Price Gouging Should Not Be Another Symptom of the Coronavirus Outbreak

As the COVID-19 infection rates grow across the United States, several states have all declared states of emergency in the past two weeks and the likelihood of more states following, or President Trump declaring a national state of emergency, also rises. So too does the possibility of product shortages – either from supply chain disruptions or unexpected increases in demand – which raises price gouging concerns.

Price gouging refers to the practice of raising prices to exploitive and unfair levels on goods and services that are in high demand and limited in quantity during natural disasters or other crises. In general, the government does not involve itself in business transactions, especially pricing. However, where there is a “temporary imbalance in bargaining power by virtue of an abnormal level of demand, in terms of both the number of consumers who desire the item and the sense of urgency that increases that desire,” the government may intervene.¹ Most states have codified the circumstances under which pricing will be monitored through price gouging statutes. Consistent with a hands-off approach to government intervention in pricing, many pricing gouging statutes are limited in time and in scope. Even in the absence of a price gouging statute, states will look to intervene to ensure that consumers are not paying inflated prices during a crisis, as is the case of California and Washington where their Attorneys General have stated that they intend to combat any price gouging in their respective states:

California Attorney General Xavier Becerra released a public statement indicating, “Californians shouldn’t have to worry about being cheated while dealing with the effects of coronavirus. Our state’s price gouging law protects people impacted by an emergency from illegal price gouging on medical supplies, food, gas, and other essential supplies.”

Washington State Attorney General Bob Ferguson similarly stated, “My office is investigating price gouging in the wake of the COVID-19 public health emergency. We do not identify the targets of our investigations, but we are taking formal investigative actions.”

Other states will likely follow suit.

Price Gouging Statutes

There is no national price gouging regulation, although such regulation was considered in the wake of Hurricane Katrina. More than half of the states have some form of a price gouging statute.² While there are some consistent elements to the price gouging statutes, these statutes vary across states. For example, California’s price gouging statute makes violations a criminal offense. In contrast, Pennsylvania’s statute is civil in nature, subjecting violators to penalties of up to $10,000 per violation as well as authorizing the imposition of injunctive relief and restitution. Pricing decisions therefore require a state-by-state analysis.

When Price Gouging Regulations Are Triggered

The majority of state price gouging statutes are triggered by a declaration of emergency from a city or county executive, a governor or the President of the United States. In California and Kansas, once a state of emergency has been declared the statute applies for 30 days and can thereafter be renewed. In North Carolina, the statute applies for 45 days. In Florida, it applies for 60 days. Some states like New York and Maine do not require a declaration of emergency, but rather are triggered by “an abnormal disruption” that recognizes events (man-made, natural and market forces) without a declaration of emergency. But statutory time frames can be easily overridden, and often are, as in the case of California, which has extended the 30 day period to September 4, 2020.

When a Price Increase Qualifies as a Price Gouge

There is no uniform threshold used to determine whether a price increase has become a price gouge. California has determined that an increase over 10 percent during a state of emergency is price gouging.³ Other states, including Florida, are less clear, using phrases like “unconscionable”⁴ and “excessive.” At least two other states, including Georgia and Mississippi, simply say that any increases made after a declaration constitute price gouging. In states that have not set forth a threshold amount, whether or not an increase is a violation under the statute, becomes an issue to be determined in litigation. The variations that exist make it difficult for businesses increasing prices nationwide to steer clear of price gouging violations.

The calculation of an increase also varies by state. California’s 10 percent is calculated based on what was being charged “by that person for those goods or services immediately prior to the proclamation or declaration of emergency.”⁵ Other statutes look at pricing in a period of time prior to the emergency.⁶ The absence of uniformity in how price increases are calculated likewise makes compliance with price gouging statutes difficult.

What Goods and Services Are Impacted by Price Gouging Statutes?

Many price gouging statutes are limited to goods and services deemed necessary for consumer’s health and welfare like fuel, food, batteries, medicine and housing.⁷ But not all states are so limited. For instance, Arkansas, California, North Carolina and West Virginia, price gouging statutes apply to almost any good or service.⁸ Most of the price gouging statutes are drafted to permit the emergency to dictate the scope of the law. 

Price Gouging Enforcement in the Absence of a Statute

Simply because a state does not have a price gouging statute does not mean that a price gouging enforcement will not occur. The Attorney General for Washington, which like several other states does not have a price gouging statute,⁹ has declared that he will tackle the issue:

We have something called the Consumer Protection Act which says you can’t engage in an unfair business practice. It’s our view, when there’s a public health crisis[,] it’s an unfair business practice to jack up your prices 20-30 percent on a common item, which makes it essentially unaffordable for so many who need to it literally save their lives.

While it is unclear whether the Washington courts will be receptive to the Attorney General Ferguson’s legal position, businesses should expect State Attorneys General to monitor the marketplace and take corrective action. In short, the absence of a price gouging statute does not insulate a business from a state enforcement action.

Price Gouging Exceptions

Not all price increases, however, constitute price gouging. A price increase may be justified where the cost of doing business has increased. For example, in California where a “seller can prove that the increased price is directly attributable to increases in the cost of labor or materials needed to provide the good or service, the seller may not be liable under the statute.” Similar cost and labor exceptions are recognized in most price gouging statutes.¹⁰ It is likely that the coronavirus will have significant impacts on labor costs stemming from employee absence and compliance with health and safety laws.  

Another avenue to avoid liability under a price gouging statute is to seek advance approval from the state for a price increase. For example, the Florida statute provides that a “price increase approved by an appropriate government agency” will not violate the price gouging statute.¹¹

Considerations When Raising Prices During the Coronavirus Outbreak

Businesses should expect that State Attorney Generals will be actively monitoring pricing to ensure that consumers are not being harmed during the coronavirus outbreak. The impact of the coronavirus is global; in a few short months, it has already had significant impacts to distribution chains. And consumers are already creating shortages. Due to disruptions in the supply chain, businesses may need to consider raising prices.

Before increasing prices, businesses should consider the following:

Don’t Assume That Price Gouging Statutes Don’t Apply to You

Businesses should not assume that their product or service is exempted even in the face of statements that their product or service is not necessary to the health and well-being of consumers. For example, New York’s Attorney General webpage regarding price gouging has the following disclaimer:

Note on the Coronavirus: Some consumers have complained to the Attorney General about recent increases in the price of surgical masks and respirators. However, the Surgeon General has stated that these items are not effective in preventing consumers from contracting the virus and has in fact have urged consumers to stop buying masks to ensure that there is no shortage for health care providers.

Despite indicating that medical masks are not necessary for the health and safety of residents, New York is treating medical mask price increases as a price gouge. Recent price increases to medical masks and sanitizing gel have triggered price gouging concerns. We are only in the early weeks of the outbreak, and as circumstances change, it is not out of the realm that products and services, not currently considered vital, may well become so. 

Raising Prices Can Have Long-Term Consequences

If you are going to raise prices, be sure to consider the impact to your reputation and customer goodwill. Being accused of price gouging during a state of emergency can have long-term financial consequences. Many companies are experiencing this first-hand: Amazon has removed tens of thousands of items that are unreasonably priced. Using the price gouging statutes that specify a threshold as a guide, any pure profit increase at or above 10 percent may expose you to risk of price gouging.

Don’t Surprise Customers with a Price at Checkout

State regulators rely heavily on consumer reporting in identifying businesses that are engaged in price gouging. If you are going to raise your pricing, be transparent about the increase. Make it clear to customers and vendors that the price increase reflects increased costs.

Be Prepared

If a price increase is required, a business should document with particularity any actual or anticipated cost increases or shortages, including when they occurred. Contemporaneous documentation is key to not only defending a price increase, but also in communicating with customers.

Maintain Antitrust Policies

Do not talk with your competitors. Antitrust laws still apply. And certain companies like those selling health care products will be monitored more closely by the Department of Justice. It may seem like good business sense to reach out to a competitor to see if they are experiencing similar issues with their supply chain or workforce, or whether they are contemplating raising prices. Resist this temptation. Information regarding a company’s supply chain, costs and pricing is competitively sensitive information that should not be discussed with a competitor.

Final Thoughts

Businesses should expect that states are going to be vigilant in pursuing any perceived price gouging. Given the current media attention on medical masks and hand sanitizers, companies thought to be engaged in price gouging will not escape scrutiny. If other states follow California’s lead, businesses should also expect that price gouging laws will be effective for much longer periods of time than those contained in the applicable laws. Because the legal landscape for price gouging is varied, businesses must be careful, particularly if they operate nationwide.