Price Gouging Laws and COVID-19: Navigating Unprecedented Market Conditions

COVID-19 (commonly known as the coronavirus) continues to cause unprecedented disruptions to the economy and supply chains worldwide. Consumer preferences have shifted rapidly as well, placing unusual demand pressure on products such as toilet paper, hand sanitizers, surgical masks and household cleaning supplies. Health care providers, too, are seeking large volumes of medical supplies to treat expected influxes of new patients. With supply down in these suddenly high demand products, the unusual market conditions in this crisis situation implicate competition, pricing and other product distribution practices and laws.

In addition to these abrupt market shifts, recent government emergency declarations have triggered application of state and local price gouging statutes and created new issues for businesses and consumers to navigate. These laws regulate price increases during times of emergency and carry civil (and sometimes criminal) fines and penalties for violators. Government officials have made clear in recent days that they intend to police and punish such violations. Businesses should get acquainted with price gouging laws and other practical issues as they assess pricing and purchasing strategies in response to the market disruptions caused by COVID-19.

The Law of Price Gouging — Federal Law

There is no specific federal anti-price gouging law, but several federal laws and regulations still may apply to pricing decisions depending on the particular conduct at issue. For example, the Sherman Antitrust Act, enforceable by the Department of Justice (DOJ) and the Federal Trade Commission (FTC) (as well as private actors),¹ prohibits “price fixing,” which includes agreements between and among competitors to set artificially high prices for goods and products. In a disaster context, the Act would apply, for example, to local gas stations that agree among themselves to fix or set minimum or maximum prices in response to a perceived supply shock.² However, claims of “price fixing” by competitors do not reach independent pricing decisions, regardless of whether those prices might be considered price gouging.³

Section 2 of the Sherman Antitrust Act also prohibits improper uses of monopoly power.⁴ One type of behavior that may trigger an antitrust monopolization claim during a disaster might involve decisions to artificially restrict energy generation, or even internet bandwidth, by a so-called natural monopolist in an effort to raise prices. A recurring issue with such claims, as the FTC noted in an investigation of gas price increases in the Hurricane Katrina aftermath, is that “unilateral conduct violates the antitrust laws only if a firm has sufficient market power that its actions could not be counteracted by its competitors or by new entry,” and few firms possess power sufficient to meet this standard. That said, in recent years, members of Congress have expressed a willingness to target unilateral abuses by large firms with market power under the antitrust laws. The current crisis may provide exactly the test case they need to expand traditional antitrust principles to meet the challenges of the day.

In the absence of specific federal anti-price gouging legislation, lawmakers wrote a letter to the FTC on March 17, 2020, imploring the agency to use all of its available tools to ferret out price gouging during the COVID-19 pandemic. While the letter does not cite the FTC’s legal basis to police pricing decisions, the FTC already has broad power under the Federal Trade Commission Act and federal antitrust laws to investigate and punish anticompetitive market conduct. For instance, Section 5 of the FTC Act bans “unfair methods of competition”, a sweeping grant of authority that arguably could be broad enough to encompass current price gouging.⁵

The Law of Price Gouging — State Law

The clearest, and therefore arguably strongest, laws against price gouging and overcharging are found in state consumer protection statutes. These laws, currently on the books in a majority of states, differ in significant respects. Still, they share common elements, including the following:

1. Emergency or Disaster Situation: Most laws only apply to pricing decisions made around the time of a government-declared state of emergency or natural disaster and continue for a specified time, the length of which is often set in statute and may be extended by subsequent orders.
2. Specific Products: Most laws only apply to certain types of goods, such as gas, food, water, medical supplies, housing and storage units.⁶
3. Price Increases: States use various measures to assess price increases during disasters or emergencies and typically provide affirmative defenses if the increase results from increased supplier costs.

These laws impose penalties, ranging from minor fines, penalties, and injunctive relief to restitution, revocation of operating licenses and even jail terms in some instances. State governments typically have sole enforcement authority for these statutes, but not always. Texas, for example, permits private citizens to sue to enforce price gouging laws and allows treble damages recovery in some cases.⁷ Similarly, California’s anti-price gouging statute provides that a price gouging violation “shall constitute an unlawful business practice and an act of unfair competition” under the state’s Unfair Competition Law, which permits private citizen suits, though suits brought by private citizens provide different remedies than one brought by the state’s attorney general.⁸

Arguably, too, price gouging suits by private citizens suing on behalf of a class may be permissible under state consumer protection statutes, though such actions may pose jurisdictional and standing issues, depending on a statute’s specific language.

Evaluating Alleged Price Gouging — Rules, Standards and Hard Caps Under State Laws

State laws use different measures to evaluate alleged price gouging. A majority of states have adopted an “unconscionable” standard to evaluate post-disaster price hikes and direct courts to use various criteria to measure the unconscionability of any particular price, such as pre-market pricing, costs created by the disaster, and comparable product pricing.⁹

Some states use percentage price increases as prima facie evidence of price gouging. For instance, the California Penal Code makes it unlawful to charge a price 10 percent greater than the price charged “immediately prior to the proclamation or declaration of emergency.”¹⁰ Similar to most other states, California also provides an affirmative defense for sellers that can prove the cost increases were “directly attributable to additional costs imposed on it by the supplier of the goods, or directly attributable to additional costs for labor or materials used to provide the services, during the state of emergency or local emergency.”¹¹ Other states, such as Alabama and Kansas, use a price increase thresholds of 25 percent, the highest of any state.¹²

A few states categorically prohibit price increases after a disaster. For instance, Georgia’s law provides that “[i]t shall be an unlawful, unfair, and deceptive trade practice for any person to sell or offer for sale at retail any goods or services necessary to preserve, protect, or sustain the life, health, or safety of persons or their property at a price higher than the price at which such goods were sold or offered for sale immediately prior to the declaration of a state of emergency.”¹³ Similarly, Connecticut's statute provides that “no person, firm or corporation shall increase the price of any item ... in an area which is the subject of any disaster emergency declaration issued by the Governor,” with the exception of price fluctuation during the “normal course of business.”¹⁴ For these categorical bans on price increases, it is unclear whether an increase in price during a disaster due to increased operating costs is permissible.

Increased Enforcement of Price Gouging During the COVID-19 Pandemic

In recent days, various government officials have signaled that they will ramp up efforts to police price gouging in the marketplace. For example, Illinois state Attorney General Kwame Raoul announced the intent to use the state’s general consumer fraud statute to police unfair pricing practices, and “prioritize[e] enforcement action for price gouging on essential medical supplies, such as protective gear.” At the federal level, lawmakers have urged the FTC to use its existing authority to protect consumers from “profiteers who have cleaned the shelves of hundreds of stores” in the wake of the COVID-19 pandemic. Joint federal and state task forces also have been created to police fraud and price gouging during the emergency.

Key Issues for Businesses Affected by Price Gouging Laws

Most states have some form of anti-price gouging laws on their books, but their scope and application vary widely. Businesses on both ends of a transaction should keep these laws in mind during the coming weeks. Particularly if the declared state of emergency persists for longer than 30 days, suppliers will begin confronting unprecedented commercial and legal issues. For instance, in cases where increased supplier costs are attributable to the many “stay home” decrees issuing from state and municipal governments, how much of these increased costs can a supplier lawfully pass on to consumers without triggering anti-price gouging laws? Are severe losses incurred by one line of business able to be counted as increased supplier costs to another line? And what about items for which demand always increases, and prices customarily rise, as spring turns to summer?¹⁵

These, and many other questions, in the short term will be answered by an uncomfortable and unsatisfactory patchwork of state-by-state answers. Companies with multi-state operations must therefore be especially vigilant, as differences in state law and the enforcement efforts can present additional challenges for pricing determinations and purchasing decisions. Lastly, companies and persons affected by price gouging should consider contacting state authorities charged with enforcement (typically the states’ attorneys general office) to report violations.¹⁶

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.