Amid the COVID-19 pandemic, news feeds have been replete with stories of some businesses and individuals taking advantage of the situation and inflating prices for critical items in violation of federal and state laws. Many other businesses, however, face a Catch-22. Unprecedented supply chain changes and pricing pressures necessitate some price increases, but state and local laws are announced daily that severely limit the ability to increase prices. Navigating these dynamic legal requirements of new and evolving price gouging laws presents a host of issues for companies seeking to manage their businesses and continue compliance.

Laws That Could Give Rise to Class Action Exposure

Price gouging laws generally share a few common elements: they are triggered by certain types of "public emergencies"; they apply to certain types of goods or services; and they are intended to police the unconscionable or excessive pricing of those goods or services during the public emergency. Not all state price gouging laws provide private litigants a right to sue. While some state laws do, and may even expressly allow for class actions, such as in Michigan, other states make price gouging a violation of another state consumer protection law. This allows for dual enforcement—by the government and by private litigants. For example, there are three putative consumer class actions pending in California federal courts alleging illegal price gouging conduct surrounding the prices of foods, medical supplies and consumer goods. Instead of suing under California's price gouging statute, the plaintiffs in these cases brought claims under the state's unfair competition statute. This was possible because the price gouging statute expressly states that a violation under the statute also constitutes unfair competition under another statute that has historically been used as a vehicle for class action claims. The plaintiffs in the California cases also brought claims alleging illicit price gouging conduct under other legal theories commonly forwarded in class actions—breach of contract, negligence and unjust enrichment.

In the wake of the COVID-19 pandemic, federal and state governments also are bringing investigations and reviewing the efficiency and efficacy of consumer protection and price gouging statutes. In addition to investigations in 46 states, including New York, California and Connecticut, this scrutiny has created a moving target for companies when it comes to assessing possible price gouging conduct, and it is important that companies keep track of this shifting legal regime. Already, some states have passed or are considering new or expanded price gouging laws. For example, pre-COVID-19, Alaska and Maryland had no codified anti-price gouging statute. That changed during the pandemic; now 38 states have some sort of anti-price gouging law. Some states, such as New York, have passed bills expanding their anti-price gouging statutes to explicitly cover broader categories of goods, such as medical supplies. Other states, such as California and New Jersey, limit how much the price of certain goods may increase from "pre-emergency" to a declared state of emergency. These states have anti-price gouging statutes with defined ceilings of between 10% (e.g., California) and 25% (e.g., Kansas). In contrast, such states as New York and Florida, generally prohibit "unconscionable" increases above pre-emergency prices.

At the federal level, the House of Representatives passed the HEROES Act, which, if codified, will create the first-ever federal anti-price gouging statute. A violation of the proposed federal statute will automatically constitute a violation under the Federal Trade Commission Act, the operating statute that empowers the Federal Trade Commission to prevent and police unfair methods of competition. While the HEROES Act does not allow a private litigant to bring claims, scrutiny from federal regulators will only attract attention to a company's pricing practices and lend support to consumer class action lawsuits predicated on the same practices. As of June 8, the bill is still being considered by the U.S. Senate.

Prudent Responses to the Price Gouging Legal Regime

Class action exposure for price gouging can be significant, ranging from injunctive relief, damages, restitution, penalties or attorney fees. For example, North Carolina and New Jersey's consumer protection and consumer fraud laws allow recovery of treble damages and attorney fees.

Price gouging laws do not mean, however, that a business can never change its price during public emergencies. While there are no set rules for making pricing decisions across all industries and in compliance with all state and local legislation, it is clear that companies need to closely evaluate and methodically plan pricing decisions with input from legal counsel at the outset.

First, companies can consider maintaining an understanding of state and federal laws addressing price gouging conduct. While the shifting legal regimes make this easier said than done, it is prudent to do so.

Second, some price gouging statutes consider whether price increases reasonably reflect actual additional costs that arise from the emergency circumstances. Thus, if price increases are considered, companies may want to document the rationale for the proposed increases. These rationales include, for example, increased input, manufacturing, labor or transportation costs. Companies may also want to document any projected impact of a public emergency on their businesses. Such records would be most useful if kept in a contemporaneous manner to justify a challenged price increase.

Third, companies looking to avoid price gouging liability should also consider being cognizant of state and federal antitrust laws and ensure their decisions with respect to pricing do not violate them. Even in a declared state of public emergency, it is illegal to coordinate output or pricing with competitors.

As the COVID-19 pandemic continues, companies can continue to operate their businesses in a manner that allows them to flexibly respond to evolving conditions. However, they should stay vigilant and continue to monitor how the shifting dynamics of the price gouging and consumer protection legal regimes may impact their pricing decisions and practices.

Carrie Mahan is a partner in Washington, D.C., Eric Hochstadt is a partner in New York, Pravin Patel is counsel in Miami and Anthony Duh is an associate in New York. All are members of the global litigation department at Weil, Gotshal & Manges.