COVID-19 has resulted in emergency declarations by at least 48 governors. The first, Washington, announced two and half weeks ago on February 29. As of four days ago, only 30 had declared. That is how quickly circumstances are evolving. While states’ primary reasons for declaring an emergency are related to resources and funding disaster response, in most states such declarations have the added impact of triggering anti-price gouging statutes.
These statutes are state specific, but most contemplate protecting consumers from profiteers who seek to take advantage of an emergency or a catastrophic event. To the uninitiated, their scope can appear narrow by use of phrases and words such as “reasonable” price increases or “necessary” goods and services that are “offered for purchase or lease” or “consumed or used” to “preserve, protect or sustain life, health, safety or economic wellbeing of persons or their property,” or that they are triggered only where a seller has “knowledge” and/or “intent” to “charge a price that is unreasonably excessive.” They are not, however, limited in scope, and these statutes—which often carry unusually high, per-violation civil penalties—can prove perilous (and expensive) for the unwary or inexperienced.
The goods and services that could be viewed within the scope of the COVID-19 emergency declarations are too numerous to list here, but we know there have already been runs on hand sanitizer, paper products, water and disinfectant. Now, with businesses closing and Americans being asked to stay home for extended periods, there is a huge swath of products and services that could fall within prevailing statutes.
Contextually, it is critical to remember that our law enforcement agencies, and especially our state Attorneys General will be vying to serve their constituents during the emergency. For many, price gouging investigations present fertile ground, and can grab headlines. If you offer any product or service for sale or lease to a consumer during the COVID-19 emergency declarations, you need to know the following:
- Does your state have an anti-price gouging statute, and if so what specifically does it cover?
- Most emergency declarations cover the entire state regardless of geographic scope of the emergency.
- Statutes tend to be disaster specific in that their focus is on goods and services expected to be needed during the specific emergency. For instance, generators and chain saws will likely get less focus with COVID-19 than they do during hurricane season, but frozen foods may get more focus during a pandemic.
- Your estimation of an unreasonably excessive price increase is likely too low. We have seen price gouging investigations resulting from three and five percent price increases. In many places a much higher increase would be necessary. The challenge is that in almost all circumstances the statutory language is subject to interpretation and it will be interpreted by people who do not go to work for the purpose of giving business the benefit of the doubt.
- Many statutes and violations are not based upon actual sales but upon the “offer” of goods or services—this demands care in advertising and marketing.
- While many statutes require knowledge or intent to offer or charge unreasonably excessive prices, it is important to note that most or all Attorneys General will consider goods or services to be priced with knowledge and intent.
- Many statutes use a look back period to establish reasonableness of any price increases. Some use a 10-day average of prices immediately before a declaration issued, and some use averages of 30 or 60 days as the measure of what a price should be.
- Some businesses experience cyclical or seasonal pricing during the year. For those businesses, 10, 30 or 60-day look back can be a terrible fit. The statutes apply to such businesses just as any other. However, in setting prices it is generally reasonable for a business to rely upon prices from the prior year’s cycle or season. In some instances, statutes refer to such cycles or seasons and even where they do not contain specific references, prior cycles or seasons can provide investigating Attorneys General the basis that they need to find reasonableness in prices.
- Most anti-price gouging statutes contemplate that materials and/or expenses may, respectively, become more expensive or increase during an emergency, and many take such merchant cost increases into account—allowing price increases that are consistent with cost increases. Here, it is important to remember that the cost increases must have already occurred. Price increases premised upon prospectively anticipated cost increases are likely to garner negative attention.
A price gouging enforcement action by an Attorney General is an event to be avoided where possible, but even a mere investigation can be cripplingly expensive, distracting and supremely damaging to hard earned brands. Investigations usually seek large volumes of documents and require complex pricing analyses, and often result in differences of perspective between merchants and their regulator counterparts. In our experience, the best way to avoid an investigation is to establish a robust customer complaint resolution program and implement it at the outset of an emergency declaration. We have seen multi-year investigations launched on as few as 20 complaints across an entire state with no opportunity to investigate or respond to the complaints prior to the institution and public announcement of the investigation. Rarely, if ever, is there a similar announcement where an investigation closes with no charges or fines. If you have the good fortune of customers who complain to you about pricing that has increased in the wake of an emergency, reduce the price and make them happy. Period. That is always your first defense and perhaps the best.