The Price of Price Gouging During the COVID-19 Pandemic

Tragedies bring about the best and worst of human behavior. First responders, health care providers, and many hard-working people providing needed services have risen to the challenges presented by COVID-19 by putting their lives at risk to aid their fellow citizens. At the same time, some bad actors are taking the opportunities the pandemic presents to conduct scams, defraud and abuse relief programs, and engage in price gouging.

Since the rise of the COVID-19 pandemic, law enforcement agencies have paid particular attention to this last offense—price gouging. Recent headlines recount, for example, that Amazon has removed accounts and listings for violating the company's "fair pricing policies." Brick-and-mortar retailers have also faced enforcement actions. The New York City Department of Consumer and Worker Protection Commissioner recently announced a $37,500 fine against a drug store for selling packs of 20 face masks for $200. New Jersey has sent almost 1,600 cease-and-desist letters to retailers. Similarly, the Florida Attorney General's Office has contacted thousands of merchants about price gouging, recovering approximately $500,000 in refunds for aggrieved customers. Concerns about price gouging have led to rapid legislative action—New York just expanded its price-gouging statute to include "essential medical supplies and services," along with "any other essential goods and services used to promote the health or welfare of the public."

But what exactly is price gouging? And how do you ensure that your company is not engaging in it?

In simple terms, price gouging is the unlawful or unfair raising of prices. The question is what renders a price increase "unlawful" or "unfair." For the 30-plus states with price-gouging protections, price gouging is typically defined as an unconscionable price markup during an emergency that exceeds the associated increase of the costs of goods and services during the emergency. States are not looking to punish retailers that increase prices because of a strained supply chain. Instead, these statutes target sellers that seek to exploit the emergency for excessive gain.

But what about businesses that expand their offerings in response to an emergency? Think of the sidewalk salespeople who regularly peddle various goods but magically have dozens of umbrellas for sale as soon as there is a 5% chance of rain. Or one of Preston's favorite local barbecue spots, which along with selling some of the District of Columbia's best ribs and pulled pork, now also sells toilet paper, hand sanitizer, and paper towels. Are these businesses all engaged in price gouging? Generally no, but some jurisdictions do place restrictions on sellers that newly enter a market after an emergency has been declared. Sellers thus face two potential pitfalls in times of declared emergencies: overpricing goods they previously sold, and, in some cases, selling new products.

The consequences for engaging in price gouging can be harsh, including public reprimand, fines, and even jail time. So how does a retailer avoid such outcomes while still conducting good business? Best practices include carefully following disaster declarations and related announcements, robust record keeping of contracts and purchase orders from suppliers, and documenting pricing decisions. Because the details of price-gouging laws and regulations vary between jurisdictions, concerned businesses should also consider retaining counsel to review the applicable price-gouging laws and regulations.

Prices will obviously fluctuate over time as markets change and promotions come and go, but businesses must be particularly sensitive about pricing increases around emergencies. If you have further questions—or if you would simply like directions to some terrific barbecue that will not disappoint—contact us for more details.

For further information on the range of price-gouging prohibitions, how those laws work in practice, and the ways in which companies might address the specter of price-gouging accusations or investigations in the current environment, please see our Advisory "COVID-19 Puts Spotlight on Price Gouging."

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.