Source: https://www.whitecase.com/publications/alert/covid-19-triggers-doj-and-state-ag-initiatives-and-proposed-federal-addition
Timestamp: 2020-06-02 10:53:00
Document Index: 557773889

Matched Legal Cases: ['§ 396', '§ 4512', '§ 4513', '§ 666', '§ 445', '§ 396', '§ 56', '§ 4501', '§ 4512', '§ 1341', '§ 641']

COVID-19 Triggers DOJ and State AG Initiatives, and a Proposed Federal Addition to United States’ Price Gouging Framework | White & Case LLP
Price gouging enforcement has largely been left to the states with their patchwork of varying laws—laws that have been invoked sporadically in crises. While the COVID-19 crisis has reportedly led to increased state enforcement, the federal government has taken a larger role, including Justice Department actions and legislative debate on newly introduced House and Senate price gouging prevention legislation. Existing penalties are both civil and criminal, and price increases as small as a 10 percent increase can constitute “price gouging.”
Price gouging laws can surprise even seasoned lawyers. The typical position of the antitrust laws has been a policy that price level alone is generally not illegal. But, state and federal efforts against COVID-19 price gouging and hoarding are particularly important for supply chain businesses and the lawyers who advise them.
Historically, price gouging prosecutions have been brought episodically in the aftermath of natural disasters by state prosecutors—think large markups on fresh water or plywood. The aftermath of the COVID-19 pandemic can be expected to produce not only state prosecutions, but federal actions as well. Indeed, as state governments look to recoup lost revenues and pay for remedial measures, they can be expected to look at price gouging prosecutions as revenue generation, particularly as we see press conferences lamenting interstate competition of scarce medical resources.
State Price Gouging Prosecution: Civil and Criminal
The laws of most states and the District of Columbia prohibit price gouging. In a proactive effort to prevent and identify price gouging during the COVID-19 crisis, 32 state attorneys general sent a letter to large online retailers urging them to set policies to prevent price gouging and develop consumer reporting capabilities.1 All states are undoubtedly on high alert for price gouging issues in the midst of the COVID-19 crisis, with the press reporting thousands of consumer complaints to officials in various states.
Typically, state price gouging laws activate only during declared emergencies (e.g., aftermath of a hurricane). A few states, such as Michigan,2 have laws that apply at all times.
Price gouging can result in civil or criminal penalties, depending on the state. Price gouging convictions can be punished with jail time in many states, including California, Florida, Louisiana, Maine, and Mississippi, where prison sentences can last for up to five years.
Scale of Prosecutions Will Be Much Higher Here. Price gouging enforcement in the past tended to be geographically limited and tailed off rapidly after the triggering natural disaster passed. The COVID-19 pandemic will be different. It is global—and thus spans the entire country—and will be sustained in duration, and the costs thus far exceed any single natural disaster or economic downturn since the Great Depression.
The details of these laws vary by state, but all aim to prevent entities from seeking windfall profits by taking advantage of emergency-driven demand surges or supply shortfalls for items essential to survival, such as food and medical supplies. Some state laws prohibit “gross” or “unconscionable” price increases during an emergency, while others have specific percentage increase thresholds. For example, California Penal Code § 396 defines price gouging as raising prices “more than 10 percent greater than the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency” unless “that person can prove that the increase in price was directly attributable to additional costs[.]”3
Even states without laws against price gouging can act swiftly to limit certain pricing in times of emergency. In Minnesota, the governor acted, in the absence of a state law addressing price gouging, by issuing an Executive Order on March 20, 2020, prohibiting all persons from selling essential consumer goods or services for an “unconscionably excessive price.”4 The order defines “unconscionably excessive” as a 20 percent price increase over earlier levels or other indicia of excessiveness.5 Additionally, the Maryland General Assembly recently passed an emergency bill granting the governor temporary powers to prohibit any retailer from increasing the sale or rental price of any good or service to a price that increases the retailer’s value of profit by more than 10 percent.6
Unfair and Deceptive Trade Practice Laws. States may also find they have other statutory tools to address price gouging allegations. The National Association of Attorneys General took the position during the 2004 flu vaccine shortage that states without price gouging statutes “could bring action under broader, more flexible authorities that prohibit ‘unfair and deceptive acts and practices.’”7
State Efforts to Date. So far, most states have gravitated toward civil penalties for COVID-19 price gouging enforcement actions. For example, the New York Department of Consumer and Worker Protection announced that it is inspecting stores and issuing fines for markups of more than 10 percent on vital supplies.8 State civil penalties for price gouging can be steep. For example, in New Jersey, where each individual sale can constitute a separate violation, violators can be fined $10,000 for a first-time violation and $20,000 thereafter.9
New Federal Criminal Penalties and US Attorney Task Force Enforcement Against Price Gouging and Hoarding During the COVID-19 Crisis
While there is no federal law against price gouging, the federal government has announced a federal task force in each US attorney’s office across the country to prosecute price gouging and hoarding.
On March 23, 2020, President Trump signed Executive Order 13910, invoking the Defense Production Act10 to give the Department of Health and Human Services (HHS) and Department of Justice (DOJ) authority to prevent the hoarding and price gouging of critical “health and medical resources” needed to fight COVID-19.11
Executive Order 13910 delegates to HHS Secretary Alex Azar the President’s power under Defense Production Act § 4512 to designate any material as a “scarce material” or one whose supply is “threatened” by an “accumulation” that is either “in excess of reasonable demands of business, personal, or home consumption,” or “for the purpose of resale at prices in excess of prevailing market prices.”12 For any materials designated by Secretary Azar under this authority, it is a federal criminal offense under Defense Production Act § 4513, punishable by up to a year of imprisonment, to “accumulate” such materials (1) “in excess of the reasonable demands of business, personal, or home consumption,” or (2) “for the purpose of resale at prices in excess of prevailing market prices[.]”13
To enforce these prohibitions against hoarding or price gouging designated materials, Attorney General William P. Barr announced a national COVID-19 Hoarding and Price Gouging Task Force led by Craig Carpenito, the US attorney in the District of New Jersey, and including representatives from each US attorney’s office.14 During the March 23, 2020, White House press conference, Attorney General Barr confirmed that “accumulating [designated] items in excess of reasonable personal or business needs or for the purpose of selling them in excess of prevailing market prices” is a federal criminal offense.15 On April 2, 2020, the DOJ announced that it had partnered with HHS to confiscate and distribute to frontline medical workers more than half a million medical supplies that had been hoarded by price gougers.16
The 93 US attorneys’ offices can be expected to utilize a variety of prospective tools. Some of those tools are commonly used to address procurement frauds at the federal, state, and municipal level. For instance, 18 U.S.C. § 666 criminalizes thefts (fraud) upon state and municipal programs that receive federal funds. The False Claims Act, mail and wire fraud,17 and federal theft statutes18 all have criminal sanctions for frauds in federal procurements. By way of example, on April 12, 2020, Newsweek reported that the FBI had targeted a fraudulent scheme involving $39 million in promised PPE sales.19
Congressional Efforts to Date. On April 7, 2020, four members of the House of Representatives introduced the COVID-19 Price Gouging Prevention Act (H.R. 6472), which would give additional enforcement powers to the Federal Trade Commission (FTC) and state attorneys general to prevent the sale of a “good or service” at an “unconscionably excessive” price for the duration of a public health emergency due to COVID-19.20 Additionally, on April 7, 2020, Senators Amy Klobuchar, D-MN, and Chuck Grassley, R-IA sent a letter to Attorney General Barr requesting details of the DOJ’s efforts to enforce Executive Order 13910 to prevent the price gouging and hoarding of critical medical materials.21 On April 10, 2020, Senators Elizabeth Warren, D-MA, and Kamala Harris, D-CA, introduced a Senate companion bill to the Price Gouging Prevention Act, previously introduced in the House of Representatives (H.R. 6450) by Joe Neguse D-CO-02, and Ted Lieu, D-CA-33.22 The Price Gouging Prevention Act would give enforcement power to the FTC and States and would provide that any price increase above 10 percent during a declared emergency is presumed to be price gouging. It would apply during the COVID-19 crisis and in future emergencies.
It is important to note that the authority granted to HHS and DOJ to prevent price gouging and hoarding of “health and medical resources” pursuant to Executive Order 13910 does not apply beyond the national COVID-19 emergency and the HHS-designated materials critical to fighting COVID-19. Because the administration issued Executive Order 13910 pursuant to the Defense Production Act, it is not expected that the Order will have a lasting impact on price gouging enforcement in the United States. Similarly, the COVID-19 Price Gouging Prevention Act (H.R. 6472) as currently contemplated would address supply and pricing during the COVID-19 crisis. So, Executive Order 13910 and the COVID-19 Price Gouging Prevention Act (if it becomes law) would be in place only as long as the COVID-19 crisis continues.23 However, if the Price Gouging Prevention Act (H.R. 6450) becomes law, it will apply to future emergencies beyond the COVID-19 crisis, creating an ongoing federal price gouging framework.
Practical Implications of State and Federal Attacks on Price Gouging
Given the more than 30 different state laws and the potential establishment of a federal anti-price gouging regime, there is currently no single set of practices that is considered unlawful across the country. In general, however, the types of activity that could lead to investigation, scrutiny, or exposure to liability (civil or criminal) for price gouging under many states’ laws, under Executive Order 13910, and under the federal law if passed, include:
Raising prices above what is reasonable in relation to increasing costs and/or exceeding 10 percent price increases during the course of an emergency
Seeking windfall profits of a product by any other means (for example, such as increasing service charges) due to emergency-driven demand spikes or supply shortages
Hoarding or stockpiling key materials (such as those designated or likely to be designated as “scarce” by HHS or any similar designation by state regulators)
Decreasing output or supply unnecessarily in order to justify raising prices
Employing dynamic pricing models (such as using automated “rules” or algorithms to automatically change prices when certain market conditions are hit) with insufficient oversight or limitations, which could result in unintended price increases
States are aware of the public focus on the pricing practices for essential healthcare products and everyday staples. This has driven them to dust off their price gouging laws and take steps to strengthen enforcement remedies. Additionally, Attorney General Barr has created a task force of federal prosecutors in every state to investigate and prosecute the hoarding and price gouging of materials designated under Executive Order 13910. Congressional leaders have now put pricing practices in their crosshairs, too. The greatest scrutiny is likely to occur for businesses receiving CARES Act funds, not only because of oversight by Executive branch departments/agencies but because Congress (particularly if the opposite party controls a chamber) will hold hearings on perceived abuses in show trials where corporate reputations can be damaged. These developments will warrant close attention in the weeks and months to come. They collectively militate in favor of exercising care in setting prices during the pandemic and recovery, particularly where pricing is for items sold to governmental units receiving federal funds.
1 Letter from State AG to Jeff Bezos, Amazon CEO, Jim Buckmaster, CEO Craigslist, Scott Schenkel, CEO eBay, Mark Zuckerberg, Chairman/CEO Facebook, and Doug McMillon, President/CEO Walmart (Mar. 25, 2020), available at: https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf.
2 Mich. Comp. Laws § 445.903 (2018).
3 Cal. Penal Code § 396 (Deering 2019).
4 Minn. Exec. Order No. 20-10, 44 Minn. Reg. 39 (Mar. 20, 2020), available at: https://www.leg.state.mn.us/archive/execorders/20-10.pdf.
5 The order’s other two indicia of excessiveness are (1) a price representing “a gross disparity between the price of the good or service and the price of the same good or service” prior to the emergency unless the person demonstrates that the increase is “substantially attributable to significant additional costs outside the control of the person” or (2) a price that “grossly exceeds the price at which the same or similar good or service is readily obtainable by other purchasers in the trade area, unless the person demonstrates that the price increase is substantially attributable to significant additional costs outside the control of the person.” Liability is triggered if pricing is found to have violated any of the three prongs.
6 H.B. 1663, 2020 Gen. Assemb., Reg. Sess. (Md. 2020).
7 Sarah A. Lister, US CONGRESSIONAL RESEARCH SERVICE REPORT FOR CONGRESS, Influenza Vaccine Shortages and Implications, RL32655 (Oct. 29, 2004), available at: https://www.everycrsreport.com/files/20041029_RL32655_716e057540c408580c3ed191abd3b05279cc2c4e.pdf; State actions could include efforts by the private plaintiffs’ bar including the use of California’s unique 17200 legislation.
8 Press Release, N.Y. Dep’t of Consumer and Worker Protection, Department of Consumer and Worker Protection Issues Emergency Rule That Makes Price Gouging Illegal for Any Item or Service Needed to Limit the Spread of Coronavirus (Mar. 17, 2020), available at: https://www1.nyc.gov/site/dca/media/pr031720-DCWP-Emergency-Rule-Price-Gouging-Illegal.page.
9 N.J. Stat. Ann. § 56:8–13, 107, et seq. (2019).
10 50 U.S.C.A. § 4501 et seq. (2020).
11 Exec. Order No. 13910, 85 Fed. Reg. 17001 (Mar. 23, 2020), available at: https://www.federalregister.gov/documents/2020/03/26/2020-06478/preventing-hoarding-of-health-and-medical-resources-to-respond-to-the-spread-of-covid-19.
12 Exec. Order No. 13910, 85 Fed. Reg. 17001 (Mar. 23, 2020), available at: https://www.federalregister.gov/documents/2020/03/26/2020-06478/preventing-hoarding-of-health-and-medical-resources-to-respond-to-the-spread-of-covid-19.
13 50 U.S.C. App. §§ 4512-4513 (1950).
14 DEP’T OF JUSTICE, Attorney General Barr Speaks at the White House Coronavirus Press Briefing, (Mar. 23, 2020), available at: https://www.justice.gov/opa/video/attorney-general-barr-speaks-white-house-coronavirus-press-briefing (Attorney General Barr elaborated: “We’re not talking about consumers or businesses stockpiling supplies for their own operations; we’re talking about people hoarding these goods and materials on an industrial scale for the purpose of manipulating the market and ultimately driving windfall profits. If you have a big supply of toilet paper in your house, this is not something you have to worry about, but if you are sitting on a warehouse with masks, surgical masks, you will be hearing a knock on your door.”).
15 Dep’t of Justice, Attorney General Barr Speaks at the White House Coronavirus Press Briefing, (Mar. 23, 2020), available at: https://www.justice.gov/opa/video/attorney-general-barr-speaks-white-house-coronavirus-press-briefing.
16 Press Release, Dep’t of Justice, Department of Justice and Department of Health and Human Services Partner to Distribute More Than Half a Million Medical Supplies Confiscated from Price Gougers (Apr. 2, 2019), available at: https://www.justice.gov/opa/pr/department-justice-and-department-health-and-human-services-partner-distribute-more-half.
17 18 U.S.C. § 1341 et seq.
18 18 U.S.C. § 641.
19 Jason Lemon, FBI Discovers Promised Stockpile of 39 Million Medical Masks was a Scam, NEWSWEEK (April 12, 2020, 4:10 PM), https://www.newsweek.com/fbi-discovers-promised-stockpile-39-million-medical-masks-was-scam-1497489.
20 H.R. 6472, 116th Cong. (2020).
21 Letter from Senator Klobuchar and Senator Grassley to Attorney General Barr DOJ (Apr. 7, 2020), available at: https://www.grassley.senate.gov/sites/default/files/2020-04-07%20Klobuchar%2C%20Grassley%20to%20DOJ%20-%20Price%20Gouging%2C%20Hoarding%20during%20Pandemic.pdf.
22 H.R. 6450, 116 Cong. (2020); Press Release, Senator Elizabeth Warren, Warren Unveils Senate Companion Bill to Stop Price Gouging During the COVID-19 Pandemic (April 10, 2020), available at: https://www.warren.senate.gov/newsroom/press-releases/warren-unveils-senate-companion-bill-to-stop-price-gouging-during-the-covid-19-pandemic.
23 Exec. Order No. 13910, 85 Fed. Reg. 17001 (Mar. 23, 2020), available at: https://www.federalregister.gov/documents/2020/03/26/2020-06478/preventing-hoarding-of-health-and-medical-resources-to-respond-to-the-spread-of-covid-19.