Businesses must review COVID-19 price gouging compliance
As the Biden administration steps up scrutiny of supply chains and pricing practices, companies should take a moment to review their COVID-19 price gouging compliance. As noted earlier, managing risk with ever-changing price gouging restrictions requires careful review of documentation and oversight of pricing practices and decisions. For reputable companies across the national supply chain, complying with the gamut of state price gouging laws requires more than intuition and a moral compass. Even with the best of intentions, many companies inadvertently violate predatory pricing laws. Since predatory pricing laws may cover more than obvious misconduct and point-of-sale pricing for consumers, manufacturers and suppliers should consider implementing procedures to assess whether they are required to comply with price restrictions, whether they comply and how to manage compliance. . Below, we outline some key considerations for businesses.
Who is subject to the predatory pricing restrictions?
Excessive pricing laws typically include high-level descriptions of covered entities. However, many laws do not specify whether and how non-retailers are affected. States differ on whether excessive pricing laws apply to suppliers. Maine law, for example, applies to all necessities no matter who they are sold to (and no matter where the seller is in the supply chain) – this may include, for example, a national wholesaler or producers of consumer goods selling to supermarkets in Maine. Similarly, New York law applies to “all parties in the supply chain, including any manufacturer, supplier, wholesaler, distributor, or retailer of consumer goods or services or both.” North Carolina law applies to “all parts of the distribution chain”. In contrast, Idaho law only applies to sales to the ultimate consumer.
Which products are subject to price restrictions?
Many states provide a general ban on price increases, while others provide a specifically enumerated list. Several states have recently become more nuanced in defining products subject to price restrictions. For example, California has recognized that only certain products remain relevant for COVID-19 price restrictions. Therefore, instead of imposing price restrictions on all products, California’s current restrictions only apply to rapid COVID-19 tests.
What are the price limits?
Once you have identified the products that may be subject to price restrictions, it is important to understand the limits of price increases. Most state price gouging laws do not specify a specific price increase that qualifies as price gouging. Alabama, Florida and Maine, for example, prohibit selling at “unreasonable” prices, but maintain a rebuttable presumption of price escalation for price increases above a certain percentage. Others, like Idaho and Texas, prohibit “exorbitant or excessive prices.” Georgia and Mississippi prohibit any price increases after a state of emergency is declared. California’s prohibition on raising prices by more than 10% of the invoice price for the good immediately prior to the declaration of emergency is a useful benchmark for domestic sellers, at least for states where some level of price increase is allowed. Other states that apply the 10% cap include New Jersey, Utah, and West Virginia, while several states allow higher thresholds: 15% (Oregon and Wisconsin) and 20% (Pennsylvania).
How does this work in practice?
The precise amount of a permitted price increase will often depend on a base price. Establishing the cost base for each covered product at issue is essential, and not always straightforward. Base pricing formulas also vary by state. For example, in Oklahoma, the base price is the price charged “immediately before the state of emergency”. Any price increase above 10% of this reference level is presumed illegal. These benchmark prices lay the groundwork to show that the price increase was permitted. In contrast, Texas does not provide a specific baseline measure, but prohibits selling covered products at an “exorbitant or excessive price”. However, the prices of these products just before the emergency would be relevant in determining whether a price increase is exorbitant or excessive. Additionally, companies should consider that COVID-19 states of emergency may still be in effect, or expire only to be reinstated, adding an additional layer to consider when calculating the base price of a product.
To the extent that price increases are put in place to reflect cost increases and maintain profit margin (potentially even increasing gross margins), they likely fall within the majority of permitted exceptions. This becomes more risky when profit margins are increased, however, as this component of the price increase may not fully benefit from the exception. Defending such price movements on the basis of the exception will necessarily require strong price and cost movement data, and the relationship between them, as well as evidence of a robust price gouging compliance program.
Other fenders may be available. For example, in Arkansas, the predatory pricing law provides a specific exception for increased costs. A successful defense might establish that the alleged price increase was “directly attributable” to increased labor or material costs, or to price increases by suppliers. Similarly, Oklahoma provides a specific exception for cost increases attributable to price increases in a petroleum product market or other non-emergency factors. Texas does not explicitly provide for such an exception, although increased costs would arguably serve as a defense against an “excessive” price claim.
In addition, the plaintiff in any lawsuit must have the right to bring an action under the law of predatory pricing. Some states limit the enforcement of price gouging to the state attorney general. Others provide for a private right of action. However, for an individual to bring such a lawsuit, the plaintiff must have suffered direct harm as a result of the allegedly unlawful conduct. A careful analysis of a private action may reveal that the plaintiff does not have sufficient grounds to file a complaint.
When faced with a lawsuit for price gouging, companies should be wary of claims that a mere price increase imposes liability. With multiple factors at play in price calculations and fender availability, many price increases are still allowed. Businesses at risk of a price gouging claim should consider the extent to which their products or services may be covered by a state’s price restrictions as well as the availability of justifications or defenses potential for price increases.
Price gouging compliance: guidelines for navigating compliance with state price gouging rules
Identify each state in which a business sells. Be too inclusive, take into account the states in which the products or services are sold, and also include the states in which they are sold. States often claim extended jurisdiction, even for products sold free on board to a receiving party outside the state, if the downstream price impact occurs inside the state.
Track requirements, price caps, or other controls, and your products are services that can be covered for each.
Identify the “benchmark” price at the beginning of the relevant emergency declaration. Keep a record of price increases and fluctuations and the basis of any price movement.
Develop a strategy to respond to any inquiries regarding possible price increases.
Monitor the ongoing and evolving requirements of state governors; executive orders continue to be issued that modify and add to the coverage and requirements of state price gouging restrictions.
Goods priced on an index may not be specifically exempt from price gouging rules, so sellers should be aware of price increases that are not directly attributable to increased costs.
Any request from the offices of a state attorney general is a serious matter that can carry significant risks, including response costs, reputational risk and penalties, as well as possible subsequent civil lawsuits by parties at all levels of the supply chain who could potentially allege overcharging. now or even after the crisis is over and restrictions are lifted.
Consider conducting a “price gouging assessment” using internal or external legal and business functions working as a unified team, and providing a deliverable that can be used across all relevant business functions to address the risk of price gouging.
© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 80