COVID-19 has had a profound effect on supply chains, creating shortages and, in some cases, raising prices of vital medical and consumer products. It is no surprise that consumers, businesses, and government authorities are sounding the alarm about potential price gouging and pursuing those who appear to be exploiting the current crisis. On March 23, President Trump signed Executive Order 13910 under the Defense Production Act, which, among other things, prohibits hoarding of designated materials for the purpose of price gouging. Various federal agencies have warned that they will vigorously prosecute related conduct. Many state authorities have triggered the operation of price gouging statutes or stated their intention to use other available enforcement tools.
The uncertainty surrounding these competing legal frameworks can present challenges for suppliers of in-demand products at all levels of the distribution chain. There is no uniform definition of the offense of price gouging, which generally refers to opportunistic pricing at above-market rates or dramatic increases of prices for products in critical need. The diverse set of applicable state and federal laws vary in their operation and scope. This alert identifies the key federal and state enforcement risks and provides practical guidance for suppliers and purchasers seeking to navigate these issues.
Federal Enforcement To Stop Price Gouging
The federal government is prioritizing use of all available enforcement authorities to take action against suspected price gouging affecting essential medical supplies, other products in short supply as a result of the pandemic, and government procurement. At the end of March, Attorney General Barr also announced the creation of a task force that will address market manipulation, hoarding, and price gouging related to COVID-19. That task force will include designated attorneys from each United States Attorney’s Office, along with personnel from the Department of Justice Antitrust Division’s Criminal Enforcement Program as needed.
The COVID-19 task force already has taken swift action, announcing on April 2, 2020, that it had seized and redistributed hundreds of thousands of hoarded medical supplies located by the FBI to date. The task force likely will leverage existing DOJ efforts policing procurement and competition. For example, early in the crisis the Department warned that the Procurement Collusion Strike Force, which focuses on combating collusion and related schemes in government procurement processes, would be on high alert for procurement misconduct affecting face masks, respirators, and diagnostics. In addition, antitrust regulators may scrutinize reported price gouging for signs of coordinated behavior or other anti-competitive conduct.
Although price gouging alone typically would not be considered an antitrust violation, the Antitrust Division has signaled vigilance relating to the manufacturing, distribution, or sale of public health products. In addition, Members of Congress have called on the FTC to investigate price gouging pursuant to its authority to challenge “unfair or deceptive acts or practices in or affecting commerce,” (see 15 U.S.C. § 45(a)(1)), and have also introduced legislation to address price gouging more directly at the federal level.
Moreover, the Defense Production Act prohibits accumulation of certain scarce products “for the purpose of resale at prices in excess of prevailing market rates,” and delegates to the President the authority to designate a list of covered materials (see 50 U.S.C. § 4512). President Trump invoked that authority on March 23, 2020, when he signed Executive Order 13910 to prohibit the hoarding of medical supplies needed to limit the spread of COVID-19. The Department of Health and Human Services followed up on March 25 with a list of covered medical supplies, which includes face masks, respirators, ventilators, hydroxychloroquine drugs, sterilizing and disinfecting products, and several other types of personal protective equipment. Those found to be accumulating these materials in excess of reasonable need or for the purpose of selling them above prevailing market prices can be fined up to $10,000 and imprisoned for up to one year (see 50 U.S.C. § 4513).
State Law Enforcement Regimes
A majority of states have laws prohibiting price gouging in times of public emergency. These laws vary considerably, creating a compliance challenge for companies that transact in multiple states. Key differences include the following:
- Covered products and services – Some statutes apply only to a limited set of products (e.g., fuel), but many others apply much more broadly, covering food, medical supplies, household goods, retail sales items, rental housing and hotels, construction materials, and other products and services.
- Definition of impermissible price increase – Most state statutes prohibit excessive and/or unjustified price increases, but the specific conduct that is prohibited can vary. Some statutes are triggered if price increases over a certain percentage threshold, but other states specify that any price increase can be a violation if statutory criteria are met.
- Exceptions for cost increases – Most state laws contain exceptions that allow certain price increases to account for production or shipping cost increases, although these exceptions differs from state to state. While some states allow sellers to increase costs to preserve margins, others allow only the amount of the cost increase to be passed along. Many states place the burden of proof for justifying the price increase on the seller.
- Penalties – Penalties differ by jurisdiction but can include hefty per-violation fines, restitution, injunctive relief, and even criminal convictions.
In states that lack a specific governing statute, suspected price gouging still may be challenged by a state attorney general as an unfair business practice. Therefore, companies should not assume that excessive price increases will go unpunished in states that lack a price-gouging statute. We are carefully tracking price gouging laws and developments in all fifty states and can provide detailed information on request.
Private Civil Litigation
Although state and federal regulators have taken the lead on price gouging enforcement so far, private litigants also pose a significant long-term risk. Some states provide direct private rights of action under their price gouging statutes and may allow recovery of treble damages. Even where price gouging statutes do not expressly authorize private suit, plaintiffs may invoke state unfair competition or consumer protection laws to seek recovery for suspected price gouging. These statutes may allow for damages (actual, statutory, and punitive), restitution, injunctive relief, and/or attorneys’ fees, depending on the state.
Practical Takeaways for Compliance
The nuances of the varied laws and regulations in this space can be difficult to navigate. That is especially true as regulators update their statutory interpretations, issue new rules, and pursue different priorities in response to this crisis. Below are some practical tips to keep in mind when considering price increases:
- Optics are important, so consider any pricing decisions in light of the potential risk that they may be unfairly targeted as exploitative. Even well-intentioned pricing decisions could become the subject of scrutiny in the current environment.
- Legal risks will be particularly acute for “critical” supplies as identified by the federal or state authorities, and these supply lists likely will evolve as the crisis progresses. Pricing of key components or inputs for scarce products may receive heightened attention too, as will aggressive pricing practices for other products deemed necessities or that are in high demand as a result of the crisis.
- Evaluate the jurisdictions in which the business is incorporated, operates, and sells products to determine which states’ laws and regulations may apply. Even small price increases can trigger scrutiny or possibly violate the law in many states—do not assume that a “small” price increase will fall outside these statutes.
- Carefully document the cost basis for any price increase, including whether it is necessary to offset an increase in the costs of manufacturing (e.g., materials or labor costs), acquisition, distribution, or sales, and maintain records of past cost information showing the company’s historic pricing practices for the products at issue.
- Avoid raising margins on products covered by state or federal price gouging regulations, but do not assume that a price increase is legal simply because margin has not increased.
- Consult applicable government contract regulations if the federal or a state or local government is your customer, as sales to government entities may be particularly scrutinized.
- The crisis may spur complaints from internal and external whistleblowers or customers, and federal and state authorities have established complaint centers to make this process easier. Addressing customer or employee concerns as they arise may help mitigate the risks of a complaint.
- Consider whether transparency in certain negotiations with your customers or the government may be helpful in reducing the risk of a complaint. In some circumstances, being able to show that a customer or government entity had knowledge of information such as your cost basis or profit margins in sales negotiations may be helpful to demonstrate a lack of ill intent and lessen the practical risks of a complaint or private lawsuit, even if it does not provide a legal defense in all cases.
- Remain vigilant about antitrust compliance. The exigent circumstances of COVID-19 do not create an exemption from the antitrust laws, and federal and state antitrust agencies have warned that they will be on high alert for price fixing, bid-rigging, market allocation schemes, or other anticompetitive conduct that seeks to exploit the pandemic. See also “Competition Guardrails for Collaborating in Response to COVID-19.”
For more information regarding legal developments relating to COVID-19, visit Covington’s COVID-19 Toolkit. You can also stay up-to-date with the Covington Competition blog, where we are providing regular updates on the competition law/antitrust implications – both procedural and substantive – of the COVID-19 crisis in the US and the EU.