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Cracking Down on COVID-19 Price Gouging: Avoid Liability with Strong Corporate Compliance

Cracking Down on COVID-19 Price Gouging: Avoid Liability with Strong Corporate Compliance Background Decorative Image

Among the countless challenges caused by COVID-19, the pandemic has wreaked havoc on supply and demand patterns nationwide. Shortages of medical, sanitary, and food supplies have led to numerous reports of commercial hoarding and “price gouging,” which only exacerbates the shortages. In response, state attorneys general around the country and the U.S. Department of Justice (DOJ) have ramped up enforcement efforts against both individuals and businesses engaging in these unlawful practices. As COVID-19 continues to disrupt market conditions, companies should proactively adjust their policies and procedures to ensure compliance with all applicable law when making purchasing, supply, and pricing decisions.

Over the past several weeks, there have been countless reports of price gouging, which involves selling a good or service at an unconscionably high price due to a severe spike in demand — often in response to a natural disaster or other emergency. Over two-thirds of states and the District of Columbia have price gouging laws, and several others have enacted emergency regulations in response to COVID-19.1 Price gouging may also be illegal under states’ consumer protection and unfair trade practices statutes. Penalties for price gouging vary, but can include substantial fines, jail time, and prohibition of future sales.2

Local and state authorities have already begun addressing price gouging complaints by sending cease-and-desist letters, issuing violations, and even making arrests.3 In Virginia, where the governor declared a state of emergency triggering Virginia’s Post-Disaster Anti-Price Gouging Act, the attorney general recently sent cease-and-desist letters to 42 businesses that were the subject of price-gouging complaints, instructing them to stop the illegal behavior.4 In New York City, the Department of Consumer and Worker Protection has issued more than 1,000 price gouging violations totaling over $250,000 in fines, which stemmed from more than 4,000 consumer complaints.5 And in Texas, the attorney general filed suit against a company that held an online auction for over 750,000 face masks, all-purpose cleaner, and other sanitary supplies, with the company facing fines of up to $10,000 per violation.6 Several states have also created public price gouging complaint websites and forms for consumers to report instances of illegal activity.7

This issue is not just limited to companies making direct sales to consumers. On March 25, thirty-three state attorneys general warned several online marketplace companies that they should take proactive steps to prevent price gouging by third-party resellers on their platforms.8

The federal government is also taking action. On March 23, President Trump signed an Executive Order authorizing the Secretary of Health and Human Services (HHS) to designate COVID-19 related medical items as protected under the Defense Production Act (DPA).9 Under the DPA, it is a crime for any person to accumulate a protected item either (1) in excess of reasonable personal or business needs, or (2) for the purpose of selling it in excess of prevailing market prices.10 Violations of the statute can result in monetary penalties of up to $10,000, or one year in prison, or both.11 HHS has designated various medical supplies, including PPE, certain types of respirators and ventilators, certain drug products, and certain sterilizers and disinfectants, as protected items.12

In connection with the President’s Executive Order, U.S. Attorney General Barr announced the creation of the DOJ COVID-19 Hoarding and Price Gouging Task Force, which is charged with investigating and prosecuting COVID-19 related market manipulation, hoarding, and price gouging.13 AG Barr noted that DOJ will not go after ordinary individuals and businesses acquiring materials they reasonably need for their own use, but that DOJ “will aggressively pursue bad actors who amass critical supplies either far beyond what they could use or for the purpose of profiteering.”14

What This Means For You

As businesses grapple with how to respond to unpredictable market conditions caused by COVID-19, they should consider taking the following three steps to reduce their risk of liability related to commercial hoarding and price gouging:

1. Conduct a Risk Assessment.

Businesses should conduct a thorough risk assessment to determine whether they are susceptible to hoarding or price gouging violations. Before increasing prices due to increased demand, businesses should analyze whether those prices would be significantly higher than previous levels, and determine whether they have a legitimate reason for doing so — such as an increase in costs. Companies that buy and sell items that are now in high demand due to COVID-19, including medical and sanitary supplies, and any items designated as protected by HHS, should be particularly vigilant. Online and brick-and-mortar retailers, and companies that permit third-party resellers on their platform, may face greater scrutiny.

2. Adjust Policies and Procedures.

After identifying areas of risk, companies should implement specific policies and procedures to prevent price gouging and hoarding of protected items as even inadvertent hoarding is forbidden. Affected businesses should identify high-risk employees, such as sales and account representatives, and prioritize their training on state price gouging laws and relevant federal rules, including HHS designations, which may change over time. Companies can also put in place additional controls requiring legal or other compliance approval before certain sales are made at prices above specified levels. Similarly, companies should closely monitor their purchases and supply levels to ensure they are not stockpiling protected items. Finally, to help prevent instances of price gouging on their platforms, retailers and companies hosting third-party sellers should issue guidelines to those sellers outlining applicable law.15

3. Implement Monitoring Mechanisms.

Strong monitoring mechanisms are a key component of any good corporate compliance program. Without the ability to detect misconduct when it occurs, companies are unable to remediate that misconduct and prevent future violations. In light of COVID-19, close monitoring is especially important for real-time sales and pricing decisions affecting protected or other in-demand items. Companies can employ a COVID-19-specific anonymous hotline for employees to report potential sales and pricing misconduct caused by the crisis. Online retailers and companies that utilize third-party resellers could also set up “fair pricing” webpages for customers to directly report instances of price gouging through an online form.16 Such online forms can solicit information such as the name of the offending vendor, the item for sale, the listed price, and the state of residence to allow companies to quickly identify and address instances of price gouging, and issue refunds, if necessary. By allowing customers to file complaints directly, companies can avoid the risk that consumers will file them with state law enforcement or the media.

Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.

1 See Price Gouging Laws by State, FindLaw (Mar. 24, 2020), https://consumer.findlaw.com/consumer-transactions/price-gouging-laws-by-state.html.

2 Id.

3 Jermaine Ong, Eight San Diego County residents arrested, accused of price-gouging during emergency, 10News San Diego (Mar. 18, 2020), https://www.10news.com/news/local-news/eight-san-diego-county-residents-arrested-accused-of-price-gouging-during-emergency.

4 Adrianna Hargrove, Attorney General Herring letters to 42 businesses, cracking down on price gouging, NBC12 (Mar. 31, 2020), https://www.nbc12.com/2020/03/31/attorney-general-herring-letters-businesses-cracking-down-price-gouging/.

5 Anna Sanders, NYC issues more than 1,000 violations for price gouging amid coronavirus pandemic, N.Y. Daily News (Mar. 25, 2020), https://www.nydailynews.com/coronavirus/ny-coronavirus-price-gouging-pandemic-fines-violations-20200325-cxtvg6nmibgrxhwse2biv5zg7e-story.html; Julia Marsh, NYC has issued $275K in fines for coronavirus-related price gouging, N.Y. Post (Mar. 17, 2002), https://nypost.com/2020/03/17/nyc-has-issued-275k-in-fines-for-coronavirus-related-price-gouging/.

6 Sunnie Tate, Texas Attorney General goes after company for price gouging, KBTX (Mar. 26 2020), https://www.kbtx.com/content/news/AG-files-lawsuit-against-price-gouging-company-569143621.html.

7 See, e.g., N.Y. Att’y Gen., Price Gouging Complaint Form, available at https://formsnym.ag.ny.gov/OAGOnlineSubmissionForm/faces/OAGPGCHome; Texas Att’y Gen., How to Spot and Report Price Gouging, available at https://www.texasattorneygeneral.gov/consumer-protection/disaster-and-emergency-scams/how-spot-and-report-price-gouging.

8 See Letters from Thirty-Three State Attorneys General (Mar. 25, 2020), available at https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf.

9 Exec. Order No. 13,910, Preventing Hoarding of Health and Medical Resources to Response to the Spread of COVID-19, 85 Fed. Reg. 17,001 (Mar. 23, 2020), https://www.govinfo.gov/content/pkg/FR-2020-03-26/pdf/2020-06478.pdfC:\.

10 See 50 U.S.C. §§ 4512, 4513.

11 See id. § 4513.

12 Dep’t of Health and Human Servs., Notice of Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures 85 Fed. Reg. 17592 (effective Mar. 25, 2020), https://www.govinfo.gov/content/pkg/FR-2020-03-30/pdf/2020-06641.pdf.

13 Memorandum from William Barr, Attorney General, U.S. Dep’t of Justice, on COVID-19 Hoarding and Price Gouging Task Force (Mar. 24, 2020), https://www.justice.gov/file/1262776/download.

14 Id.

15 See, e.g., Letters from Thirty-Three State Attorneys General (Mar. 25, 2020), available at https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf.

16 See id.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.