Nationwide Shortages Open New Frontiers in Fight Against COVID-19-Related Price Gouging

On April 3, 2020, Representatives Ted Lieu (D-CA) and Joe Neguse (D-CO) introduced the Price Gouging Prevention Act in the US House of Representatives, and on April 10, Senators Elizabeth Warren (D-MA) and Kamala D. Harris (D-CA) introduced a companion bill in the Senate. If passed, this would be the nation’s first statute directly outlawing price gouging during a state of emergency. Although the full text of the bill is not yet publicly available, it reportedly mirrors California’s anti-price gouging statute, one of the strictest among those enacted by the various states. The bill provides that any price increase of 10% or more would be presumed to constitute price gouging and would direct the Federal Trade Commission (FTC) to enforce the ban. This is in line with California’s price gouging statute, California Penal Code § 396, which strictly prohibits price increases of 10% or more on a wide range of goods and services, unless the price increase is “directly attributable” to an increase in costs and the new price represents no more than a 10% increase above the seller’s usual markup. Violations in California are punishable by jail time, fines, and/or civil penalties and may be enforced by the California Attorney General or through a private right of action.

In parallel, Reps. Jan Schakowsky (D-IL), Frank Pallone (D-NJ), David Cicilline (D-RI), and Jerry Nadler (D-NY) unveiled a competing price gouging bill, the COVID-19 Price Gouging Prevention Act, during a pro forma session on Wednesday, April 8. The bill would similarly prohibit price gouging on a wide range of goods and services and empower FTC to enforce the ban, but would implement a multi-factor test to determine whether prices constitute price gouging in lieu of imposing a numerical threshold.

These bills follow multiple letters from legislators encouraging the FTC to take action against price gouging by exercising its existing authority to prevent “unfair or deceptive acts or practices” under Section 5 of the Federal Trade Commission Act. Most recently, a group of 17 senators penned a March 27 letter describing reports of price gouging behavior and urging the FTC to “explore the limits of the FTC’s consumer protection authority” and “take urgent action to address these abuses.”

Statutory authority governing price gouging currently varies greatly from state to state. O’Melveny & Myers LLP has developed a 50-state survey to help others navigate this maze of price gouging statutes and enforcement activity. Please let us know if you are interested in receiving a copy.  

While Congress deliberates on a federal response to price gouging, some companies are taking preemptive measures to control the tide of public outrage on price gouging. On Friday, April 10, 3M filed a lawsuit against Performance Supply LLC, a New Jersey company that it accused of posing as a 3M distributor while offering to sell $45 million in N95 respirators to the city of New York at a 500-600% markup. On April 13, 3M filed another lawsuit, against Rx2Live LLC, a Utah-based company that it accused of posing as a 3M distributor while offering to sell approximately $50 million of 3M masks to medical providers in California at a 400-500% markup. Although both complaints are styled primarily as trademark infringement suits, 3M spends much of its complaints detailing Performance Supply’s and Rx2Live’s price gouging activities while highlighting its own efforts to combat price gouging. 3M does not claim to be a victim of price gouging in the traditional sense, but alleges that “unsavory characters,” including Performance Supply LLC and Rx2Live, have damaged its brand and reputation by offering 3M products at exorbitant prices to increasingly desperate consumers. And throughout its complaints, 3M emphatically and repeatedly declares that it has committed to keeping its own list prices for PPE virtually flat. 

3M’s pricing commitment demonstrates the role that manufacturer announcements may play in price gouging enforcement. One of the most important issues in assessing price gouging claims is whether the increase in price was in response to increase in costs; an announcement by the manufacturer that it has kept its prices (and, by implication, distributors’ costs) stable may draw additional scrutiny to distributors who have raised their prices during the crisis.