Revisiting Price Gouging Compliance | Proskauer – Minding Your Business

As the Biden administration ramps up scrutiny of supply chains and pricing practices, companies should take a moment to reconsider their compliance with COVID-19 price gouging. As we have already emphasized, with ever-changing price driver constraints, managing risk requires careful review of documentation and monitoring of pricing practices and decisions. For reputable companies up and down the national supply chain, complying with the array of government price-gouging laws requires more than intuition and a moral compass. Even with the best of intentions, many companies accidentally get in trouble with price-cutting laws. Because price gradation laws can involve more than apparent wrongdoing and point-of-sale pricing to consumers, manufacturers and suppliers should consider putting in place procedures to assess whether they are required to comply with price restrictions, whether they comply, and how they comply can be regulated. Below we outline some key considerations for businesses.

Who is subject to price gouging restrictions?

Price gouging laws generally include high-level descriptions of the entities involved. However, many laws are silent on whether non-retailers fall within the scope, and if so, how. States differ on whether price gouging laws apply to suppliers. For example, Maine law applies to all commodities regardless of who they are sold to (and regardless of where the seller is in the supply chain)—this may include, for example, national wholesalers or consumer goods manufacturers that sell to Maine supermarkets. Similarly, New York law applies to “all parties within the distribution chain, including manufacturers, suppliers, wholesalers, distributors, or retailers of consumer goods or services, or both.” North Carolina law applies to “all parties in the distribution chain.” In contrast, Idaho law applies only to retail sales.

Which products are subject to price restrictions?

Many federal states provide a blanket ban on price increases, others a specially enumerated list. Several states have recently become more nuanced in defining which products are subject to price restrictions. For example, California has recognized that only some products remain relevant to COVID-19 price restrictions. Accordingly, the current California restrictions apply only to rapid COVID-19 tests, rather than imposing price restrictions on all products.

What are the price restrictions?

Once you’ve identified which products may be subject to price restrictions, it’s important to understand the limits on price increases. Most state anti-price gouging laws do not specify an exact price increase that qualifies as price gouging. Alabama, Florida and Maine, for example, prohibit selling at “unscrupulous” prices but maintain the rebuttable presumption that price gouging occurs when prices rise above a certain percentage. Others, like Idaho and Texas, prohibit “exorbitant or inflated prices.” Georgia and Mississippi, lock out any rate hikes after a declared state of emergency. California’s limit on price increases in excess of 10% of the price charged for the commodity immediately before the emergency was declared is a useful metric for national sellers — at least for states that allow some level of price increases. Other states using the 10 percent cap are 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 exact amount of a permissible price increase often depends on a base price. Setting the base price for each covered product affected is essential – and not always easy. The formulas for the basic prices also vary depending on the federal state. For example, in Oklahoma, the base price is the price charged “immediately prior to the state of emergency.” Any price increase above 10% of this base value is allegedly illegal. These base prices form the basis for proving that the price increase was permissible. In contrast, Texas does not provide a specific baseline measurement, instead prohibiting the sale of covered products at an “exorbitant or inflated price.” However, the prices of these products just prior to the emergency would be relevant in determining whether a price increase is exorbitant or excessive. Additionally, businesses should consider that the COVID-19 emergency may still be in effect or may have just expired to be reinstated, adding an extra layer to consider when calculating a product’s base price.

To the extent that price increases are introduced to reflect cost increases and maintain profit margins (possibly even increasing gross margins), they are likely to fall under the majority of allowable exceptions. However, it becomes more risky when profit margins are increased, as that component of the price increase may not take full advantage of the exception. Defending such price movements on the basis of the exception necessarily requires solid data on price and cost movements and the relationship between them, and evidence of a strong price-gouging compliance program.

defense

Other defenses may be available. For example, in Arkansas, the Price-Gouging Act provides a specific exception for increased costs. A successful defense could show that the alleged price increase was “directly a result of increased labor or material costs, or price increases by suppliers.” Similarly, Oklahoma provides a specific exception for increased costs resulting from price increases in a petroleum market or other nonurgent factors. Texas does not specifically provide such an exception, although increased costs would arguably serve as a defense against claims of “inflated” prices.

In addition, in any lawsuit, the plaintiff must have the right to sue under the Price Gouging Act. Some states limit enforcement of price gouging to the Attorney General. Others provide for a private right of action. However, for a private individual to bring such a claim, the plaintiff must have suffered direct harm from the alleged unlawful conduct. Careful analysis of a private prosecution may reveal that the complainant does not have sufficient grounds to bring an action.

When faced with a price gouging lawsuit, companies should be wary of claims that a simple price increase creates liability. Because multiple factors play into pricing and the availability of countermeasures, many price increases remain permissible. Companies at risk of a price reduction request should consider the potential impact of a government’s price restrictions on their products or services and the availability of potential justifications or defenses for price increases.

Compliance with price gouging: Guidelines for navigating compliance with government price gouging rules

  • Identify each state in which a company sells. Be too broad, consider states where products or services are sold or sold, and also include states to which they are sold. States often assert broad jurisdiction, even for products sold free on board to a receiving party outside the state, when the impact on downstream prices occurs within the state.
  • Track requirements, price caps or other controls and your products are services that can be covered for everyone.
  • Identify the “base rate” at the beginning of the relevant emergency declaration. Keep a record of price increases and fluctuations and the basis for all price movements.
  • Develop a strategy to respond to inquiries about potential price gouging.
  • Monitor the ongoing and evolving requirements of state governors; Implementing regulations continue to be enacted that amend and supplement the scope and requirements of government price reduction restrictions.
  • Commodities priced on an index may not be specifically exempt from the price-gouging rules, so sellers should consider price increases that are not directly related to increased costs.
  • Any request from an attorney general’s office is a serious matter that can involve significant risks, including costs of responding, reputational risks and penalties, as well as possible subsequent civil lawsuits from parties at all levels of the supply chain who may claim excessive charges now or even after the Crisis and lifting of restrictions.
  • Consider conducting a “price gouging assessment” with internal or external legal and sales functions working as a unified team and provide a result that can be used across all relevant business functions to address price gouging risk.

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