May Price Gouging Update

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A number of O’Melveny clients have expressed an interest in receiving information regarding the legal landscape governing price gouging, including legislation, enforcement, and litigation. As the COVID-19 crisis continues to linger, this landscape is constantly shifting. O’Melveny continues to keep abreast of price gouging news as it develops, and offers this update on recent price gouging litigation for the month of May.

State Attorney General Enforcement

May saw State Attorneys General (“AG”) continue to bring price gouging suits against parties that had allegedly raised their prices exorbitantly in the midst of the COVID-19 crisis. These new May enforcement actions focused on smaller, local defendants, as opposed to actions like Texas AG Ken Paxton’s April 23rd suit against Cal-Maine Foods, Inc., which targeted the nation’s largest producer of shell eggs. For example, on May 1, 2020, District of Columbia AG Karl Racine brought a price gouging enforcement action against Helen Mart, LLC, accusing Helen Mart of selling Clorox bleach at a 200% markup in violation of the District’s statute against price gouging. On May 7, California AG Xavier Beccera brought similar action against Alameda County store Appa Bazar, alleging that the store sold a host of food items at exorbitant markups as high as 200%, in violation of California law.

Although the DC and California cases contain very similar allegations, the respective Attorneys General differed in the remedies sought. While Racine’s action asked for civil damages including injunctive relief and penalties, Beccera’s suit invoked California Penal Code § 396(b) and sought unspecified criminal sanctions. Becerra appears to be the first (and thus far only) state Attorney General to seek criminal sanctions for price gouging in the COVID-19 crisis.

Federal Enforcement

On May 26, 2020, the U.S. Attorney’s Office for the Southern District of New York arrested Ronald Romano, a New York car salesman, and charged him with wire fraud and conspiracy to violate the Defense Production Act (“DPA”). The United States alleges that Romano offered to sell protective personal equipment (“PPE”), including millions of 3M-brand N95 respirator masks, to New York City and to Florida’s Division of Emergency Management at mark-ups between 250% and 1100%, and that Romano did not possess these masks but rather was simultaneously trying to procure them from 3M. Romano also allegedly submitted “false and misleading references” to help induce New York City into purchasing the offered masks, constituting a violation of 18 U.S.C. § 1343 and its prohibition on wire fraud.

This inclusion of the wire fraud charges is a notable departure from prior COVID 19 DPA cases brought forth by the United States, which relied solely on the DPA. The relatively light maximum punishment for violating the DPA may prompt future U.S. Attorneys to similarly allege violations of additional laws when possible; whereas wire fraud can carry penalties up to $250,000 and a prison sentence up to thirty years, the DPA is limited to a maximum fine of $10,000 and a prison sentence of up to one year.

Challenges to Price Gouging Laws

In the midst of the above flurry of enforcement actions against alleged price gougers, one group of sellers has decided to strike back. On May 1, the Online Merchants Guild, a trade association of “small eCommerce businesses,” brought suit against the State of Kentucky, alleging that Kentucky’s two price-gouging statutes are unconstitutional violations of the Dormant Commerce Clause, the Due Process Clause, and the First Amendment. Specifically, plaintiffs argue that Kentucky places an undue burden on interstate commerce by requiring non-Kentucky merchants to comply with multiple price-gouging regulations, and that the statutes deter participation in interstate commerce. Plaintiffs also argue that Kentucky’s price gouging laws do not give sufficient notice of what conduct is lawful or unlawful, violating plaintiffs’ due process rights, and that the laws threaten prosecution for certain speech about transactions that would be lawful in other states, in violation of the First Amendment.