What Is Price Gouging, and Is It Criminal?

Supply and demand are the drivers of price in a competitive market.  Under normal circumstances, sellers’ attempts to maximize profits are offset by their competitors, who can attract buyers by offering better deals. 

Acute shortages of a product can disrupt the normal competitive pricing process.  If there is not enough of a product to go around—say, toilet paper, hand sanitizer, or face masks—would-be competitors have nothing to sell, and so cannot offer better deals.  In such circumstances, those who do have a stock of the scarce goods have the ability to raise prices to maximize their own profits, to the public’s detriment.  That is commonly referred to as “price gouging.”

Federal law does not prohibit price gouging.  Most States, however, forbid it—at least as to essential supplies during a declared state of emergency.  Now that the President and nearly every State has declared such an emergency in light of the COVID-19 pandemic, anti-gouging laws are in full force.   

States have had price-gouging laws on the books for decades.  They have previously been invoked, for example, to fight “gas gouging” in the wake of hurricanes.  But the widespread impacts and uncertain duration of the COVID-19 pandemic make hurricane shortages look simple by comparison.  The current situation has already created shortages in medical supplies, paper goods, and groceries.  And numerous other products may soon be in short supply, as the companies that make them may temporarily close down and their employees may be required to stay home and “shelter in place.”  As a result, some state legislators have moved to expand the reach of their anti-gouging laws to fight the newly wide-ranging price hikes. 

Penalties for illegal price gouging vary widely from State to State.  They can range from moderate to severe fines all the way to prison time.  Illegal price gouging may also open sellers up to civil lawsuits.

States, however, define price gouging in very different ways.  Some define it as charging an “unconscionable,” “exorbitant,” or “excessive” price for certain products as compared to the price before the state of emergency.  Those standards would certainly appear to be met in recently reported instances of people hoarding bottles of hand sanitizer purchased for a couple of dollars, and then reselling them for up to $70 each, in the wake of shortages created by COVID-19 panic buying.  But apart from such dramatic examples, it will not always be clear when a price increase could be found sufficiently “unconscionable,” “exorbitant,” or “excessive” as to be illegal under those States’ laws.

Other States define price gouging in more specific—but perhaps surprising—terms.  For example, a number of States define price gouging as raising prices on essential goods by just 10% over the pre-emergency price.  In those States, a convenience store owner who raises the price of a gallon of milk from $3.50 to $3.85, a mere 35 cents, could potentially be liable for price gouging.  And several other States’ laws provide that any increase in the price of certain products after an emergency is declared can be price gouging unless justified by other market conditions.      

Consumer complaints of price gouging have been pouring in to state regulators in the midst of the COVID-19 pandemic, and several state attorneys general have indicated that they are stepping up enforcement efforts.  As a result, businesses selling goods subject to their State’s price-gouging restrictions must take special care to understand the governing rules and set prices within their bounds.  While one would expect States to focus their criminal enforcement efforts on the more egregious cases, the fact is that a wide range of conduct could legally be deemed price gouging and prompt, at a minimum, cease-and-desist letters from state authorities.

To learn more about the impact of COVID-19 on the law, follow us on LinkedIn.  “Brilliant lawyers with courtroom savvy” – Benchmark Litigation.  Copyright MoloLamken LLP 2020.

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