United States: Private Antitrust Litigation

In summary

This article reviews US federal and state laws on price-gouging during the covid-19 pandemic, investigations and prosecutions for price-gouging practices, and developments in the private litigation of price-gouging cases in the United States and expectations for these cases going forward.

Discussion points

• Background on federal price-gouging standards and prosecutions by the US Department of Justice (DOJ) and its Covid-19 Hoarding and Price Gouging Task Force
• Summary of state-level price-gouging laws and enforcement actions by state attorneys general
• Review of recent price-gouging cases by private parties and expectations for the future litigation of these cases

Referenced in this article

• Covid-19 pandemic
• Defense Production Act
• DOJ
• US federal and state price-gouging, hoarding and antitrust laws
• DOJ Covid-19 Hoarding and Price Gouging Task Force
• California Unfair Competition Law, California Business and Professions Code section 17200 et seq

In this year of the coronavirus pandemic, it is not surprising that antitrust litigation at both the federal and state levels related to pandemic pricing is garnering a significant amount of attention in the United States. Some of the biggest competition and consumer issues cited in pandemic-related US lawsuits concern pricing practices, including price-gouging and hoarding. While price-gouging is often considered a consumer protection issue, it is a hot topic in US antitrust circles these days and there is a growing amount of price-gouging litigation as the pandemic continues. After reviewing US federal and state laws on price-gouging and developing investigations and prosecutions for alleged price-gouging, we consider the emergence of private antitrust litigation premised on price-gouging practices during this time of pandemic and expectations for these cases going forward.

Federal price-gouging law and enforcement

At the US federal level, on 23 March 2020, President Donald Trump signed an executive order aimed at preventing price-gouging and hoarding of crucial medical supplies needed to fight covid-19. ¹ The executive order invokes the Defense Production Act (DPA) to prevent hoarding of certain critical items as designated by the US Department of Health & Human Services (HHS). ² For such items, including personal protective equipment (PPE) and ventilators, ³ individuals and companies are prohibited from accumulating them either in excess of reasonable needs or for the purpose of selling them in excess of prevailing market prices. ⁴

Apart from the authority granted to the President under the DPA, there is no general federal price-gouging law, although such legislation is currently being contemplated in the United States. In the past, when price-gouging concerns arose after natural disasters such as hurricanes, the disasters affected particular geographical regions and concerns were focused on products such as gas, water and building supplies. Price-gouging enforcement was typically a state enforcement issue limited to the region and a few essential products. Under the new federal enforcement regime, the Department of Justice (DOJ) created the Covid-19 Hoarding and Price Gouging Task Force, and US Attorney General William Barr said the DOJ will prioritise hoarding and price-gouging involving vital supplies needed to fight covid-19. ⁵ Each US attorney’s office, as well as relevant DOJ components, designated an attorney to serve as a member of the task force. Today, the task force consists of over 100 federal prosecutors around the country who have prioritised the task force’s work in addition to their pre-existing duties in their districts.

Since its inception, the task force has opened hundreds of investigations involving allegations of hoarding and price-gouging, counterfeiting or misbranding of medical devices, and fraud, among other violations. ⁶ The task force has commenced numerous enforcement actions, including criminal prosecutions.

DOJ and hoarding and price-gouging task force prosecutions

Federal prosecutors in the US District Court for the Eastern District of New York charged the DOJ’s first criminal case under the DPA on 24 April 2020 in US v Amardeep Singh. ⁷ The complaint alleged that the defendant used his retail sports shoe and apparel store to amass and sell large quantities of PPE – including face masks, surgical gowns, gloves and disinfectant products – at exorbitant prices. As one example alleged in the complaint, the defendant purchased disposable three-ply masks for US$0.07 per mask and then resold them for US$1.00 per mask, a markup of approximately 1,328 per cent.

In May 2020, prosecutors in the Southern District of New York announced hoarding and price-gouging charges against a man who allegedly attempted to defraud New York City into paying him approximately US$45 million for PPE masks that he did not possess and was not authorised to sell. ⁸ In United States v Ronald Romano, it was alleged that the defendant offered the city millions of N95 respirators at more than a 400 per cent markup of the list price and separately offered three-ply N99 face masks to the Florida Division of Emergency Management at prices marked up to more than 500 per cent of the manufacturer’s price. Prosecutors also brought similar charges, in United States v Richard Schirripa, against a licensed pharmacist in New York who, according to the allegations in the complaint, sold N95 respirator masks to customers for up to 50 per cent more than he paid to acquire them. ⁹

Some of the task force’s investigations into price-gouging activity have revealed evidence of apparent fraud. In these prosecutions, the government alleges the defendants neither possessed the PPE nor had the means to acquire it; instead, these individuals deceived victims into sending them up-front payments for PPE transactions that never materialised. ¹⁰ For instance, in US v Donald Allen and Manuel Revolorio, ¹¹ the defendants allegedly misrepresented the nature of their business experience, their inventory of PPE, and their right to resell PPE to purported purchasers of PPE. The complaint alleges that the defendants created a website in furtherance of the fraud, falsely claimed their company had contracts and agreements in place to resell millions of masks, and attempted to pressure a potential purchaser to wire more than US$4 million to secure those masks. In US v Paul Penn, ¹² the defendant is accused of attempting to defraud a foreign government in connection with an attempted sale of 50 million respirator masks. The government alleges that Mr Penn, through his company, agreed to act as a middleman in exchange for a cut of the US$317 million sales price. The negotiated sales price for these masks was more than 500 per cent higher than the previous normal market value for the masks.

State price-gouging laws and enforcement

Approximately 38 states and the District of Columbia have price-gouging laws, and there is additional legislation pending in several other states in reaction to covid-19. ¹³ Once triggered, typically by a state-of-emergency declaration, state laws prohibit price increases for certain essential products. The category of products may change given the nature of the emergency. For example, water, fuel and food are often essential products after hurricanes, but PPE, ventilators and hand sanitisers are now seen as essential in the fight against covid-19. ¹⁴

The state price-gouging laws vary, though there are a few common threads seen among many of them. Almost all are limited in time to a period following a declaration of an emergency. ¹⁵ Many include some sort of price ceiling that is set at a certain percentage above the average price that the relevant good sold for during a time period immediately preceding the emergency. ¹⁶ For example, some states, including New Jersey and California, prohibit selling products at prices greater than 10 per cent over the average price for the same product preceding the emergency declaration. ¹⁷ Some state laws make the percentage increase an element of the law, while for others, a price increase over the prescribed percentage constitutes prima facie evidence of a violation. ¹⁸ Other laws are more vague and merely prohibit sales at unconscionably high or excessive prices. ¹⁹ Most have exceptions or defences, the most common being that the defendant can seek to show the price increase was directly attributable to increases in costs, though many of these defences also require evidence that the seller’s markup did not increase. While there are common threads, sellers do not have a safe harbour under which they could increase their prices or begin selling a relevant product with complete certainty that they would not be in violation of any existing price-gouging law. In this confusing landscape of restrictions, market participants look for data points as state and local enforcers prosecute price-gouging violations.

In Nassau County, New York, the Office of Consumer Affairs has already fined two businesses US$5,000 each for price-gouging on protective masks. ²⁰ The New York Attorney General sent cease-and-desist letters to a hardware store in Manhattan and a grocery store in Queens for excessive prices on hand sanitiser and disinfectant. One hardware store was reportedly charging customers US$79.99 for 1.2L of hand sanitiser (a 300 per cent increase of the usual price), while the grocery store was reportedly charging customers US$14.99 for a 19oz bottle of disinfectant spray (a 150 per cent increase of the usual price). ²¹ The New York Attorney General also filed a lawsuit against a wholesale grocery distributor for allegedly increasing wholesale prices for Lysol disinfectant products sold to neighbourhood grocery and discount stores in New York. Between January and April 2020, the store allegedly increased the price of Lysol Disinfectant Spray from approximately US$4.25 per 19oz can to as high as US$9.15 per can, even though the company did not incur increased costs for the product. ²²

Reflecting the vigour with which some states have moved to enforce price-gouging laws, the Pennsylvania Attorney General set up a dedicated hotline for price-gouging reports in response to covid-19. The Attorney General’s office has reported receiving more than 1,200 tips from the public since the hotline’s creation. After reviewing the complaints, the office has already sent more than 30 cease-and-desist letters and subpoenas regarding price-gouging behaviour. ²³

Some state attorneys general have also called on large online retailers to help enforcers crack down on price-gouging during the covid-19 outbreak. The Pennsylvania Attorney General issued a letter bluntly stating that ‘[r]ipping off consumers by jacking up prices in the middle of a public emergency is against the law and online resellers . . . must join in this fight’. ²⁴ The Attorney General also stated that companies forming ‘the backbone of online retail’ have ‘an obligation to stop illegal price-gouging now’, and the Attorney General called on these companies to ‘put strong practices into place to stop it from happening in the future’. ²⁵

The existing patchwork of state and federal laws makes selling essential products during a time of crisis an uncertain and risky venture. It can be very difficult to ensure compliance with laws that use undefined and vague standards in prohibiting ‘excessive’ and ‘unreasonable’ pricing. It is also often not clear whether the relevant ‘price’ is the advertised price or the actual price and how to account for discounts or seasonal pricing. Given the infrequent enforcement of the relevant state price-gouging laws, case law defining these terms is sparse. The executive order in place under the DPA falls into this category as well. It provides no guidance as to what it means for a price to be ‘in excess of prevailing market prices’. This uncertainty, however, has not deterred private parties from initiating and pursuing litigation for alleged price-gouging during this pandemic.

Private price-gouging litigation

A recent flurry of price-gouging lawsuits in the United States suggests that this could be only the beginning of a swell of private litigants bringing claims of alleged price-gouging due to covid-19. These lawsuits may foreshadow the nature of future private price-gouging litigation and the parties that might find themselves entangled in such litigation.

The recent lawsuits suggest that price-gouging cases will be premised on various forms of price-related allegations. Some of these cases allege conventional price-gouging, such as a recently filed case by egg purchasers alleging that egg prices nearly tripled between the onset of the pandemic and the end of March and have remained at price levels deemed unlawful (at least 10 per cent higher than usual) under the California Unfair Competition Law (UCL). ²⁶ Other recent cases suggest claims may be based on market or consumer preference changes due to the pandemic, such as in a case alleging food delivery companies, which have increased in use during the pandemic, wielded their power to force restaurants to charge uniform prices for menu items in violation of federal antitrust laws. ²⁷ This case also suggests that price-gouging may become a commonplace, additional cause of action in antitrust complaints challenging conduct during the pandemic.

Along with price-gouging and antitrust claims, recent cases show additional causes of action may be expected. Across the country, numerous suits alleging breach of contract and consumer protection violations also have been filed in the wake of covid-19, particularly against gyms, sports and other membership clubs. ²⁸ In these cases, the plaintiffs usually allege deceptive trade practices when the clubs continued to charge membership or usage fees despite their facilities being closed due to the pandemic. Although gyms and sports clubs have been the primary targets so far, the case theory advanced by the plaintiffs’ lawyers could apply to any business and has already been advanced against resorts and popular theme parks where customers retain yearly passes. ²⁹

A broad swath of firms may be accused of price-gouging, as demonstrated in recent cases. As an example, in a case filed in federal court in California, the plaintiffs allege that more than 20 of the largest egg producers, distributors and retailers in the United States ³⁰ price-gouged in violation of the California UCL. ³¹ Relying on the California Attorney General’s statement that its price-gouging law ‘applies to transactions between manufacturers, wholesalers, distributors, and retailers as it does between retailers and consumers’, ³² the plaintiffs sought damages from any and all of the producers and retailers that increased their transaction prices by 10 per cent or more during the pandemic emergency. This case illustrates that more than customer-facing retailers may be sued and participants at every level in a distribution or supply chain may be subject to price-gouging litigation. ³³

Similarly, a wide variety of products may be subjected to price-gouging claims, as illustrated by a series of recent cases. A class action case against an online retailer shows that price-gouging claims can include items as diverse as black beans, hair remover, facial cleanser, pain relief tablets and laundry detergent. ³⁴ Even a single item may lead to litigation. In a recent case against a grocery store chain, the plaintiff focused on toilet paper in alleging that grocery stores sold essential items in excess of their pre-covid-19 prices and in violation of the California UCL. ³⁵ While price-gouging laws focus on ‘essential’ items, the identification of these items can depend on the nature of a given emergency, and the ongoing covid-19 litigation has defined little limitation for such items during the pandemic.

The private cases filed during covid-19 indicate that class actions may be the popular vehicle for bringing cases with price-gouging and antitrust claims. Nearly all the recent cases brought by consumers have been class actions. Because price-based, consumer allegations can present common issues of fact or law, these allegations may be amenable to class-wide litigation. Also, the plaintiffs bringing price-gouging cases can be incentivised to pursue class claims when they file in jurisdictions that permit the recovery of restitution on behalf of the citizens of the state. ³⁶ For these reasons, price-gouging cases, especially those involving consumer purchases, will likely continue to be litigated as class actions.

Conclusion

United States price-gouging laws are intended to protect victims of life-altering disasters from having to pay exorbitant prices for essential products. The complex web of state and federal price-gouging laws can be hard to navigate as companies try to price scarce, difficult-to-source, essential products during the pandemic. There is very little legal precedent to look to for guidance, as very few price-gouging cases have been litigated to conclusion. While the covid-19 pandemic has led to the commencement of many federal, state and private cases focused on price-gouging, these cases may take years to play out. The cases recently filed, however, indicate that price-gouging and antitrust allegations may go hand-in-hand for many complaints, any number of products may be targeted for price-gouging, firms at all levels of distribution or supply chains may be vulnerable to claims, and class actions will continue to be the popular vehicle for litigating these cases.

Notes