Pandemic price gouging is a huge issue—but state laws to stop it are creating more problems than they solve
Media coverage of price gouging during the COVID-19 pandemic has focused predominantly on individuals hoarding much-needed supplies and reselling them for high prices online. State price gouging laws are designed to prevent such actions—they exist to prevent sellers from taking advantage of consumers during a temporary state of emergency. Typically triggered by natural disasters, they often have a short life span.
Such laws were not designed to deal with the length and national scope of the current pandemic. As states of emergency continue, law-abiding businesses and consumers are suffering unintended consequences.
Businesses face a patchwork of these laws. At least 36 states have price gouging statutes, and they vary greatly. Some states prohibit all price increases during a state of emergency, while others prohibit increases over a set amount, and still others prohibit “unconscionable” price increases that provide little guidance to businesses.
The laws are ambiguous in other ways. Some expressly state that they apply to supply chain businesses; others do not. Some cover only materials necessary for emergency response; others also apply to more commonplace goods and services. Many are silent on whether businesses can continue with regularly scheduled price increases. Some are unclear as to whether they even remain in effect. This mishmash of laws has caused increasing difficulties throughout the economy.
For one, these laws have discouraged innovation and competition. COVID-19 has forced businesses to alter operations. From the end of March through mid-April, transactions at full-service restaurants plunged 79%. Grocery store food demand is up, with some nonperishables seeing over a 200% increase in demand. Suppliers have shifted production to meet demand, often having to retool plants, packaging, and logistics to get products to consumers. Many suppliers face increased costs throughout the supply chain. Businesses normally respond to price signals to make planning decisions, but now, prices are frozen or capped.
In response, some suppliers are likely sitting out the emergency instead of sending their products into new channels to respond to increased demand, for fear of being hit with a price gouging investigation or class action lawsuit. Likewise, businesses considering the launch of new products and charging more for them may be waiting until after the pandemic to enter the market.
Second, this patchwork of laws disrupts companies’ standard operations. Most businesses raise prices annually to account for inflation and to provide cost-of-living salary increases to employees. This year, such an increase could trigger investigations and lawsuits from state attorneys general and the private plaintiffs’ bar as possible price gouging. This creates a perverse incentive to hold down wages and reduce sales volume, while margins vanish.
The third issue with these laws is that their vagueness attracts class action lawsuits. Already, in one class action lawsuit for alleged price gouging during the pandemic, the plaintiffs did not know who to sue, so they sued almost everyone in the industry even though they “[could] not assert that every defendant engaged in price gouging.” This threat of being forced to defend against expensive litigation is a further hit to businesses. To avoid it, many of them are pulling back from entering new markets, upgrading their products, or developing new products—because they all could require price changes that might draw fire from overzealous class action lawyers.
Where should we go from here? The cleanest solution would be enacting a single nationwide price gouging law. This would enable businesses to adopt a clear and consistent compliance policy. Such action by Congress, however, seems unlikely. As an alternative, states could provide “reciprocity” to each other, so that a business complying with one state’s price gouging law would be deemed to be in compliance in the other states in which the business operates.
Even if every state continues on its own, states should improve their price gouging laws as follows. First, the extension of a state of emergency should not automatically extend the activation of price gouging laws. States should separately consider the impact of keeping their price gouging laws activated given the unintended consequences.
Second, price gouging law violations should not be subject to private lawsuits. State attorneys general should oversee these government-imposed price controls, not class action lawyers.
Third, price gouging statutes should be substantially clearer as to when and where they apply. To avoid chilling innovation and competition in areas unrelated to the emergency, these laws should only apply to the types of goods and services implicated by the emergency, and not to other goods and services for which it is counterproductive to control prices for months on end.
While well intended, existing price gouging laws are not tailored to meet the challenges of the COVID-19 pandemic. As states of emergency continue to be extended, it is becoming clear that such laws are unintentionally harming businesses and the economy, and ultimately harming consumers along the way.
Christopher E. Ondeck is co-chair of Proskauer’s antitrust group and leads the firm’s price gouging team. He represents clients in civil and criminal antitrust litigation, defending mergers and acquisitions before the U.S. antitrust agencies, defending companies involved in government investigations, and providing antitrust counseling.
Jennifer E. Tarr is an associate in Proskauer’s litigation department and a member of the firm’s antitrust group and price gouging team.