Pricing in the Time of Price Gouging: Trying to Find a Safe Harbor

As unfortunately happens during every national disaster or emergency, unscrupulous individuals and companies see an opportunity to make money.  A lot of it.  When that happens, there are always immediate calls to prosecute individuals and companies for “price gouging” certain products and taking advantage of the dire and devastating circumstances.  During natural disasters, it’s gasoline and generators; during a health emergency and pandemic, it’s PPE, hand sanitizer, and toilet paper.

Hyman, Phelps & McNamara, P.C. has worked extensively with clients on all aspects of federal government drug and device pricing (here, here) and state drug price reporting and the related penalties. We have worked with drug and device clients on whether certain price concessions or services constitute fraud and abuse, or whether they fit into a Department of Health & Human Services (HHS) safe harbor (here and here). And we’ve blogged about state laws targeting generic drug price gouging.  That is a long way of saying that HPM has done a great deal of work in the area of pricing.  To an already complicated system, Covid-19 has added a whole new layer of craziness for companies, adding a price-gouging regulatory framework that is a patchwork of little-used state laws, brand new federal and state executive orders, and a federal law that was passed during the Korean War, that applies to so-called essential commodities and services (which may or may not be defined, depending on what law or executive order you are looking at).

Some may find it surprising that there is no federal law that expressly prohibits price gouging. What we do have is the aforementioned Korean War-era law, the Defense Production Act, and the President signed an Executive Order on March 23rd instructing the HHS and the Department of Justice (DOJ) to enforce the anti-hoarding provisions of that Act.  The Attorney General also set up a Covid-19 Hoarding and Price Gouging Task Force, led by the US Attorney in the District of New Jersey, with assistance from the DOJ Antitrust Division’s Criminal Program.  On April, 24, 2020, DOJ indicted the first person under the Executive order alleging the hoarding of face masks, face shields, surgical gowns, and disinfecting products at a Long Island warehouse and selling them at inflated prices.  While the Federal Trade Commission (FTC) has been largely silent on price gouging and has never brought a price gouging case in its history (they have no express mandate to target excessive pricing) they are aggressively targeting companies for false Covid-19 treatment claims, false lenders targeting small businesses, and Covid-19 related robocalls.  My colleagues recently did an excellent blog post on the many recent enforcement actions by FTC, DOJ and the FDA.

At the state level, 38 or so states (and some municipalities) have some form of price gouging law, and there is legislation pending in other states.  Like the Defense Production Act, these laws are usually triggered by the declaration of a state of emergency by the Governor. There are helpful summaries of the state laws at FindLaw and FMI – The Food Industry Association, among others.  In addition to the state laws, there have been quite a number of state Executive Orders issued within the last two months regarding price gouging.

These state laws, regulations and orders typically are enforced by the State Attorneys General, and fall into three categories:

• A percentage increase cap making it unlawful for anyone to raise prices on certain products by more than a certain percentage (usually ranging from 10% to 25%), with certain exceptions.
• A ban on “unconscionable” or “grossly excessive” price increases (sometimes defined, sometimes not)
• Outright prohibition of any increase that raises the price higher than what was offered before the emergency declaration.

In addition, private companies have also started policing price gouging through their own policies and litigation.

Given the regulatory chaos and laser focus of government and private entities on price gouging, it is clear that there is no safe harbor for price increases. Companies who are considering pricing decisions should consider the following:

• Has a state of emergency been declared?
• Is the product an essential commodity or service?
• Is the price excessive as defined by the state?
• Is the price the result of a justifiable cost increase to the seller? Many state laws have exceptions for situations that may include passing along cost increases from suppliers.

If a company is considering any pricing decisions, they should, among other things, be aware of all the applicable federal, state and local laws, and executive orders that might regulate your product, consult with counsel, focus on their costs, build in a typical (non-emergency) margin, and make sure those decisions are well-documented and justified.