There is no question that the COVID-19 pandemic has caused a shortage of personal protective equipment (PPE) and certain cleaning supplies. Although it may be tempting for manufacturers, suppliers and others with access to inventory or production of those products to use the supply shortage as a business opportunity, business owners should proceed with caution before acting. Laws are in place that prevent businesses from charging higher prices when demand far exceeds supply.
When President Trump invoked the Defense Production Act, he identified PPE as scarce and essential material that is necessary to respond to the COVID-19 pandemic and provided the Secretary of Health and Human Services with the authority to identify other items that may become scarce and essential. To date, both certain PPE and certain sanitizing and disinfecting products fall within the scarce and essential materials designation.
While it is perfectly legal to buy and sell materials that are designated as scarce and essential for personal or business purposes, the Defense Production Act makes it unlawful for anyone to hoard scarce and essential materials or engage in price gouging during the sale of scare and essential material.[1] In fact, there are criminal consequences for the willful hoarding of scarce and essential materials and for willfully charging above-market rates for such materials. Criminal charges have a maximum penalty of one year in prison and a maximum fine of $10,000.[2]
Currently, the United States Department of Justice is aggressively prosecuting individuals who appear to use the supply shortage for unfair financial gain. In fact, the Attorney General created the COVID-19 Hoarding and Price Gouging Task Force, led by the U.S. Attorney for the District of New Jersey.[3] Since the creation of that task force, the U.S. Attorney for the Eastern District of New York (covering Long Island, Queens, Brooklyn, and Staten Island) has been aggressively prosecuting cases relating to price gouging and fraud in connection with these scarce and essential materials.
In one case, a criminal complaint was filed against a Plainview store-owner for violating the Defense Production Act by allegedly hoarding large quantities of PPE and then reselling it at his Plainview store for “huge markups.”[4] In a second case, a criminal complaint was filed against two individuals, including an attorney, for conspiring to violate the Defense Production Act by allegedly looking for individuals to sell one million face masks for double or triple the purchase price.[5]
Besides price gouging, the U.S. Attorney for the Eastern District of New York filed a criminal complaint against two individuals who were charged with conspiracy to commit wire fraud for allegedly attempting to enter into a $4 million contract to sell large quantities of PPE that they did not have access to. As part of their scheme, it is alleged that these individuals set up a fake company that they claimed worked closely with global traders, medical institutions and other companies to supply PPE, and had contracts in place to resell millions of face masks.[6]
If you or anyone you know has been or is looking to buy or sell large amounts of materials that are in short supply due to the COVID-19 pandemic, please have them contact an attorney to make sure that they are in compliance with both the Defense Production Act and the designations by the Secretary of Health and Human Services to avoid potential criminal charges. An attorney can also help perform due diligence to avoid any potential fraud if you are looking to purchase materials from unknown suppliers.
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[1] 50 U.S.C. § 4512.
[2] 15 C.F.R. § 700.74, 50 U.S.C. § 4557.
[3] Office of the Attorney General, Memorandum dated March 24, 2020, Department of Justice COVID-19 Hoarding and Price Guarding Task Force https://www.justice.gov/file/1262776/download
[4] https://www.justice.gov/usao-edny/pr/long-island-man-charged-under-defense-production-act-hoarding-and-price-gouging-scarc-0
[5] https://www.justice.gov/usao-edny/pr/two-individuals-arrested-conspiring-violate-defense-production-act
[6] https://www.justice.gov/usao-edny/pr/two-individuals-arrested-conspiring-defraud-purported-purchasers-personal-protective
