COVID-19: New York Attorney General Signals Increased Attention on Price Gouging Across Industries During Period of Record Inflation

The coronavirus pandemic has led to increased attention from regulators—and in particular state attorneys general—concerning price increases for essential goods and services. Although COVID-19 case counts are currently dropping, continued labor shortages, stretched supply chains, and increased demand for certain goods have contributed to the fastest pace of annual inflation in 40 years.¹ New York has been particularly active in its efforts to combat price gouging during the pandemic. A recent initiative by the New York Attorney General signals that its commitment to aggressively police markets for goods and services has not abated, even as New York State and New York City have eliminated nearly all pandemic rules and restrictions.

On March 4, the Attorney General released an Advance Notice of Proposed Rulemaking (“ANPRM”) seeking information in connection with a planned price gouging regulation. The ANPRM is the first rulemaking under the June 2020 amendments to New York’s price gouging law, which expanded the statute’s scope and strengthened the Attorney General’s ability to address violations, as discussed in a previous alert.

Pointing to increased corporate profits during a period of record inflation, the Attorney General’s announcement said, “big corporations appear to have used the pandemic as an excuse to charge more for necessary goods, such as gas and oil, food, and cars.”² Although the ANPRM singles out a few industries of particular concern, it indicates that the Attorney General has taken note of price increases across the marketplace and throughout the supply chain.

Entities doing business in New York should consider the impact price increases will have on their profit margins, given the Attorney General’s apparent focus on profits and the fact that New York’s price gouging law now includes a profit margin maintenance defense. Companies also should retain records documenting any increased costs and be prepared to show that their prices are in line with competitors’, two factors a state court found persuasive in dismissing a lawsuit by the Attorney General alleging price gouging by a wholesaler of Lysol products.³

I. New York’s Price-Gouging Law

New York’s recently amended price-gouging law prohibits any “party within the chain of distribution” of “goods and services vital and necessary for the health, safety and welfare of consumers or the general public” from selling such goods or services for an “unconscionably excessive price” during an “abnormal disruption of the market.”⁴ The statute defines “abnormal disruption of the market” as “any change in the market, whether actual or imminently threatened, resulting from” certain listed emergent circumstances “or other cause of an abnormal disruption of the market which results in the declaration of a state of emergency by the governor.”⁵ State courts have held that the Governor’s declaration is a sufficient, but not necessary, condition for a price-gouging enforcement action.⁶

The law includes within its scope products beyond just consumer goods and services, including “essential medical supplies and services” and “any other essential goods and services used to promote the health or welfare of the public.”⁷ While many state price gouging laws apply only to pricing practices by retailers, New York’s applies to “any manufacturer, supplier, wholesaler, distributor or retail seller of goods or services or both.”⁸ The law does not define an “unconscionably excessive price,” but identifies factors relevant to that inquiry, including if “the amount of the excess in price is unconscionably extreme” or “there was an exercise of unfair leverage or unconscionable means.”⁹ A price may be “unconscionably excessive” if the amount charged represents a “gross disparity” from the price prior to the emergency, or “grossly exceeds” the price at which the same or similar goods were available in the market.¹⁰

A defendant in a price-gouging lawsuit brought by the Attorney General “may rebut a prima facie case with evidence that (1) 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 or (2) additional costs not within the control of the defendant were imposed on the defendant for the goods or services.”¹¹ The Attorney General can seek injunctive relief, restitution, and civil penalties of the greater of $25,000 per violation or three times the gross receipts for the goods or services at issue.¹² The 2020 amendments granted the Attorney General the authority to promulgate rules and regulations,¹³ pursuant to which it issued the ANPRM.

II. The Attorney General’s Advance Notice of Proposed Rulemaking

On March 4, the Attorney General launched this first rulemaking process under the amended law.¹⁴ The ANPRM states that New York is experiencing an “abnormal disruption of the market” because of the “ongoing severe health crisis,” as well as “disruptions to supply chains, large shifts in demand for goods and services and supply of labor, and reductions in manufacturing output in certain industries.”¹⁵

The ANPRM asserts that while many recent price hikes “were legal, [] when steep price hikes during an abnormal disruption are accompanied by increases in profitability, it raises questions about whether price gouging occurred.”¹⁶ Data demonstrating “record-level profitability” suggests to the Attorney General “that some of the past price hikes and current inflation are the result of companies taking advantage of the disruption to raise prices beyond the need to cover costs.”¹⁷ The ANPRM singles out beef and shipping as examples of two industries where—according to the Attorney General—supply chain disruptions and increased costs alone cannot explain the significant price increases.¹⁸ It also points to several other industries in which prices and profits have increased substantially, including auto dealers, supermarkets, fast food, oil and natural gas, and lumber.¹⁹ In addition, the ANPRM seeks information on how New York’s price gouging law “should apply, if at all, to essential products”—such as at home COVID-19 tests—“that entered the market after the abnormal disruption, but whose value and demand flow directly from the reasons for the disruption, resulting in new or enhanced pricing power.”²⁰

The Attorney General requests information by April 15 from, among others, consumers, consumer advocacy groups, and industry participants to assist the Attorney General in “determining what rulemaking would help deter price gouging” and “what examples of pricing behavior during the COVID-19 disruption can inform rulemaking.”²¹ The ANPRM’s listed questions hint at potential areas of regulatory interest. It requests information on price gouging by suppliers and distributors, asks about the role profit should play in determining whether price gouging has occurred, inquires as to how price gouging should be measured for new products, and queries whether it would be feasible to limit the amount of cost increases during emergencies or set thresholds at which price increases are presumed to be “unconscionably extreme.”²²

After the April 15 deadline for comments, the Attorney General may propose new rules, which would be subject to another 60-day comment period.²³ The Attorney General could then promulgate new rules with the force of law.²⁴

III. Significance of the ANPRM to Entities Doing Business in New York

The ANPRM demonstrates the Attorney General’s continued commitment to police the market for a wide variety of goods and services. Because the price-gouging law regulates pricing for “any [] essential goods and services used to the promote the health or welfare of the public” during an emergency, companies selling goods or services into the New York market should consider its impact.

Although the rulemaking references the “ongoing severe health crisis,” the Attorney General also cites “the current supply-chain disruptions and the overall increase in inflation” as justification for price-gouging regulation.²⁵ This suggests that, even while COVID-19 itself appears to be receding and the Governor’s emergency declaration has expired,²⁶ the Attorney General views the inflation stemming in part from the response to the pandemic—among other factors—as its own “abnormal disruption” of the market triggering the applicability of the price gouging statute.

Entities that do business in New York should consider submitting comments by April 15. Any information supporting the need for price increases, justifying increased profit margins notwithstanding any price increases, or explaining how profits are allocated may prove relevant given the Attorney General’s apparent focus on corporate profits. Companies in the industries identified in the ANPRM and throughout the supply chain should consider submitting information for the Attorney General to consider as it weighs new rules.

In addition, to ensure compliance with the rules and prepare for any potential scrutiny, companies also should carefully evaluate their pricing strategies, particularly when considering price increases. Companies should consider the impact a price increase will have on their margins and document supply chain impacts, particularly increased internal or upstream costs. In dismissing the Attorney General’s price gouging lawsuit in People v. Quality King Distributors, Inc., for example, the state court relied on the fact that Quality King did not uniformly raise its prices on Lysol products to customers, that Quality King’s prices were in line with or even lower than competitors’, and that Quality King itself experienced increased costs.²⁷ In addition, companies should review contracts with upstream vendors and downstream customers to ensure that appropriate pricing and diligence provisions, such as representations and warranties, are in place.

The COVID-19 pandemic has been marked by state attorneys general aggressively enforcing state price-gouging laws. The ANPRM signals that New York’s close scrutiny of prices across industries will not recede even if the pandemic does.

WilmerHale is closely monitoring developments in state and federal enforcement, as well as private litigation, related to COVID-19.