increase also varies by state. California's 10% is calculated based on what was being charged "by that person for those goods or services immediately prior to the proclamation or declaration of emergency."[9] Other statutes look at pricing in a period of time prior to the emergency.[10] The absence of uniformity in how price increases are calculated likewise makes compliance with price-gouging statutes difficult.
What Goods and Services Are Affected by Price-Gouging Statutes?
Many price-gouging statutes are limited to goods and services deemed necessary for consumer's health and welfare like fuel, food, batteries, medicine and housing.[11] But not all states are so limited. For instance, in Arkansas, California, North Carolina and West Virginia, price-gouging statutes apply to almost any good or service.[12] Most of the price-gouging statutes are drafted to permit the emergency to dictate the scope of the law.
Price-Gouging Enforcement in the Absence of a Statute
Simply because a state does not have a price-gouging statute does not mean that a price-gouging enforcement will not occur. The attorney general for Washington, which like several other states does not have a price-gouging statute,[13] has declared that he will tackle the issue:
We have something called the Consumer Protection Act which says you can't engage in an unfair business practice. It's our view, when there's a public health crisis[,] it's an unfair business practice to jack up your prices 20-30 percent on a common item, which makes it essentially unaffordable for so many who need to it literally save their lives.[14]
While it is unclear whether the Washington courts will be receptive to Ferguson's legal position, businesses should expect state attorneys general to monitor the marketplace and take corrective action. In short, the absence of a price-gouging statute does not insulate a business from a state enforcement action.
Price-Gouging Exceptions
Not all price increases, however, constitute price gouging. A price increase may be justified where the cost of doing business has increased. For example, in California where a "seller can prove that the increased price is directly attributable to increases in the cost of labor or materials needed to provide the good or service, the seller may not be liable under the statute."[15]
Similar cost and labor exceptions are recognized in most price-gouging statutes.[16] It is likely that the coronavirus will have significant impacts on labor costs stemming from employee absence and compliance with health and safety laws.[17]
Another avenue to avoid liability under a price-gouging statute is to seek advance approval from the state for a price increase. For example, the Florida statute provides that a "price increase approved by an appropriate government agency" will not violate the price-gouging statute.[18]
Considerations When Raising Prices During the Coronavirus Outbreak
Businesses should expect that state attorneys general will be actively monitoring pricing to ensure that consumers are not being harmed during the coronavirus outbreak. The impact of the coronavirus is global; in a few short months, it has already had significant impacts to distribution chains. And consumers are already creating shortages. Due to disruptions in the supply chain, businesses may need to consider raising prices.
Before increasing prices, businesses should consider the following:
Don't Assume that Price-Gouging Statutes Don't Apply to You
Businesses should not assume that their product or service is exempted even in the face of statements that their product or service is not necessary to the health and well-being of consumers. For example, the New York Attorney General's Office's webpage regarding price gouging has the following disclaimer:
Note on the Coronavirus: Some consumers have complained to the Attorney General about recent increases in the price of surgical masks and respirators. However, the Surgeon General has stated that these items are not effective in preventing consumers from contracting the virus and has in fact have urged consumers to stop buying masks to ensure that there is no shortage for health care providers.[19]
Despite indicating that medical masks are not necessary for the health and safety of residents, New York is treating medical mask price increases as a price gouge.[20] Recent price increases to medical masks and sanitizing gel have triggered price-gouging concerns.[21] We are only in the early weeks of the outbreak, and, as circumstances change, it is not out of the realm that products and services, not currently considered vital, may well become so.
Raising Prices Can Have Long-Term Consequences
If you are going to raise prices, be sure to consider the impact to your reputation and customer goodwill. Being accused of price gouging during a state of emergency can have long-term financial consequences. Many companies are experiencing this first-hand: Amazon.com Inc. has removed tens of thousands of items that are unreasonably priced. Using the price-gouging statutes that specify a threshold as a guide, any pure profit increase at or above 10% may expose you to risk of price gouging.[22]
Don't Surprise Customers With a Price at Checkout
State regulators rely heavily on consumer reporting in identifying businesses that are engaged in price gouging. If you are going to raise your pricing, be transparent about the increase. Make it clear to customers and vendors that the price increase reflects increased costs.
Be Prepared
If a price increase is required, a business should document with particularity any actual or anticipated cost increases or shortages, including when they occurred. Contemporaneous documentation is key to not only defending a price increase, but also in communicating with customers.
Maintain Antitrust Policies
Do not talk with your competitors. Antitrust laws still apply. And certain companies like those selling health care products will be monitored more closely by the U.S. Department of Justice.[23] It may seem like good business sense to reach out to a competitor to see if it is experiencing similar issues with its supply chain or workforce or whether it is contemplating raising prices. Resist this temptation. Information regarding a company's supply chain, costs and pricing is competitively sensitive information that should not be discussed with a competitor.
Final Thoughts
Businesses should expect that states are going to be vigilant in pursuing any perceived price gouging. Given the current media attention on medical masks and hand sanitizers, companies thought to be engaged in price gouging will not escape scrutiny.
If other states follow California's lead, businesses should also expect that price-gouging laws will be effective for much longer periods of time than those contained in the applicable laws. Because the legal landscape for price gouging is varied, businesses must be careful, particularly if they operate nationwide.
Gretchen Jankowski is a shareholder and co-chair of the litigation section at Buchanan Ingersoll & Rooney PC.
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] People v. Two Wheel Corp.
, 525 N.E.2d 692, 694 (N.Y. 1988).[2] Statement by California Attorney General Xavier Becerra, https://oag.ca.gov/news/press-releases/attorney-general-becerra-issues-consumer-alert-price-gouging-following-statewide.
[3] Statement of Washington State Attorney General Bob Ferguson, https://www.atg.wa.gov/news/news-releases/ag-ferguson-statement-price-gouging-public-health-emergency.
[4] See, e.g., "Price Increases in the Aftermath of Hurricane Katrina: Authority to Limit Price Gouging," Report Prepared for FTC, https://fas.org/sgp/crs/misc/RS22236.pdf.
[5] See, e.g., "Directorate for Financial and Enterprise Affairs Competition Committee Working Party No. 2 on Competition and Regulation Excessive Prices – Background Paper" (Jan. 9, 2012) (Twenty-nine states and the District of Columbia prohibit excessive pricing of motor fuels and other commodities during periods of abnormal supply disruption), https://www.justice.gov/atr/public/international/278823.pdf; Price Gouging Laws by State, FindLaw, https://consumer.findlaw.com/consumer-transactions/price-gouging-laws-by-state.html.
[6] See, e.g., "Price Increases in the Aftermath of Hurricane Katrina: Authority to Limit Price Gouging," Report Prepared for FTC, https://fas.org/sgp/crs/misc/RS22236.pdf.
[7] Other states that set a 10 percent threshold include Arkansas, New Jersey, Oklahoma, West Virginia, and the District of Columbia.
[8] Fla. Stat. Ann § 501.160.
[9] Cal. Penal Code § 396, Louisiana follows a similar method.
[10] Iowa (7 days), Alabama and Florida (30 days), Washington D.C. (90 days).
[11] See e.g. Cal. Penal Code § 396, Connecticut General Statutes § 42-230, Ark. Code Ann. § 4-88-301 ("Selling commodities, household essentials, fuel, etc."); Fla. Stat. Ann § 501.160. ("Selling commodities, household essentials, rentals, fuel, etc."); N.Y. Gen. Bus. Law § 396-r. (Selling "goods and services vital and necessary for the health, safety and welfare of consumers"); N.C. Gen. Stat. § 75-38 ("Selling or renting goods and services "used to preserve, protect, or sustain life, health, safety..."); W.V. Code § 46A-6J-1 ("selling consumer food items, medical supplies, heating oil, building supplies").
[12] See e.g. 2006 Pa. Laws 133 ("sell the goods or services within the geographic region that is the subject of the declared emergency"); La Rev.Stat. § 29:732 ("Selling goods/services") Haw. Rev. Stat. Ann. § 127A-30 ("the selling price of any commodity").
[13] Alaska, Arizona, Colorado, Delaware, Maryland, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Wyoming, and Puerto Rico.
[14] See, e.g., "Price Increases in the Aftermath of Hurricane Katrina: Authority to Limit Price Gouging," Report Prepared for FTC, https://fas.org/sgp/crs/misc/RS22236.pdf.
[15] See, e.g., "Price Increases in the Aftermath of Hurricane Katrina: Authority to Limit Price Gouging," Report Prepared for FTC, https://fas.org/sgp/crs/misc/RS22236.pdf.
[16] See People v. AGIP Gas, LLC
, 2013 NY Slip Op 32805[U], *4 (Sup. Ct. Oct. 18, 2013) (a gas station owner successfully justified a temporary 80% price increase in the wake of an abnormal market disruption from Hurricane Sandy as resulting from supplier increases and "additional burdens and costs, including man-hours, which it incurred relating to gas lines, security concerns, crowd and traffic flow, uncertainty with respect to the delivery of replacement inventory, and other "soft costs" due to emergency conditions.").[17] For a robust discussion of the impact of the coronavirus on employers, see https://www.bipc.com/preparing-the-workplace-for-coronavirus.
[18] Fla. Stat. Ann § 501.160.
[19] New York State Attorney General, Price Gouging, https://ag.ny.gov/price-gouging.
[20] Rich Calder, "NYC cracks down on face mask price-gouging during coronavirus crisis, New York Post (Mar. 4, 2020), https://nypost.com/2020/03/04/nyc-cracks-down-on-face-mask-price-gouging-during-coronavirus-crisis/.
[21] See e.g. Catherine Thorbecke, "Americans hoarding hand sanitizer, face masks and oat milk amid coronavirus fears," CBS News (Mar. 4, 2020) ("Sales for medical face masks in the U.S. jumped 319 percent in the four-week period ended on Feb. 22…Household maintenance masks sales were similarly up 262 percent in that same period."), https://abcnews.go.com/Business/americans-hoarding-hand-sanitizer-face-masks-amid-coronavirus/story?id=69385946.
[22] See Sharon Terlep, "Amazon Dogged by Price Gouging as Coronavirus Fears Grow: Third-party sellers on the website charging as much as six times the normal price for virus-killing supplies; $50 for a two-pack of Purell," Wall Street Journal (Mar. 5, 2020), https://www.wsj.com/articles/amazon-dogged-by-price-gouging-as-coronavirus-fears-grow-11583417920.
[23] See Press release No. 20-289, Justice Department Cautions Business Community Against Violating Antitrust Laws in the Manufacturing, Distribution, and Sale of Public Health Products, https://www.justice.gov/opa/pr/justice-department-cautions-business-community-against-violating-antitrust-laws-manufacturing.
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