Legitimate Survival Tactic or Exploitative Business Behavior | Snell & Wilmer - JD Supra

The Legal Implications of Increasing Prices During COVID-19

From personal protective equipment (PPE) and ventilators to simple consumer goods like toilet paper, hand sanitizer, and cleaning products, shortages caused by COVID-19 have driven up prices for these items and many more. State attorney generals and the federal government have actively engaged with suppliers and, in particular online shopping platforms to warn against the practice of inflating prices for essential consumer goods and services and taking unfair advantage of consumers during an emergency or disaster; a practice commonly referred to as “price gouging.” However, price inflation can be caused by any number of factors which are unrelated to opportunistic and exploitive pricing decisions. These factors include dramatic increases in the cost of raw materials, logistics, and managing a workforce that may be working from home or, if onsite, forced to work with social distancing and increased sanitation measures. For some businesses, price increases are more than just an attempt to pass this cost on to consumers as increases may be necessary for the business to survive. With all this in mind, questions remain as to whether a business can raise prices, by how much, and what additional compliance steps should be taken.

The Federal Trade Commission Act does not expressly prohibit price gouging however, it does prohibit “unfair methods of competition” and the Sherman Act prevents price fixing. Neither body of law has provided particularly useful tools in protecting consumers against price gouging in the past following emergency events such as Hurricane Katrina. However, in light of COVID-19, President Trump, invoked the Defense Production Act and signed an executive order, identifying health and medical resources as scarce materials that could not be hoarded for the purpose of “resale at prices in excess of prevailing market prices.” On April 24th, a New York man was the first person to face such charges, the relevant complaint indicating that he had amassed, amongst many other items, over 21,000 KN-95 respirator face masks that he resold for markups of up to 99 percent. (Link)

On a state level, price gouging legislation varies with certain state summaries provided below.

Arizona does not have a specific price gouging statute, but in light of COVID-19, Arizona Governor Ducey issued an executive order prohibiting any “licensed health professional or healthcare institution” from price gouging in connection with COVID-19 diagnosis and treatment costs.

Colorado, similarly, does not have a specific price gouging statute, however, taking advantage of a state of emergency by unreasonably increasing the prices of essential goods and services may constitute unfair and unconscionable business acts and practices under the Colorado Consumer Protection Act. Colorado expanded the Consumer Protect Act last year, which grants the state broad authority to penalize companies and individuals who engage in “any unfair, unconscionable, deceptive, deliberately misleading, false, or fraudulent act or practice.” Under the Act, the Colorado Attorney General is authorized to file suit against parties participating in price gouging and may seek damages, injunctive relief, restraining orders, restitution, and civil penalties. In determining whether price gouging has occurred, the Colorado Attorney General’s Office will consider the following factors: (i) the price the seller charged for the product or service compared to either (a) the price at which the product or service was sold immediately before, or (b) the price charged by another reputable seller of a comparable product or service; (ii) additional business costs imposed by the supplier or another party in the supply chain; and (iii) additional costs of bringing the product to market because of a declared state of emergency.

Nevada has not enacted specific law related to price gouging, but through executive order, has targeted medical insurers to ensure that healthcare costs are moderated. In addition, relying on state general antitrust and fraud laws, the Nevada Attorney General has asked for consumers to report incidents of price gouging.

California has enacted specific legislation targeting price gouging and the limits seem to apply at every level of the supply chain, from manufacturer to retailer. Under California law, the highest price that a supplier can charge for essential goods and services (which is defined in detail in the California Penal Code) is no more than 10 percent above the total cost to purchase plus the customary markup. Violation of this Penal Code section (link) constitutes an unlawful business practice and an act of unfair competition within the meaning of California’s Unfair Competition Law, Business and Professions Code, section 17200, et seq. Like other states, the California Attorney General has issued specific warnings against price gouging.

Utah’s Price Controls During Emergencies Act seeks to prevent price gouging by making it unlawful for retail suppliers to sell goods for (i) more than 10 percent above the price that the same goods were sold for prior to the emergency and, (ii) where the upstream production cost of the goods have increased, more than 10 percent above the cost for which the supplier can obtain the goods during the emergency. Utah’s Department of Commerce has actively encouraged consumers to report any incidents of price gouging. The legislation does not explicitly extend up the supply chain, stating “a person may not charge a consumer an excessive price for goods or services sold or provided at retail…” (Link).

Under many of the above statutes, there is risk of both criminal and civil sanctions, the latter of which could obviate any benefit that a price increase could have garnered.

Online Retailers

In a traditional setting, a physical shopping mall would not be liable for the price gouging activities of a tenant store. However, online shopping platforms have garnered increased scrutiny from regulators for the costs of their own goods and also for the costs of goods that third party sellers sell through their platform. State attorneys general recently challenged a number of such commerce platforms stating that they expect the platforms to use their “considerable technological prowess” to eliminate price gouging on their websites. One of the first enforcement actions has already commenced in the form of a class action lawsuit in California. However, even under California’s extensive statutory framework, it is not clear that such platforms can be held liable for the actions of third-party sellers.

Practical Steps to Consider When Increasing Prices

As the COVID-19 pandemic continues, more and more businesses may need to raise prices for legitimate and lawful reasons. Before taking these steps, businesses should consider consulting with counsel to avoid running afoul of price gouging statutes and regulations. The following are examples of specific business actions that might be taken in response to the changing legal landscape surrounding price gouging.

1. Preparing to Defend

Businesses may need to defend price increases by identifying the specific upstream and internal costs that contributed to the decision. Many businesses are running in crisis mode, but documentation is key. Businesses may wish to consider something as simple as creating a folder in which to preserve any and all correspondence, invoices, meeting notes, and other communications or correspondence related to the price increases and discussions leading up to the increases. Being overinclusive at this point allows businesses, when the crisis has passed, to filter out, sort, and identify the material of importance that can justify the price increases. Without some form of documentation system, many actions taken under the current conditions may be but a distant memory at the time a business is called to account for them.

2. Adjust Routine or Preplanned Increases

Consider that routine or preplanned price increases in addition to COVID-19 price increases may combine to exceed certain state thresholds and trigger regulatory scrutiny. While the business may later be able to defend both increases, a regulator’s investigation and the negative press attention garnered during that process could be costly and negate any business benefit derived from the increase. Businesses may consider delaying routine price increases until after the immediate emergency to avoid any unnecessary scrutiny.

3. Escalate the Decision

While price increases may not usually make it to senior management or the board or managers of a company, in this environment, such decisions have additional risks and implications that may need to be weighed at the appropriate leadership level. Additionally, counsel will often leave financial business terms, such as price, to the relevant business lead. In this case, a price increase may have legal implications and consultation with counsel may be an important step to take, even when operating in a manner that is not usually subject to such review.

Ongoing Compliance

Just like the situation with COVID-19 is fluid, so are the different ways that states and the federal government are responding to the situation. Businesses would be well advised to monitor their compliance with price gouging statutes as the legal landscape is ever-changing and many states that previously did not have price gouging statutes may have passed, or are in the process of passing, such laws or are finding other ways, such as through executive order, to curb those practices. Further, while there is no current federal price gouging statute, on May 15, 2020, the U.S. House of Representatives passed a new stimulus package that includes the Health and Economic Recovery Omnibus Emergency Solutions, or HEROES Act, which includes a proposed federal price gouging law (link). The COVID-19 Price Gouging Prevention Act states that it is “…unlawful for any person to sell or offer for sale a good or service at a price that (1) is unconscionably excessive; and (2) indicates the seller is using the circumstances related to such public health emergency to increase prices unreasonably.” The HEROES Act would also provide a series of factors to be considered in determining whether a person has violated the HEROES Act and delegates enforcement authority to state attorneys general and the Federal Trade Commission who may seek civil penalties from violators during the COVID-19 state of emergency. While this bill would still require Senate and White House approval to become law, it is an excellent indication of why businesses need to be vigilant in monitoring their compliance with price-gouging statutes and regulation.

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