COVID-19: Price-Gouging During a Public Health Crisis

Unprecedented times do not call for unprecedented prices. This is especially so when that pricing puts the public—specifically patients, healthcare workers, and first-responders—at risk. And as inventory shortages and freight issues plague the healthcare supply chain, manufacturers, wholesalers, and retailers of medical supplies need to be mindful of the often broad inventory and pricing restrictions imposed by anti-hoarding and price-gouging laws.

By now, even the most causal news consumer has watched, heard, or read numerous stories about extreme shortages of personal protective equipment (“PPE”) on the front lines. PPE is defined by the Occupational Safety and Health Administration as “specialized clothing or equipment worn by an employee for protection against infectious materials.” PPE is routinely utilized by healthcare professionals and first responders to protect themselves, their patients, and others alike to deliver care effectively. PPE safeguards these professionals from infectious patients and equipment in the healthcare field. And now, PPE is needed for healthcare professionals and first responders more than ever. Due to the COVID-19 national public health emergency, PPE shortages are on the rise and causing a significant challenge to the US healthcare system. Healthcare facilities and professionals across the country are facing extreme difficulties locating and accessing PPE.

It should not come as a shock, therefore, that all manufacturers, wholesalers, and retailers of medical supplies have been focused on sourcing PPE. And in doing so, they have encountered a myriad of new PPE sources, including suppliers, importers, and brokers who have flooded the marketplace in the hopes of capitalizing on the intense demand for product. To be clear, there is nothing inherently wrong or unlawful about capitalizing on market conditions. But hoarding PPE and other desperately needed medical supplies in the hopes of excessively marking up those same supplies to sell has been the subject of both civil and criminal enforcement actions.

State agencies nationwide have been bombarded with thousands of complaints of individuals who are ill-suited to profit from this pandemic by hoarding critical PPE at the expense of those suffering and working on the frontlines. For example, in the Office of the Attorney General in New Jersey announced that during a one-week span, the Division of Consumer Affairs (“DCA”) sent 217 cease-and-desist letters to merchants across the state. And, to date, about 92 subpoenas and 731 cease-and-desist letters were sent to retailers advising them of the penalties for violating New Jersey’s price gouging law by unreasonably increasing prices during the state of emergency. Approximately 3,623 complaints have been filed with DCA, with almost 90% of those complaints involving price increases on PPE, hand sanitizers, disinfectant sprays, and wipes.

Using New Jersey as an example, the state’s price gouging law was implicated when Governor Phil Murphy signed Executive Order No. 103 declaring a state of emergency. This law prohibits excessive price increases during a declared state of emergency, or for 30 days after the termination of the state of emergency. The law, codified as part of the New Jersey Consumer Fraud Act, states:

It shall be an unlawful practice for any person to sell or offer to sell during a state of emergency or within 30 days of the termination of a state of emergency, in the area for which the state of emergency has been declared, any merchandise which is consumed or used as a direct result of an emergency or which is consumed or used to preserve, protect, or sustain the life, health, safety or comfort of persons or their property for a price that constitutes an excessive price increase.
N.J.S.A. § 56:8-109. The law defines an “excessive price increase as being either: (i) more than 10% higher than the price during the normal course of business unless it is attributable to additional costs in the supply chain; or (ii) an increase of more than 10% in the amount of markup from cost when the cost of acquisition increases. N.J.S.A. § 56:8-108. Price-gouging under the New Jersey Consumer Fraud Act may be punishable by up to a $10,000.00 civil penalty for the first violation and $20,000.00 for the second and subsequent violations. Additionally, businesses violators may be required to pay consumer restitution, attorney’s fees, and investigative fees. Notably, each sale of merchandise as an “excessive price” is considered a separate violation.

The key takeaway for medical supply chain attempting to navigate a cluttered and desperate PPE marketplace is to remember that no price-gouging law—including New Jersey’s law—prohibits good faith price increases driven by acquisition costs. So, existing manufacturers, wholesalers, and retailers should rest easy so long as their markups remain static. The key to avoiding regulatory scrutiny, of course, will be copious recordkeeping of all sourcing and acquisition costs to justify price increases. And for operators new in this space—after all, how often does one see surgical gloves and masks for sale in liquor stores, gas stations, and other non-traditional locales—be mindful that while there are no “price controls” on these products, your markups will be scrutinized and it will be critical that you document costs.

With over thousands of complaints being submitted across the state, particularly in New York metropolitan area as the epicenter of this pandemic, our attorneys have been fielding calls from not only our supply chain clients, but many others who find themselves thrust into an unexpected world of complexity. If you are a wholesaler or retailer of medical supplies and you receive an inquiry from DCA regarding your pricing of PPE or if you want to be proactive in addressing concerns regarding your pricing of PPE, we are here to help.

Please feel free to call us at 609-799-5150 or mail us at info@buttacilaw.com any time with your questions or concerns.

Stay safe, stay healthy, and we will get through this together.

Posted in: Compliance, Healthcare Transactions, Risk Management