Price Gouging and Hoarding During COVID-19: Preparation and Compliance as Congress Seeks to Fill Gaps in State Laws

Currently, a specific federal price gouging statute does not exist, placing enforcement primarily within the purview of the states.[1] In the past, state price gouging enforcement has been effective in responding to natural and man-made emergencies where the impact is isolated to a specific locality and/or is relatively short-lived. But the COVID-19 pandemic is different in scope and duration and has exposed the gaps in existing state laws and in enforcement of those laws during a crisis of this nature. To address these gaps and respond to the country’s concerns about the impact that supply shortages are having on essential goods needed by first responders (and by the American people), Congress is currently considering several price gouging bills. If Congress is successful, many businesses currently not subject to price gouging and hoarding statutes may find themselves in violation of one or more new federal laws.

Current State Laws Vary in Scope and Content  

A majority of states have price gouging laws, although there is no uniformity among these state laws. While state price gouging laws are typically triggered when a state declares an emergency[2] or experiences a major market disruption,[3] these price gouging laws differ, for example, in scope and content. Some state price gouging statutes are broad,[4] prohibiting any business from raising prices on all goods during the state of emergency, while others target only essential goods being sold to consumers.[5] There are a few state price gouging laws that only regulate fuel and oil prices,[6]  but the majority of state price gouging laws focus on direct retail sales to consumers of necessary goods. 

Notably, not all states even have a price gouging statute. There are 16 states,[7] plus Puerto Rico, that do not currently have price gouging laws.  Several of those states, such as Washington, plan to use their consumer protection laws to combat price gouging during COVID-19. Other states are presently pursuing legislation, and Governor Larry Hogan of Maryland issued an executive order using a recent expansion of executive power to address price gouging during the current crisis.

More than any other recent national emergency, COVID-19 has demonstrated that a federal structure is necessary to eliminate hoarding and shortages of essential goods—and also prevent price gouging of consumers and first responders in their search for essential goods and materials.  Indeed, as comprehensive as a state statute might be, it cannot expand its reach to regulate sales of products to consumers and first responders outside of the state.   

Federal Efforts in the Wake of COVID-19

Recognizing the severity that price gouging and hoarding is having on this country, the federal government is looking for ways to address national shortages and significant price increases for essential goods like ventilators, PPE, masks, and disinfectants.

Executive Order 13910: Prosecuting Hoarders to Prevent Price Gouging

On March 23, 2020, President Trump issued Executive Order 13910 (EO 13910), "Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19." EO 13910 invokes Sec. 102 of the Defense Production Act (DPA), which defines hoarding to include "materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation." EO 13910 addresses situations where significant quantities of designated materials are withheld from the marketplace with the purpose of creating or exacerbating a shortage to raise prices. EO 13910 may be an effective tool for discouraging price gouging, but is not available for actual price gouging enforcement.

Coordination by Federal Agencies

The Federal Emergency Management Agency (FEMA) and the U.S. Department of Health and Human Services (HHS) have been working with medical supply companies to allocate personal protection equipment (PPE) and supplies and ensure timely delivery of supplies of PPE to "hot spots" designated by the Centers for Disease Control and Prevention (CDC). To participate, medical supply companies apply for permission through an expedited process established in March by the Department of Justice (DOJ) and Federal Trade Commission (FTC) to allow collaboration between competitors without violating antitrust laws. The voluntary coordination and allocation of such supplies by these companies removes buyer competition and the potential up-bidding for supplies between buyers. The program also seeks to prioritize those most in need of supplies. While the allocation process may help prevent price gouging by minimizing up-bidding and desperation--circumstances that foster price gouging of PPEs and other supplies--it does not itself regulate price gouging.

Moreover, the National Center for Disaster Fraud (NCDF), the DOJ, and the Federal Bureau of Investigation (FBI) are coordinating with a variety of states to assist with the investigation and prosecution of a variety of COVID-19-related issues. The NCDF, established in the wake of Hurricane Katrina, coordinates available law enforcement and prosecutorial resources and is able to field and organize complaints. The coordination is allowing states to manage an often-overwhelming number of complaints, and assist in the investigation and enforcement of those complaints. While the NCDF is busy with organizational tasks, the FBI and DOJ are teaming with U.S. Attorneys’ Offices and state agencies to create task forces[1] to address a variety of complaints during the pandemic, including price gouging. These federal efforts supplement and enhance the ability of states to respond to and track gouging complaints.

Focus on Gaps in State Coverage

The gaps in coverage for price gouging result from the division of regulatory authority over commercial activities between the state and federal governments. The federal government has exclusive control over interstate commerce, and the states, through their police power, may regulate sales within their boundaries. Indeed, state laws that impose restrictions or burdens on commercial activities outside their boundaries risk being struck down as unconstitutional.[2] The most prominent gaps that exist from the absence of a designated federal price gouging statute relate to state procurement, interstate commercial activities, business-to-business commerce, and states with no price gouging regulatory scheme.

State Procurement

Governor Andrew Cuomo of New York recently highlighted the significant issue of states bidding against one another, resulting in purchases at excessive prices. Neither the New York nor the California price gouging statutes, for example, could be applied to negotiations to restrict pricing without exceeding each state’s authority and interfering with interstate commerce. As such, any federal price gouging legislation should consider the extent to which state procurement of essential goods should be regulated nationally.

Interstate Commercial Activities

As with state-to-state procurement, transactions occurring between businesses in different states is generally governed by federal law, whereas retail sales to consumers within a single state are often within the scope of state law. Therefore, it is likely that a state prosecuting an out-of-state business for pricing offered to an in-state business would be deemed as interfering with interstate commerce. This is one primary reason why the majority of active state price gouging laws are limited to retail sales. As a result, there is currently a significant gap in the regulation of price gouging between companies in different states. Accordingly, federal price gouging legislation should seek to address interstate activities such as these and thereby fill the void that prevents states from constitutionally regulating interstate commerce.

Business-to-Business Commerce

Because the majority of state price gouging statutes regulate retail consumer transactions, state regulation of business-to-business transactions is less prevalent.  The limited number of states governing wholesale or supply transactions also creates a significant gap in enforcement. 

Federal Legislation Aimed at Filling the Gaps

Despite the above-referenced federal efforts at enforcement, price gouging persists because most relevant state laws are not designed to protect the purchase or procurement of critical goods like PPE by hospitals, medical facilities and offices, assisted living entities, and other types of institutions.  Recognizing that a pandemic of this magnitude requires a multi-faceted approach, Congress is presently undertaking to address price gouging, particularly as it pertains to business transactions not currently covered by state laws. Ultimately, the federal government hopes to fill the gaps in regulation and remedy the lack of uniformity in current state laws. Since the coronavirus outbreak, four bills have emerged from Congress to combat price gouging. Given the number of proposals and the difficulties presented by the current legal and commercial landscapes, it is possible that one of these bills will be fast-tracked by integrating it into one of the COVID-19 financial support bills under consideration.

H.R. 6472

H.R. 6472, the "COVID-19 Price Gouging Prevention Act" sponsored by Representatives Janice Schakowsky, Frank Pallone, David Cicilline, and Jerrold Nadler is limited to the "duration of a public health emergency… as a result of confirmed cases of 2019 novel coronavirus." H.R. 6472 makes it unlawful for "any person to sell or offer for sale" a "good or service" at "unconscionably excessive" or "unreasonable" prices. The terms "unconscionably excessive" and "unreasonable" are not defined.  Goods and services, however, are defined as "a good or service offered in commerce" including, but not limited to, necessities, PPE, medical supplies, and respirators. The bill compares prices currently offered to those offered by the company or a similarly-situated competitor "during the 90-day period immediately preceding January 31, 2020"--or "during the same 90-day period of the previous year" -- to determine whether the price is "unconscionably excessive" or "unreasonable." Violations of H.R. 6472 will be treated as an "unfair or deceptive act or practice in violation of a regulation under section 18 of the FTC Act" and enforceable by the FTC and state attorneys general. Penalties are civil rather than criminal and include fines and restraining orders. Further, H.R. 6472 does not supersede or preempt any state laws. H.R. 6472 applies to interstate commerce and is not limited to retail, consumer, and household goods.  Unlike some of the other proposals, H.R. 6472 concerns only the COVID-19 pandemic and would not, as currently drafted, apply to unrelated national emergencies.

H.R. 6264

H.R. 6264, sponsored by Representatives Jason Smith and Josh Gottheimer and titled "Preventing Pandemic Profiting Act," if passed, would apply to the current pandemic and any declared future state of emergency.  The bill makes it unlawful to offer or charge "an unconscionably excessive price" on "any goods or services identified by HHS as "vital and necessary for the health, safety, and welfare of consumers, including medical treatment." Under H.R. 6264, excessive pricing is "a price higher than the average price at which goods or services were sold or offered for sale during the 30-day period prior to the date on which a state of emergency declaration is made." H.R. 6264 relies on HHS to determine the scope of products covered by the Act and refers to pre-emergency pricing when determining whether the price is "unconscionably excessive." Violating H.R. 6264 is "a misdemeanor punishable by imprisonment in a county jail for a period not exceeding one year, or by a fine of not more than ten thousand dollars ($10,000), or by both that fine and imprisonment." As drafted, H.R. 6264 would fill the gaps in price gouging regulation, but only with regard to those goods and services identified as "vital" by HHS. 

S. 3574

S. 3574, sponsored by Senator Thom Tillis and entitled "Ending Price-Gouging During Emergencies Act," is similar to H.R. 6264. S. 3574 would apply when a national emergency has been declared and FEMA issues a proclamation. According to the bill, FEMA may "issue a proclamation with respect to an emergency area during an emergency period to designate the goods and services" that will be governed by the bill. Thus, FEMA is responsible for the identification of goods and services covered by the bill, meaning that the emergency will define the scope of goods covered. Any person or company charging a price that "grossly exceeds" the item’s average price from the month before the national state of emergency violates S. 3574. This bill imposes civil and criminal penalties "up to 10 times the amount of profits from price gouging, with maximum criminal penalties up to $500 million." Enforcement of this bill is the responsibility of the FTC and affords state attorneys the ability to prosecute after they provide notice to the FTC of their intent to enforce, at which time the FTC may intervene or leave enforcement to the state. S. 3574 would fill gaps in price gouging regulation, but only with regard to those goods and services identified by FEMA. S.3574 does not preempt state laws, and as such requires compliance with the variety of state laws in addition to the new federal requirements. By allowing penalties "up to ten times the amount of profits," S. 3574 has the harshest penalty profile of any of the proposed bills.

H.R. 6450

H.R. 6450, sponsored by Congressmen Joe Neguse and Ted Lieu, is titled "Price Gouging Prevention Act." The legislation is triggered by either a national emergency or an "abnormal disruption in the market" ("abnormal disruption" is not defined). The proposed bill covers "consumer goods.’’ However, the bill appears to expand the scope of goods covered beyond "consumer" or retail sales to end users because the definition of "consumer good" here is "a good offered in commerce." This broad definition could, for instance, encompass sales throughout supply chains, business-to-business transactions, and state procurement. The enforcement of this bill is the concern of the FTC, similar to H.R. 6472. A violation of the bill is considered an unfair or deceptive act or practice enforceable under the Federal Trade Commission Act (15 U.S.C. 57a (a)(1)(B)). The bill also provides for enforcement by states after they provide notice to the FTC of their intent to enforce, at which time the FTC may intervene or leave enforcement to the state. Penalties for violation here are civil rather than criminal and include fines and restraining orders. The bill does not preempt the existing patchwork of state laws. Therefore, while the bill will address many of the gaps, it does not create a uniform, national price gouging law.

While the proposed federal legislation described addresses the most serious price gouging issues related to COVID-19, none of these proposed bills preempts current state gouging laws. Without preemption, companies operating on an interstate basis and seeking to comply with a litany of diverse state statutes face continued compliance challenges, for which preventive measures will prove particularly useful.  

Preventive Measures for Businesses

Price gouging laws and regulations are being primarily enforced at the state level, although it is only a matter of time before heightened federal enforcement. As federal efforts at legislation continue, and state enforcement surges, businesses should be cognizant of current gaps in applicable state laws, monitor federal efforts to seal those gaps, and implement (or enhance) preventive measures to deter, detect, avoid, and, if necessary, effectively respond to gouging and hoarding enforcement actions.

Familiarize Yourself with Applicable State Laws

None of the proposals in Congress to establish price gouging and/or hoarding laws and regulations will displace current state laws. And even if a federal statute were enacted that preempted one or more state laws, state price gouging laws have been active and enforceable since the COVID-19 crisis unfolded.  Accordingly, as part of ongoing efforts to assess risk and allocate available compliance resources, companies should assign internal legal and compliance teams with responsibility for reviewing and monitoring state laws (and federal legislation efforts) as the COVID-19 pandemic continues.

Maintain Strong Messaging from Leadership

COVID-19 has created substantial challenges for businesses attempting to move forward in a marketplace and economy currently rife with uncertainty.  Nevertheless, leadership, whether through the Board, the C-Suite, management personnel, or a combination of all three, should step forward, as resources permit, to maintain strong messaging with employees on the importance of following key guidelines, policies, and procedures relating in any way to mitigating price gouging and hoarding risk.

Be Proactive and Act Now

Do not wait for Congress to pass federal legislation before taking preventive measures. Because each company’s current prices will be compared to its pre-pandemic pricing, its pricing activity from the start of the pandemic is subject to scrutiny under any of the proposed federal bills. Conduct regular auditing, monitoring, and oversight of your pricing models and keep your compliance and legal teams in the loop.

Report and Memorialize Pricing Changes

Be prepared to justify and appropriately memorialize the legal and economic rationales for any actual or proposed price increases. Generally, an increase in price reflecting current market circumstances – for example, growing shipping costs, limited labor supply, burgeoning material costs, and supply chain price increases –is potentially a defense to price gouging allegations. Therefore, track all pricing variations, cost increases, and reports reflecting the changing status of the supply and production markets. 

Update Relevant Policies and Procedures

A review of almost all federal and state enforcement and regulatory agency guidelines reveals that one of the keys to maintaining a robust compliance program, particularly at a time like now where more infrequent risks such as price gouging and hoarding become amplified, is to appropriately update pertinent policies and procedures. As resources permit, evaluate applicable policies and protocols and, if necessary, integrate corporate gouging and/or hoarding guidelines.

Remain Vigilant in Business Partner Engagements

Remember, antitrust laws still apply. If you plan to cooperate with competitors in response to state or federal requests, be sure to seek and obtain permission from the FTC and DOJ. Any unapproved communications with competitors makes a company potentially vulnerable to conspiracy allegations in violation of antitrust laws, putting the company at further risk for attention by federal regulators.

No News Is Not Necessarily Good News

Just because a company has not yet been notified about a suspicious price increase or hoarding allegation does not mean that it is immune to a potential enforcement action. A significant portion of price gouging inquiries will likely take place after the pandemic since many courts are currently unable to assemble grand juries for criminal indictments and state and federal law enforcement resources are stretched thin. Maintain price discipline and oversight throughout the crisis and set applicable compliance guidelines to avoid future brush-ups with either federal or state enforcement agencies.

Do Not Hesitate to Seek Help and Guidance

These are extremely challenging times for companies of all types, and particularly those involved in the purchase or sale of PPEs and other materials that are less available as a result of the pandemic. There are documented instances (since the outbreak of COVID-19) of agencies and regulators – including the DOJ, FEMA, DOJ, HHS, SEC, and relevant state entities – providing skillful guidance to companies that need assistance in complying with applicable gouging and hoarding expectations and requirements.  It may also be useful to involve outside legal counsel, as many law firms have specialized price gouging expertise to lend a hand to companies in need of advice during such a difficult national emergency.