Unless you’ve been off the grid for the past month rafting in the Grand Canyon, you’ll know that the hoarding of toilet paper and hand sanitizer has apparently become our country’s most popular March pastime during our new COVID-19 reality, which makes it tempting to retailers selling these items to increase the prices to try to make a few extra bucks during these times of economic uncertainty.
Although it may be tempting for retailers to increase prices of items that are in shortage during a pandemic, they should keep in mind that price gouging laws in many states can impact their ability to increase prices. On March 20, 2020, California Attorney General Xavier Becerra announced that his office sent “several letters calling on large online marketplaces to intensify their efforts to combat price gouging related to novel coronavirus—or COVID-19—on their platforms.” In the letters, Attorney General Becerra encourages all online marketplaces to consider taking the following steps if they have not already done so:
- Supplement algorithmic management of postings on their websites with meaningful human review. It is clear from the volume of potentially illegal postings that algorithms currently in use are not up to the task of filtering out posts that price gouge.
- Ensure that algorithms and human review include shipping costs in order to prevent price gouging by sellers who attempt to evade detection by increasing shipping costs rather than base prices.
- Ban third-party sellers that engage in price gouging or offer other predatory products using their platform. These sellers should not be allowed to operate in the marketplace.
- Ban sales by new third-party sellers of certain items that are particularly ripe for price gouging abuse, such as surgical masks, cleaning supplies, hand sanitizer, certain household goods and paper products. Allowing only longtime third-party sellers to sell these products will reduce the opportunity for abuse by new third parties looking to make a quick buck off a crisis.
- To prevent bidding wars that unfairly drive up prices of high-necessity goods, restrict or eliminate features that allow products that are particularly ripe for price gouging to be posted for bid rather than be sold at set prices.
- Contact the attorney general’s office to refer bad actors that marketplaces have identified on their platforms.
It is important for all retailers to remember that price gouging during a state of emergency, such as last year’s fires or the current pandemic, is illegal under California law. California law prohibits businesses from raising the price of covered items by more than 10 percent following a declaration of emergency, such. While exceptions exist, the California statute covers most goods, including food, emergency supplies, medical supplies, building materials and gasoline.
States of emergency and price gouging statutes, however, are not limited to fires or California. Around 35 states, including Florida, Louisiana, South Carolina and Texas, have a price gouging statute, and states of emergency can be declared for a wide variety of reasons beyond pandemics, including hurricanes, earthquakes, tornadoes, blizzards and civil disturbances.
While the severity of a pandemic is never known at the outset, the nervous reaction of consumers is to rush to stores to stock up on water, nonperishable food, toilet paper (?) and other essentials. So when consumer demand suddenly increases without a corresponding supply increase, retailers want to react by raising prices. But when price gouging statutes kick in, retailers must play by a new set of rules, which are not always obvious. For example, some states, like California, prohibit raising prices after the declaration of an emergency, while others prohibit selling items at prices that exceed a certain threshold, even if the business ordinarily sells its items at that price. In other words, not only can a price gouging statute penalize a retailer for raising prices, but it can also penalize the retailer for failing to lower them.
State of Emergency—Who Declares It and When?
Generally, a state of emergency is declared by the governor of the state. For example, under Florida’s statute, a state of emergency of up to 60 days is triggered by a declaration from the governor, but the state of emergency may be renewed in subsequent declarations. Under Arkansas’ statute, a state of emergency can be declared by the president of the United States or the governor for a period of 180 days from the time of the proclamation, though that period may be extended. In D.C., a state of emergency is declared by the mayor. In Hawaii, the price gouging statute is triggered not only by the governor’s or mayor’s declaration of a state of emergency, but anytime the state or any portion of it is subject to a severe weather warning.
Some states have very broad statutory coverage. For example, Alabama’s statute covers any “commodity” or “rental facility” and defines both very broadly. Commodities include any good, service, material, merchandise, supply, equipment, resource or other article of commerce. Rental facilities include hotels, motels, boardinghouses, dwelling houses and self-storage facilities offered for rent or lease. Florida’s statute has similarly broad coverage but does include some narrow exemptions. In Connecticut, the statute applies to any product or service designated by the governor as being in short supply or in danger of being in short supply. In addition to addressing goods, Hawaii’s statute, with some exceptions, also prohibits landlords from terminating any tenancy for a residential dwelling. North Carolina’s statute covers the sale or rental of any good or service that is consumed or used as a direct result of an emergency or is consumed or used to preserve, protect or sustain life, health, safety or economic well-being, and it applies to all parties in the chain of distribution. The Texas statute limits its application to fuel, food, medicine and other necessities.
How Are Price Differences Measured?
Different states measure prices differently. Some compare prices to the seller’s prior prices, and others compare prices to the market. Alabama’s statute, for example, defines an unconscionable price as any that is 25 percent or more above the average price at which the same or similar commodity or rental facility was obtainable in the affected area during the 30 days immediately preceding the declared state of emergency and that is not due to reasonable costs incurred in connection with the rental or sale of the commodity. Florida’s statute similarly compares prices to the average price at which an item was selling during the 30 days immediately prior to the declared state of emergency, but does not specify what percentage increase constitutes a “gross disparity” and therefore violates the statute. Louisiana also bases its statute on the existence of a gross disparity between the price before and after the declared state of emergency. D.C.’s statute looks at a broader period, restricting businesses from increasing prices of services by more than 10 percent over the price at which similar services were sold or offered during the 90-day period immediately preceding the declaration. For merchandise, the threshold is the price equal to the wholesale cost plus a retail markup that is the same percentage over wholesale cost as the retail markup for similar merchandise sold during the immediately preceding 90-day period.
Some states also have lower tolerances for price increases than others do. For example, Connecticut’s statute also relates to the price prior to the declared state of emergency, but very broadly states that the price cannot exceed the price at which the product or service was sold or offered for sale by that person in the usual course of business immediately prior to the declaration. As such, under Connecticut law, a price increase of even 1 percent might be deemed improper. Similarly, Hawaii’s statute indicates that any increase in the selling price is prohibited.
How Much Could a Violation Cost Your Company?
The amount and type of penalty, again, depend on the state. In California, for example, a violation is subject to both criminal and civil penalties. Criminal prosecution can result in up to a year of imprisonment and/or a fine of up to $10,000. Civil penalties can be up to $5,000 per violation, and the attorney general and local district attorneys can also seek injunctive relief and mandatory restitution. In Alabama and Florida, the civil penalty is $1,000 per violation, with an aggregate total not to exceed $25,000 for a 24-hour period. In Alabama, a continuous and willful violation may result in the revocation of a business license or certificate.
Is There Anything You Can Do to Prepare?
Actually, there is. Retailers that may be impacted by a price gouging statute can choose to reach out to their local attorney general’s office to ask what they can do in the event of an emergency. In certain states and under certain conditions, price increases may be approved by the government. For instance, Florida’s statute specifically provides that a price increase may be approved by a government agency and thereby not violate the statute. Similarly, in Arkansas, a price is acceptable despite being in the price gouging range if the increase was directly attributable to additional costs imposed on the business by the supplier of the goods or directly attributable to additional costs for labor or materials used to provide the services. If you think there may be a compelling reason to increase your prices, you may benefit your business by reaching out to state officials to discuss your circumstances before you think that a state of emergency is imminent.
Why it matters: Given the frequently declared states of emergency in this uncertain time of COVID-19, it is crucial for retailers to be aware of price gouging statutes, their triggers and their implications. Moreover, awareness of the statutes may also alert businesses to situations in which they can legally raise their prices. Businesses that sell, rent or lease goods or services that are potentially subject to these statutes should engage counsel to assess what price increases may be tolerated in the event a state of emergency is declared. Additionally, most laws have exceptions to these prohibitions. For example, in many states, a price increase is not unlawful if a company can prove that the increase was 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 services. If you are a retailer and need to increase prices as a result of increases from your suppliers, make sure to check the relevant state laws and to document those increases. While generally enforced against retailers, some laws expressly apply to suppliers, distributors and/or wholesalers—and others are broad enough to arguably apply to these entities. At a minimum, this means that retailers may have leverage to request documentation to support the increase. While individual consumers generally do not have a private right of action under these statutes, attorneys general take note of complaints from consumers, and significant price increases will not go unnoticed. Additionally, the negative press generated by price gouging during an emergency situation may further harm a business. The statutes are nuanced and not always logical. Potentially impacted businesses should seek the advice of counsel regarding how best to prepare and what constitutes permissible pricing in the event of an emergency.