May 27, 2020

Still No Clarity On Price-Gouging Rules

New Jersey Law Journal

On April 1, I wrote that the unprecedented scope and duration of the COVID-19 emergency will raise novel issues under New Jersey’s emergency pricing law, and that New Jersey businesses need clear guidance from the Attorney General’s Office about how the law would work during this pandemic. No guidance has emerged.

The general state of emergency that Governor Murphy declared on March 9, which triggered the price-freeze law, already has lasted far longer than the Hurricane Sandy state of emergency, and likely will remain in effect for at least several more months. By law, prices will remain controlled until 30 days after the governor terminates the emergency.

All “essential” businesses that have remained open during the emergency, up and down the supply chain, have had to protect their workers and customers while providing New Jersey residents with critical goods and less-critical comforts. They have faced unprecedented challenges in doing so, adapting to regulations adopted on the fly and communicated by Executive Orders, along with constantly changing health guidance.

In pricing their goods, essential businesses also have had to navigate compliance with New Jersey’s and other states’ differently worded emergency pricing laws, none of which were designed with a long-term, health-related national “lockdown” in mind.

New Jersey, as one of the few states that allows consumers to bring private class actions to enforce its emergency price-freeze law, has a special responsibility to provide regulatory guidance about how this law applies in the pandemic.

Unfortunately, as we enter the fourth month of the emergency, the only pricing-related information coming from the Attorney General’s Office has been news releases discussing the total number of enforcement steps taken by the office and a few examples of the targets.

In fairness, outside of the Attorney General’s Division of Consumer Affairs (DCA) and the Division of Law attorneys who support DCA, it is likely that few in state government are thinking about how the price-freeze law is affecting essential businesses in and outside of New Jersey. They are focused, rightly, on protecting our health and restoring more sectors of the economy to normalcy.

The problem is that private class action lawsuits have begun with a vengeance, getting out ahead of the Attorney General’s own enforcement priorities.

It should not be left to judges to look backward, without regulatory guidance, and reach their own conclusions about how businesses should have priced goods during the emergency. It would be far better for DCA to publish at least general, forward-looking guidance on a few key matters.

First, New Jersey’s emergency price-freeze law, N.J.S.A. 56:8-109, by its terms applies only to “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.”

Perhaps in a short-term emergency, it makes sense to construe those words very broadly. But now, with the emergency three months old and counting, what should still count as merchandise tied “direct[ly]” to the emergency? Personal protective equipment (PPE) and sanitizing products certainly qualify, but it is hard to see what else does.

Unless we are prepared to set up World War II-style price control boards, with special courts to hear disputes, DCA should define narrowly what prices the state has a true “emergent” need to control indefinitely. Guidance on this subject for the remainder of the crisis, especially to the food and consumer staple industries, is essential.

Second, for any goods covered by the law, sellers cannot raise prices “by more than 10 percent” above what the seller charged “immediately prior to the state of emergency.” In a short-term emergency, this prevents retailers from marking up emergency goods already on the shelves in patrons’ time of need. No state, however, has used “emergency” statutes to keep prices frozen for as long as this pandemic will last, and it is not clear that New Jersey or any state can lawfully impose such long-term restraints on commerce, particularly with out-of-state suppliers.

This is especially true if DCA does not define a narrow set of true emergency-related goods, like PPEs, and provide a sufficient justification as to why price controls for those goods need to remain in place for the duration of the crisis.

Third, there seems to be confusion about whether New Jersey’s price-freeze law applies only to consumer-facing retailers or also to suppliers and manufacturers further up the chain of distribution. Importantly, the Attorney General’s news releases have highlighted only enforcement actions against direct sellers, both online and in stores.

New Jersey’s law applies ambiguously to “any person” who may “sell or offer to sell” covered merchandise. Pennsylvania’s emergency price-freeze law, by contrast, explicitly applies to “[a]ll parties involved in the sale and resale of consumer goods and services, including any manufacturer, supplier, wholesaler, distributor or retail seller.”

Complicating matters further, New Jersey’s law allows sellers to pass on to purchasers “additional costs imposed by the seller’s supplier.” This suggests that the term “seller” does not include suppliers.

DCA likely believes its enforcement powers are broad enough to sue manufacturers and suppliers for gouging, especially if they are based in New Jersey. The justification for allowing private plaintiffs to sue manufacturers and supplies in class actions is much less clear.

Unless New Jersey intends to become the epicenter for post-COVID-19 consumer class actions, the Attorney General should make clear that private plaintiffs cannot sue to enforce the pricing law against parties with whom they are not in privity, just as indirect purchasers already cannot sue in New Jersey on an “unjust enrichment” theory. Our Supreme Court has not opined on whether a private Consumer Fraud Act plaintiff can establish an “ascertainable loss” against a party with whom that plaintiff did not transact.

Fourth, speaking of “additional costs,” New Jersey businesses have had no official guidance to help them determine what counts as a “cost of providing the good or service during the state of emergency,” which businesses can pass on without violating the law.

Some line items, like increased transportation costs, may be relatively easy to measure. Calculating increased labor costs, however, is more complicated, especially for companies with multiple business lines.

It seems likely that DCA itself would refrain from enforcement actions against businesses that treated their workers fairly and passed on added labor costs as a result. Here, too, the problem is the uncertainty of private-plaintiff class actions and how judges, without the benefit of regulatory guidance, will look at “additional costs” in hindsight.

A similar problem arises with the law’s restriction on markups that sellers are allowed to impose when their costs increase. N.J.S.A. 56:8-108 prohibits increases “of more than 10 percent in the amount of markup from cost, compared to the markup customarily applied by the seller in the usual course of business immediately prior to the state of emergency.”

Take the case of a seller that, pre-emergency, bought an item from its supplier for $1.00, and sold it for $2.00. Post-emergency, the seller’s supplier raised the price to $2.00.

Can the retailer that bought the item for $2.00 mark it for sale to consumers only at $3.10, representing a profit of 10% more than the pre-emergency $1.00 markup? Or could the seller mark the item at $4.20, thinking that because it earned a 100% profit pre-emergency, it can earn a 110% profit post-emergency?

When DCA set out to enforce the price-freeze laws in the past, mostly after storms, this problem did not arise. If a seller had a covered item on its shelf for $2.00 the day before the emergency, it could not sell that item for more than $2.20 during the emergency. By the time the seller obtained a new supply, the emergency might be over. No New Jersey case has construed what this part of the law actually means in the context of multiple rounds of resupply, with demand ebbing and flowing for reasons other than the reason why the emergency was declared.

Fifth, what about long-term supply contracts tied to market prices? Pennsylvania’s law explicitly allows resellers to pass along “costs that are a result of a contract where consumer goods or services are prices on a formula that references published market prices.” Would New Jersey, which has no such explicit exemption, allow a reseller to enforce its long-term contracts pegged to market indices, even if that would result in price increases of more than 10%?

If DCA were to issue prospective guidance applying the price-freeze law to a narrow set of goods, such as PPEs, most of these questions would become happily moot.

Issuing forward-looking guidance would not require DCA to let people off the hook who gouged consumers in the early days of the emergency as to goods that faced skewed demand, like toilet paper and hand sanitizer. What was emergency-related in March, however, may be much less emergent in June, July, and beyond.

We have passed the “drinking from a fire hose” stage of preserving life to a longer-term process of managing supply chains in an age of social distancing. Particularly as more sectors of the economy open, guidance on how to comply with the pricing law is essential.

Governor Murphy, as part of his pathway to reopening the state, could address much of the law’s uncertainty with an Executive Order limiting application of the price-freeze law to PPEs and any other specific items he considers emergency-related. The governor also could use his emergency powers to direct DCA quickly to develop rules guiding the affected industries.

True gouging, like jacking up the price of N95 masks to hospitals, is indefensible. Most businesses, however, are trying their best to comply with a patchwork of state laws at a time when their own survival (fiscal and physical) is on the line.

Some clear rules on how to do this, in an emergency likely to persist for months to come, should not be too much to ask.

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Reprinted with permission from the May 27, 2020 edition of the New Jersey Law Journal© 2020 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.

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