The Complexity of Price-Gouging during COVID-19

Over the past month and a half, stories of “price-gouging” have dominated headlines, especially in my hometown?—?New York City. In fact, NYC-Mayor Bill De Blasio has urged New Yorkers to call 311 to report stores that have jacked up prices by 10% or more on basics.

In New York City, to date, this has sparked over 7,000 complaints resulting in nearly 3,000 “violations.”

However, this issue is much more complex than simply stating that “all price increases above 10% are the result of price-gouging.” And in reality, this statement is often inaccurate, or at least misleading.

What is price-gouging?

Price-gouging is an issue governed by state law, in which each state has its own standards.

In New York State, price-gouging is governed by General Business Law §396-r, which prohibits merchants from taking unfair advantage of consumers by selling goods or services that are “vital to the health, safety or welfare of consumers” for an “unconscionably excessive price” during abnormal disruption of the marketplace or state of emergency.

Essentially, this is a three-prong analysis, highlighted above in bold. However, New York has done two-thirds of the analysis for you:

On March 7, 2020, New York Governor Andrew Cuomo declared a state of emergency to contain the spread of COVID-19.

In addition, on March 16, 2020, NYC Department of Consumer and Worker Protection announced that “personal or household good or any service that is needed to prevent or limit the spread of or treat the new coronavirus (COVID-19)” are vital to the health, safety or welfare of consumers, including for example:

• Cleaning products
• Diagnostic products and services
• Disinfectants (wipes, liquids, sprays)
• Face masks
• Gloves
• Hand sanitizer
• Medicines
• Paper towels
• Rubbing alcohol
• Soap
• Tissues

What is an “unconscionably excessive” price?

Clearly, NYC is trying to set the standard that a 10% increase in the pre-pandemic price is “unconscionably excessive”. However, under NYS law, merchants may provide evidence that their higher prices were justified by increased costs beyond their control.

Although these are unprecedented times, when looking back at cases of price-gouging during past emergencies (usually hurricanes), merchants should keep a few things in mind:

1. Large price increases are generally prohibited unless increases are attributable to additional costs imposed by suppliers.
2. “Strong bargaining power” is not a reason to increase prices during an emergency.
3. Watch your profit margin?—?it should be similar to pre-emergency standards.
4. Keep records?—?receipts, purchase orders, communications, etc. that justify increased pricing.

But wait?—?well-known brands may too have an interest in fighting increased pricing.

On Friday, April 10, 3M Company accused a New Jersey-based company of trademark infringement and violating unfair competition laws for reselling 3M’s N95 masks at an unconscionably excessive mark-up.

As alleged in the complaint, Performance Supply LLC offered to sell New York City’s Procurement Office 7 million 3M brand N95 masks at over $6 per mask, where the 3M’s suggested list price is near $1 per mask.

To quote the complaint:

The mere association of 3M’s valuable brand with such shameless price-gouging harms the brand, not to mention its more serious threat to public health agencies that are under strain in the midst of a worldwide pandemic.

This creates an interesting ripple in the price-gouging analysis: 

Well-known brands?—?whose products are being sold, and re-sold at increased prices that may not technically constitute price-gouging?—?may be able to police and protect against price increases with threats of infringement, false advertising, and unfair competition.

Importantly, we don’t know how much Performance Supply purchased its 3M masks for (it could have been well over the suggested list price), and we don’t know its profit margin. However, does that really matter here? Probably not.

**To be clear?—?3M alleges that Performance Supply did more than just increase prices, 3M alleges that Performance Supply used 3M’s trademarks and slogan various times on Performance Supply’s quotes and spec sheets, which caused customers to mistakenly believe that the company was an “authorized distributor”.

But this still raises the question: does the practice of merely re-selling a well-known brand’s product, at a price that looks like price-gouging, raise trademark infringement concerns? Partner Michael Steinmetz says the lawsuit seems “a bit farfetched” and more like a PR-stunt, but still cautions non-authorized resellers.

For assistance concerning price-gouging or trademark infringement, please contact Jacob Pargament or call  212-380-3623.