Reed Smith Client Alerts

While state attorneys general continue to actively pursue price-gouging1 investigations against individuals and entities, courts seem to be taking a different, more business-friendly approach, highlighting the fact that price-gouging laws are subject to limitations. State attorneys general have taken a strong stance against price gouging in the United States since the start of the global pandemic. On March 25, 2020, 33 state attorneys general wrote letters to a number of large online platforms asking them to more rigorously monitor price-gouging practices by online sellers using their services.2 Cases filed by attorneys general in response to these and other price-gouging practices are now progressing through the court system.

Auteurs: John P. Feldman Michelle A. Mantine Toam Rubinstein Danielle L. Stewart

On September 23, 2020, New York Supreme Court Judge Eileen A. Rakower dismissed the New York attorney general’s case against Quality King Distributors Inc. and its CEO, Glenn Nussdorf. The suit, filed on May 27, 2020, accused Quality King and Nussdorf of price gouging more than 46,000 cans of Lysol disinfectant spray. New York Attorney General Letitia James called Quality King’s price increase from about $4.25 to $9.15 on a 19 oz. can of Lysol spray between January 2020 and April 2020 “appalling.”3 In her order, Judge Rakower disagreed, stating that “the price increases charged by Quality King were not, as a matter of law, unconscionable or overall extreme.”4 She noted that there were isolated instances of price increases that were seemingly increased to the extreme, but that Quality King did not “uniformly” raise its prices on Lysol products offered to customers. Further, Judge Rakower stated, “the pricing overall did not indicate any use of unfair leverage, an abuse of bargaining power or unconscionable means; nor did the pricing represent a gross disparity between the price of goods and their value measured by the price at which they were sold immediately prior to March 7, 2020.” Additionally, Quality King was able to demonstrate its price increase was related to its own increased cost for Lysol products.

The New York attorney general filed its case against Quality King pursuant to a prior version of New York’s price-gouging law.5 Governor Andrew Cuomo signed an amendment to New York’s price-gouging law on June 6, 2020. This amendment expands the scope of covered goods, expands the scope of the statutory defense, and expands potential penalties for price gouging. The prior version of the law covered only “consumer goods and services” that are “used, bought or rendered primarily for personal, family or household purposes.” The amendment now includes “essential medical supplies and services used for the care, cure, mitigation, treatment, or prevention of any illness or disease” and “any other essential goods and services used to promote the health or welfare of the public.” As a defense, a defendant is still able to demonstrate that their own costs increased, and, in addition, the amended law allows a defendant to show that “the increase in the amount charged preserves the margin of profit that the defendant received for the same goods or services prior to the abnormal disruption of the market.” Given Judge Rakower’s order, it is unlikely that Quality King’s case would have had a different outcome under New York’s amended price-gouging law.

Price-gouging enforcement and internet sales

The same day as Judge Rakower dismissed Quality King’s case, 31 state attorneys general filed an amicus brief in support of Kentucky Attorney General Daniel Cameron’s appeal of his office’s recent price gouging court loss.6 The attorneys general urged the Sixth Circuit to allow Kentucky’s investigation into online merchants for price gouging to proceed. U.S. District Judge Gregory F. Van Tatenhove, of the Eastern District of Kentucky, granted Online Merchants Guild a temporary injunction on June 23, 2020, staying the Kentucky attorney general’s investigation.7 The Online Merchants Guild argued that Kentucky’s ban on price gouging is unconstitutional as it applied to internet sales. They further argued that the “Kentucky AG’s efforts to impose Kentucky-specific price controls is tantamount to national regulation of online merchants, who cannot engage in Kentucky-only business. The Kentucky AG’s regulation of the interstate marketplace violates the dormant Commerce Clause.” Judge Van Tatenhov agreed. He was “sympathetic with the attorney general’s goal to protect Kentucky consumers;” however, “the Court cannot cast a blind eye to what appears to be an unconstitutional means to achieve this worthwhile end with respect to a specific class of retailers – those who use an online platform. On the present record, the attorney general’s recent investigatory actions and threats of enforcement in this context have the type of impermissible extraterritorial effect on interstate commerce forbidden by the dormant Commerce Clause.” In their amicus brief, the attorneys general argued that Kentucky’s rules do not have an impermissible impact on commerce beyond the state’s borders because they do not control other states’ commerce or establish “conflicting regulatory burdens.”8 They also argued that although the price-gouging laws vary between states, there is no conflict among the laws, so sellers can abide by the varying price hike limits of the different states, even if it means selling products at different prices in different locations.