Price Gouging

Price-Gouging 101 for Suppliers

April 27, 2020
Retailers aren't the only ones facing penalties. Here’s what to watch out for.

When demand for an item or service increases in a free market, the price tends to increase accordingly. This can seem particularly true in times of crisis – just ask anyone who recently paid $20 for a small bottle of hand sanitizer. Unfortunately for those entrepreneurs following Winston Churchill’s maxim to “Never let a good crisis go to waste,” raising prices on essential items during a public emergency may be violation of state law, as well as a federal crime pursuant to a recent presidential executive order. 

In addition to the new U.S. Department of Justice Task Force investigating hoarding and related price increases on essential items, the attorneys general of many states have launched numerous enforcement investigations around COVID-19. The laws under which federal and state authorities are acting vary among jurisdictions, but they generally apply to all participants in the manufacturing chain – including suppliers – and provide for not only restrictive court orders and fines but also the potential for imprisonment of company owners and employees.

While the country grapples with this pandemic, any business considering making a price increase, or any business on the receiving end of a proposed price increase, will want to understand the laws that apply to price gouging and the practical options available to it.

Federal and State Price Gouging Standards

It may come as a surprise to learn that there was no federal law on price gouging until last month. President Trump’s March 23, 2020 executive order, issued pursuant to the Defense Production Act, covers items specially designated as protected by the Department of Health and Human Services (HHS). Presently, HHS designations cover only those items critical to responding to the COVID-19 crisis, such as ventilators and personal protective equipment. The executive order makes it a federal crime for any person (or business) to accumulate a designated product either (1) in excess of his or her reasonable needs, or (2) for the purpose of selling it in excess of “prevailing market prices.” The phrase “prevailing market prices” is not defined in the executive order, and its interpretation almost certainly will be the subject of many lawyers’ arguments and experts’ testimony in any prosecutions. For the present, the best guidance may be the different state laws.

Most states and at least one municipality (New York City) have their own distinct price gouging laws. These laws vary from jurisdiction to jurisdiction, with differing standards and nuances that are essential to understand in order to be in compliance. For example:

  • New York, Massachusetts, and Rhode Island prohibit “unconscionably” high prices during a local or national emergency. Generally speaking, a price is unconscionably high if there is a gross disparity between the increased price and either (a) the price of that good or service immediately prior to the declared emergency, or (b) the price at which other businesses are offering the same product or service during the emergency. 
  • California and New York City have laws that impose a percentage cap on price increases during a state of emergency. Both jurisdictions prohibit raising the prices of certain items by more than 10 percent.
  • Connecticut and some other states fall into a third category, with laws that purport to prohibit any price increase during any state or federal disaster or emergency declaration. These laws are not as ironclad, as they may superficially appear to be and often do not prohibit all price increases – just those due to the emergency.

Despite their myriad differences, these laws typically have the same broad scope. They apply to anyone selling goods or services at any point in the supply chain – suppliers, manufacturers, wholesalers, distributors, and retailers are subject to enforcement. Additionally, the prohibitions apply to all transactions, not only retail transactions with individual consumers, but also business-to-business and business-to-government sales.

As a result, complaint about price gouging can come from almost anywhere – the government, a consumer, or even another business, such as a competitor.

Businesses facing an exploitative price increase from a supplier have a host of options, from the informal route of initiating a non-threatening dialogue with the party, to the extreme of filing a reporting with the state Attorney General’s Office or the local office of the U.S. Department of Justice.

There is also direct litigation. The recently filed 3M lawsuits, which target an online retailer, are a good example. In them, 3M is targeting alleged price-gougers in California, New York, Florida and Texas for attempting to sell 3M masks for as much as six times their prior cost.

Price Gouging Laws Generally Allow for Normal Market Conditions 

None of this is to suggest that all price increases are prohibited during the pandemic. To the contrary, price-gouging laws are aimed at preventing exploitation and, therefore, generally allow price increases that result from normal market conditions. In other words, the cause for the increase must be unrelated to COVID-19.For example, if a supplier’s cost is now higher due to a raw materials shortage that has nothing to do with the virus, the supplier may raise its price when selling to an OEM, and that increase ultimately may be passed along to the end user with no violation of price gouging laws. Likewise, a product (e.g., new technology) may simply be in high demand because of its novelty or ingenuity, regardless of the pandemic.

Understandably, no company believes it will ever be the target of a government investigation related to price gouging. But this is an important and politically charged issue, which means that enforcement actions are inevitable. When they do knock on the front door of a business, government agents will be prepared to dig into the facts. It will not be enough to simply say that a price increase was due to factors unrelated to COVID-19.

The most prepared companies will have considered certain proactive measures, such as:

  • Issuing an internal declaration from a senior executive to all company personnel that articulates the company’s official anti-price gouging position
  • Developing internal written policies and procedures that specifically address setting and raising prices, taking into consideration (with the assistance of legal counsel) the March 23 executive order and the nuances of the laws of each state into which the company’s products are sold
  • Maintaining restrictions on which employees can set prices, and then formally training those selected employees on the pricing policies and procedures
  • Requiring employees responsible for price increases to maintain a complete, electronically stored set of all records (e.g., emails, letters, purchase orders, invoices) related to those decisions, all in order to demonstrate later that the increase was due to factors unrelated to COVID-19 
  • Operating a portal on the company’s website for customers and employees to report price concerns directly
  •  Designating, in advance, one person to monitor those complaints as well as to monitor all federal and state emergency declarations.

While none of these measures are guaranteed to prevent or quickly resolve a government investigation, they are worthwhile investments that could minimize the risk of violations and help to demonstrate corporate good faith. In these uncertain times, businesses might well heed a perhaps more apt maxim than Churchill’s—namely, that “The cost of compliance is almost always less than the cost of a crisis.” 

Kendra Berardi, a member of Robinson+Cole’s Business Litigation Group, focuses her practice on complex commercial litigation and real estate litigation. She handles complex business disputes, including claims for breach of contract and business torts such as fraud, misrepresentation, unfair and deceptive trade practices, and class action litigation.

Edward Heath is the chair of Robinson+Cole’s Business Litigation Group and leads its Government Enforcement and Corporate Compliance Teams.

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