Alerts and Updates

Federal and State Enforcers Will Scrutinize Pricing Behavior During COVID-19 Pandemic

April 7, 2020

Thirty-six states plus the District of Columbia and the territories have laws prohibiting price gouging.

In addition to drastic changes to everyday life, the COVID-19 pandemic is impacting antitrust enforcement. Companies must be prepared to address these impacts, including steering mergers and acquisitions through regulatory approvals, seizing opportunities to collaborate to solve public health issues raised by COVID-19, and avoiding use of pricing algorithms or other pricing mechanisms that could lead to allegations of price gouging. Indeed, U.S. lawmakers recently urged the Federal Trade Commission (FTC) to act quickly to protect the public from price gouging, particularly for essential COVID-19 health products such as face masks, disinfectants and hand sanitizers. Thirty-three state attorneys general also recently issued a letter urging the nation’s major retailers to rigorously monitor price gouging practices on their platforms during this time.

Federal Efforts and Laws Relating to Price Gouging

Price gouging refers to a seller’s excessive increase in price of an essential item or service during a period of high demand, such as when a governor or mayor declares a state of emergency in an area. While there is no federal anti-price-gouging law, the FTC has broad authority under the FTC Act and federal antitrust laws to regulate anticompetitive conduct. Section 5 of the FTC Act broadly prohibits “unfair or deceptive acts or practices” and “unfair methods of competition,” which the FTC may enforce as a stand-alone provision or as a violation of either the Sherman Act or the Clayton Act. The FTC’s Section 5 authority, however, is not well-defined, and the FTC has been hesitant to bring stand-alone Section 5 claims. So far, the FTC has not brought any price-gouging actions in response to the congressional demand, while state attorneys general have been actively pursuing price gouging in their states in recent weeks. However, the FTC is actively engaged in working with major platform sellers to combat price gouging and has not ruled out the possibility of enforcement actions.

State Efforts and Laws Against Price Gouging

Thirty-six states plus the District of Columbia and the territories have laws prohibiting price gouging. Most require the declaration of a state of emergency as a prerequisite, and that the targeted products be essential commodities (some states’ laws target only certain products, like gasoline and fuel). There are several different ways that state and local laws define excessive prices and unconscionable profits. Generally, states compare the actual prices charged during a state of emergency to a preemergency benchmark price. Many factors impact this calculus, including the relevant geographic and product market, the relevant costs and historical margins and the time window that states look at when determining preemergency pricing behavior. While some state laws carry criminal sanctions, most enforcement is done civilly. There are exceptions allowed in most states, such as price increases based on increased costs.

The letter from the state attorneys general went to large companies and urged them to (1) set clear policies against price-gouging during emergencies on their platforms and enforce those policies; (2) trigger enforcement of the policies independent of or prior to an emergency declaration; and (3) create and monitor a “fair-pricing” portal to allow consumers to report instances of price gouging. Several companies have responded and have taken action, such as removing third-party sellers from the platform or banning the sale of essential COVID-19 products. During the past several weeks, state attorneys general have been sending “cease and desist” letters and document subpoenas to companies suspected of price gouging. The letters warn the companies that they may be subject to state enforcement actions seeking fines and restitution.

Conclusion

The legal and economic analysis of pricing decisions following a state of emergency declaration depends on the facts and circumstances in each case and varies by jurisdiction. The outcome of this analysis can have significant consequences for the party making the pricing decision. Before making pricing decisions that might invite antitrust or price-gouging scrutiny, companies should seek experienced antitrust counsel to advise them on these various factors.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

For Further Information

If you have any questions about this Alert, please contact Sean P. McConnell, Christopher H. Casey, Edward G. Biester III, one of the attorneys in our Antitrust and Competition Group, or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.