Texas’s focus on anti-gouging initiatives is a good reminder that there are limits on the ability of a seller to set prices in accordance with supply-and-demand principles when a disaster strikes. Those restrictions are based on both federal and state law.
Cal-Maine also had plenty of warning that state attorneys general were keeping an eye on market prices. On March 25, 2020, 33 state attorneys general issued a joint letter to Amazon, Facebook, eBay, Walmart, and Craigslist to “more rigorously monitor price gouging practices by online sellers who are using their services.” The letter recommends that online retailers take the following steps, among others, to help curb the deceptive practice:
- “Set policies and enforce restrictions on unconscionable price gouging during emergencies: Online retail platforms should prevent unconscionable price increases from occurring by creating and enforcing strong policies that prevent sellers from deviating in any significant way from the product’s price before an emergency. Such policies should examine historical seller prices, and the price offered by other sellers of the same or similar products, to identify and eliminate price gouging
- Trigger price gouging protections prior to an emergency declaration, such as when your systems detect conditions like pending weather events or future possible health risks
- Implement a complaint portal for consumers to report potential price gouging”
In response to the rise in price gouging activities on their respective platforms, and even prior to the letter by state attorneys general, eBay and Amazon both began warning sellers and removing listings that were not in compliance with the retailers’ pricing policies.
“We will not let those hoarding vital supplies & price gougers to harm the health of America in this hour of need,” White House Press Secretary Stephanie Grisham tweeted on March 23, 2020, announcing that President Donald Trump had signed an executive order to prevent price gouging amid the COVID-19 pandemic. In relevant part, the executive order delegated to the Secretary of Health and Human Services (HHS), “(i) the authority of the President conferred by section 102 of the [Defense Production] Act to prevent hoarding of health and medical resources necessary to respond to the spread of COVID-19 within the United States, including the authority to prescribe conditions with respect to the accumulation of such resources, and to designate any material as a scarce material, or as a material the supply of which would be threatened by persons accumulating the material either in excess of reasonable demands of business, personal, or home consumption, or for the purpose of resale at prices in excess of prevailing market prices.” The Act, drafted broadly, deems any price “in excess of prevailing market prices” price gouging.
On March 25, 2020, the Secretary of HHS exercised the authority delegated by the president to prevent such price gouging. The secretary designated as “scarce materials” certain personal protective equipment, including N-95 masks, ventilators and face shields. The Defense Production Act makes the willful violation of the president’s executive order a crime punishable by a fine of not more than $10,000, or imprisonment for not more than one year, or both. Amardeep Singh, a retailer in New York state, is the first individual charged with violating the Defense Production Act amid the COVID-19 crisis. Singh, who owns and operates a network of sneaker retail establishments, including “HottestFootwear.com,” repurposed his outlets to sell “COVID-19 Essentials.” Prior to the March 25 indictment, Singh was issued a citation for selling N-95 respirator face masks as well as a cease and desist for price gouging of hand sanitizers and other disinfectants. Now, Singh is accused of accumulating and selling “scarce” personal protective equipment and other health and medical resources “in quantities that far exceeded the reasonable demands of Singh’s retail business” and at price increases ranging from 59 percent to 1,328 percent.
Federal law
“Unfairness” is defined under Federal Trade Commission (FTC) jurisprudence pursuant to the Federal Trade Commission Act (FTC Act). An act is “unfair” when it causes substantial consumer injury which is not outweighed by countervailing benefits to competition and which the consumer could not reasonably avoid. One could reasonably make an argument that charging a premium price on certain necessary items during an emergency situation meets that definition.
Even if the FTC did not choose to expend its resources looking into whether a seller might be engaged in unfair acts or practices, Congress can create laws that protect consumers against such practices. In the wake of Hurricane Katrina, the FTC conducted a congressionally mandated investigation and issued a report pursuant to section 1809 of the Energy Policy Act of 2005, requiring the FTC to “conduct an investigation to determine if the price of gasoline is being artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices.” In its investigation, the FTC found no instances of illegal market manipulation that led to higher prices during the relevant time periods but found 15 examples of pricing at the refining, wholesale, or retail level that fit the relevant Energy Policy Act’s definition of evidence of “price gouging.” Nevertheless, in a 2006 report, the FTC found that there were mitigating factors that explained why there were higher prices in certain regional or local areas. In fact, the FTC indicated that the reactive legislation was difficult to enforce and “could cause more problems for consumers than it solves.” Preferring its flexible “unfairness” standard under section 5 of the FTC Act to the draconian definition imposed by Congress during a regional state of emergency, the FTC argued that “competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump.”
On March 17, 2020, four Democratic members of Congress wrote to the Chairman of the FTC demanding that the FTC look into reports of price gouging in the wake of the COVID-19 public health emergency. As described in the letter by the lawmakers, “profiteers who have cleaned the shelves of hundreds of stores are hoarding these [essential] supplies or charging unconscionable prices.” The lawmakers further cautioned the FTC that if it does not act within its existing authority, they would “pursue other means, including legislation, to assist your efforts and help consumers.”
As was demonstrated in the aftermath of Katrina, one can expect that the FTC will take a very careful competition-based approach to gouging enforcement under section 5 of the FTC Act. As Chairman Leibowitz said at the time the FTC released its 2006 report regarding gas prices, “price gouging is a phenomenon that is hard to nail down. Indeed, price gouging is the obscenity of antitrust law: difficult to define in theory but easily recognized at the pump.” The chairman seems to suggest that people might feel there is gouging going on, but from the perspective of section 5, which incorporates a balance with benefits for competition and consumers, increased prices may be justified and not unlawful.
State law
While the FTC takes a balancing approach to “unfairness” and thereby can theoretically bring price gouging under its enforcement scrutiny, states can take a more pointed view and most states have statutes or regulations prohibiting price gouging. State price gouging laws typically involve two elements: (i) an event (typically an event of emergency) that significantly increases demand for certain goods and/or services; and (ii) a retailer that increases the price of such goods and/or services above a certain threshold relative to the previous market price in the trade area. Price gouging laws will often define the particular category of goods and/or services (e.g., food items, gasoline, pharmaceuticals, and emergency supplies). These categories are typically goods and/or services that regulators deem “essential.” Such laws may also require that the triggering event be classified by executive order or a declared state of emergency. While some statutes place a particular threshold on the price increase (e.g., a price increase of over 15 percent constitutes “gouging”), others more generally refer to “unconscionable,” “excessive,” or “exorbitant” price increases. States (like the FTC) can use their Unfair and Deceptive Acts and Practices (UDAP) statutes to investigate and take action against violators.
What if the seller’s costs have increased? Generally, there are express exceptions in the case where a merchant’s costs have increased, occasioning the increase in its offering prices. A merchant should be prepared to show that its costs actually have increased and that only that incremental amount is being passed on to the consumer.
Because these state laws generally flow into the state UDAP statutes, recovery is usually available by both state regulators and consumers. Accordingly, class actions are a possibility. Some anti-gouging provisions, however, limit remedial actions to state regulators.
It should also be noted that some municipal jurisdictions, like New York City, enforce their own unfair trade practices regulations or ordinances, which prohibit unconscionable practices in the sale or lease of consumer goods and services.
For a complete summary of state-by-state price gouging laws, visit:
FindLaw - Price Gouging Laws by State or
The Food Industry Association - State Price Gouging Laws
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Client Alert 2020-277
