March 2020

Under normal circumstances, in a primarily capitalistic society, the laws of supply and demand establish reasonable prices for goods and services.  In times of emergency, markets are much more vulnerable to exploitation.  Laws prohibiting price gouging in an emergency are designed to protect consumers against such exploitation and the potentially dangerous conditions that may result.

The federal government and nearly all states have declared a state of emergency related to COVID-19.  These formal declarations trigger various authorities and specialized circumstances, including increased consumer protections.  Various laws recognize that in times of emergency consumers have increased and immediate needs for essential items such as food, water, medical supplies and fuel.  They are also vulnerable to panic buying based on fear of an uncertain future. Differing state laws are designed to protect consumers from retailers who might prey on these needs and create dangerous situations by hoarding product and depleting general supplies in order to then raise prices for high demand items to exorbitant levels in violation of unfair or deceptive trade practices law.

Penalties for such price gouging can include both civil fines and criminal prosecution depending on the laws of the individual state and the enforcement actions by the state attorney generals.  For instance, the New York Post describes a retailer selling a bottle of hand sanitizer for $79 as just one example of the 1,000 complaints received by New York City.  New York has already issued 550 violations totaling $275,000 for price gouging on supplies related to COVID-19, including excessive prices for hand sanitizers, face masks, toilet paper, thermometers, cough suppressants and disinfectant wipes.

California has a similar 10% threshold to define price gouging under its Penal Code 396, which includes the following basis and application of the law:

“While the pricing of consumer goods and services is generally best left to the marketplace under ordinary conditions, when a declared state of emergency or local emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified increases in the prices of essential consumer goods and services be prohibited….

Upon the proclamation of a state of emergency…it is unlawful for a person, contractor, business, or other entity to sell or offer to sell any consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels for a price of 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.  

However, a greater price increase is not unlawful if that person can prove that the increase in price 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 the services, during the state of emergency or local emergency, and the price is no more than 10 percent greater than the total of the cost to the seller plus the markup customarily applied by the seller for that good or service in the usual course of business immediately prior to the onset of the state of emergency or local emergency.”

This California law similarly prohibits (with similar caveats) the following:

  1. A contractor to sell or offer to sell any repair or reconstruction services or any services used in emergency cleanup for a price of more than 10 percent above the price charged by that person for those services immediately prior to the proclamation or declaration of emergency.
  1. An owner or operator of a hotel or motel to increase the hotel or motel’s regular rates, as advertised immediately prior to the proclamation or declaration of emergency, by more than 10 percent.
  1. Any person, business, or other entity, to increase the rental price of subdivision advertised, offered, or charged for housing, to an existing or prospective tenant, by more than 10 percent.
  1. A person, business, or other entity to evict any residential tenant of residential housing and rent or offer to rent to another person at a rental price greater than the evicted tenant could be charged under this section (although one may continue an eviction process that was lawfully begun prior to the proclamation or declaration of emergency).

A violation is a misdemeanor punishable by imprisonment in a county jail for a period not exceeding one year, or by a fine of not more than ten thousand dollars ($10,000), or by both that fine and imprisonment.  Further, it is an unlawful business practice and an act of unfair competition within the meaning of Section 17200 of the Business and Professions Code with appropriate remedies therein.

Those accused of price gouging are subject to class action lawsuits.  Such a claim was recently brought against Amazon in Florida, accusing the online retailer of charging excessive prices for essential goods in the wake of the coronavirus.  The lead plaintiff in that matter claims she was charged $99 for a 36-pack of toilet paper and $199 for a two-pack of 1-liter hand sanitizer bottles versus the typical price of $1 per roll of toilet paper and $7-8 per liter of hand sanitizer.  In Florida, the prohibition during a state of emergency is against “unconscionable prices” which is generally described therein (with additional caveats) as:

  • a gross disparity between the alleged improper price and the average price for that item in the usual course of business during the 30 days prior to the declaration of a state of emergency (unless the increase is attributable to additional costs incurred or market trends) or
  • when an alleged improper price grossly exceeds the average price at which the same or similar commodity was readily available in the trade area during the 30 days immediately prior to the declaration of a state of emergency.

As described above, in order to prove price gouging during an emergency under the applicable law, one must examine not only the existence of a price difference which exceeds a certain threshold, but also possible reasonable explanations for the price difference.  Analysis of historical price comparisons, comparable marketplace pricing, unusual cost identification, cost allocation, and other economic considerations may be critical to identifying the existence of and damages associated with price gouging.

Fulcrum Inquiry has expertise in identifying the existence and quantifying the effects of non-competitive behavior and unfair business practices and provides expert witness testimony and analysis of damages, including in class action matters.