Our country is facing critical shortages of supplies that are essential to the fight against COVID-19. Hospitals and health systems are struggling to procure the personal protective equipment and ventilators necessary for the providers on the front lines. Sanitizers and disinfectants essential to the safety of healthcare systems, consumers, and businesses are in extremely short supply.
Demand is far outpacing supply for many of the pharmaceuticals and other therapeutics that have shown promise in treating this novel coronavirus. This dramatic increase in demand for certain products and services has resulted in higher prices at many levels of disrupted and strained supply chains.
Buyers and sellers at all levels of the supply chains for these scarce products and services should be cognizant of how state and federal laws regulate pricing. Our antitrust laws treat price increases in times of shortage as a valuable signal to the market: higher prices tell suppliers to expand their production and incentivize new entrants to help meet the high demand.
In short, high prices in a time of shortage are not an antitrust problem, but they may be a consumer protection issue. Many states have “price gouging” laws to regulate increases in the price of certain products during emergencies. Most of the state laws make it a crime to engage in price gouging, which is defined in a patchwork of ways, making it extraordinarily challenging to understand what it takes to be compliant in supply chains that cross many state lines.
Executive Order Supplements State Price-Gouging Enforcement
To complicate matters further, despite no federal price gouging law, President Trump issued an executive order that directs the Department of Justice to enforce hoarding and price gouging under the broad executive authority that comes with the administration’s invocation of the Defense Production Act.
Whether that statute is properly used for enforcement of price gouging is another matter, but for now companies should assume federal enforcement may target price gouging. Attorney General Barr announced that an Assistant U.S. Attorney at each U.S. Attorney’s Office will be tasked with enforcement of hoarding and price gouging of products identified as scarce by the Secretary of Health & Human Services.
HHS issued its first notice of designation of scarce materials on March 25, 2020, which included the following:
- N-95 masks and other personal protective equipment (surgical masks, face shields, medical gowns, coveralls, Tyvek suits, surgical gloves, et al.).
- Respirators, including their replacement parts (e.g., filters/cartridges).
- Ventilators, anesthesia machines, and the equivalents (and replacement parts).
- Sterilization services for devices.
- Disinfectants and sanitizers.
Companies selling these products at any level of the supply chain should be especially careful in making pricing determinations during the COVID-19 pandemic. A knowing violation of the Defense Production Act is a crime punishable by fines or imprisonment up to one year. Below is more detail on the price gouging laws, along with recommendations for staying compliant.
Overview of State Price Gouging Laws
More than half the states have laws prohibiting price increases of certain products in times of emergency. Some laws, like California’s, make it a crime to increase the price of certain products a certain percentage above their levels prior to the state of emergency. California’s law provides a cap of 10 percent on price increases:
Upon the proclamation of a state of emergency… and for a period of 30 days following that proclamation or declaration, it is unlawful …to sell any consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels for a price of more than 10 percent greater than the price charged by that person for those goods or services immediately prior to the … emergency.
The California law, like many others, recognizes that resellers have to increase prices because they face price increases from their suppliers. The law allows resellers to sell at 10 percent above the price that allows for their customary markup.
Some states, like Oregon, tie the restriction on increased prices to the prices prior to the declaration of emergency or to prices available to consumers from other sellers in the same area during the emergency. Oregon’s law provides that “charging unconscionably excessive prices [is] prohibited and [] subject to regulation as an unlawful trade practice.”
Oregon’s law defines unconscionable as a matter of law to include circumstances where “the amount charged for the essential consumer goods or services exceeds by 15 percent or more the price at which the same or similar consumer goods or services were readily obtainable by other consumers in or near the geographical area covered by the declaration of an abnormal disruption of the market.”1
Some states, like New York, do not use a specific percentage increase to define what constitutes price gouging. The New York price gouging law makes it unlawful in a time of emergency to sell “goods and services vital and necessary for the health, safety, and welfare of consumers” at an “unconscionably excessive price.”2
The definition of excessive pricing is not the only variant between these state laws, but also the laws vary in two other key respects: (1) the products and services covered; and (2) the duration of the restriction.
Massachusetts’ law only applies to petroleum products (although a bill is being considered that would cover pharmaceuticals).3 Many states’ laws only cover price gouging for products, but some, like Georgia’s, include services.4 As far as the duration of these price gouging restrictions, most last for the duration of the emergency and some extend for a period after the emergency is declared over.
Washington State is among the approximately 20 states that do not currently have price gouging laws. A bill was introduced right before the end of the last Washington State legislative session, but without a special session it will not be enacted this year.
Most governors have declared a state of emergency over the coronavirus outbreak, and state attorneys general and local law enforcers have begun enforcing these state price gouging laws. For instance, Illinois Attorney General Kwame Raoul announced enforcement efforts against merchants marking up disinfecting wipes, masks, and other supplies in high demand.5
Texas Attorney General Ken Paxton filed a lawsuit against a company that was advertising over 750,000 N-95 masks for sale by auction.6 California Attorney General Xavier Becerra issued a consumer alert soliciting price gouging complaints,7 and local law enforcement agencies in California have begun policing the law.8
Antitrust Laws and Enforcers' Views on "Excessive Pricing"
Unlike price gouging laws, the antitrust laws do not generally restrict unilateral price increases in times of short supply. On the contrary, federal antitrust laws treat price increases in response to low supply as a good thing because these price increases will spark increases in supply to satisfy the demand. Thus, the federal antitrust enforcers have expressly rejected the core premise of price gouging laws: that high prices in a state of emergency are bad for consumers.
In 2011, the Antitrust Division of the Department of Justice and the Federal Trade Commission issued a joint statement regarding high pricing in emergencies. FTC and DOJ stated that price hikes in a time of short supply “serve a signaling function, demonstrating where more resources are required and where they are not.”
More specifically, “rising consumer demand typically raises prices, thus signaling to suppliers to expand their production (output) to meet the growing demand. High prices also typically attract new market entry, by producers lured by the lucrative profits to be made, thus promoting output.”
As a result, the federal antitrust enforcers stated that “enforcement against ‘excessive pricing’ may chill incentives to compete and innovate in the first place, and interfere with the proper functioning of markets.” With this policy position in mind, the federal antitrust enforcers are unlikely to be involved in the ongoing efforts to police rising prices of scarce supplies.9
Recommendations for Compliance
We are in uncharted territory with potential federal criminal enforcement of price gouging and hoarding layered on top of state enforcement of divergent price gouging laws. Now is the time to ensure you understand and comply with these laws.
Here are our recommendations in that regard:
- Sellers of products or services that are in high demand during this crisis should check if the states they operate in and/or sell into have price gouging laws and ensure their sales practices are compliant with those laws.
- As a practical matter, it may be very difficult to attribute costs and margins to specific sales in a dynamic market with so many supply chain disruptions and distortions caused by rapidly changing circumstances.
- Suppliers can reduce risk by selling into states that do not have price gouging laws.
- Sellers of products identified by HHS as scarce should be mindful of both pricing decisions and hoarding of scarce products.
- Buyers of substantial volumes of designated scarce products – particularly resellers – should be careful of accumulating more than needed or withholding product from customers in the interest of obtaining higher prices in the future.
- Companies should warn their sales personnel of price gouging laws and the active federal and state enforcement. Now is a good time to reinvigorate your antitrust compliance training programs and recall that DOJ will consider robust antitrust compliance programs when contemplating criminal charges.
- Companies should consult counsel if uncertain about how these laws police pricing.
FOOTNOTES
1 O.R.S. § 401.965
2 N.Y. Gen. Bus. Stat. § 396-r
3 940 C.M.R. 3.18
4 Georgia C. § 10-1-393.4
5 https://illinoisattorneygeneral.gov/pressroom/2020_03/20200317b.html.
6 https://www.texasattorneygeneral.gov/news/releases/ag-paxton-files-lawsuit-halt-price-gouging-auctions-unlimited-llc.
7 https://www.oag.ca.gov/news/press-releases/attorney-general-becerra-issues-consumer-alert-price-gouging-following-statewide.
8 https://www.sandiego.gov/department-document/city-attorney-warns-coronavirus-related-price-gouging.
9 State AGs are unlikely to use state antitrust laws – which largely align with federal law – to police price gouging, but might seek to use state consumer protection laws.
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