New York Attorney General’s Loss Shows Limits of Price-Gouging Laws

In the wake of COVID-19, consumers everywhere have seen a stark decline in available resources such as disinfectant sprays, cleaning supplies, toilet paper, and hand sanitizer. These items, along with many others, have become hot commodities and seem to disappear from shelves just as soon as they are restocked. With the increased purchase of these products by consumers, retailers are forced to increase their purchase of these products from wholesalers. Wholesalers, are in turn, forced to increase prices on certain products as they face increased fees to keep them stocked for distribution.  A recent decision serves as a useful reminder that, oftentimes, retailers and wholesalers increase prices in response to increased costs, and that doing so does not amount to price gouging under New York State law.

New York State Anti-Price-Gouging Statute
New York is one of many states with laws against price gouging. The difference between New York and other states, however, is that the laws in most states focus only on specific rates of price increases, while New York also considers the concept of abusive bargaining power.

Under New York Consolidated Laws, General Business Law Section 396-R, “charging grossly excessive prices for essential goods and services” during “abnormal disruptions of the market” is prohibited. The statute further states that violations of this law are determined based on “(i) that the amount of the excess in price is unconscionably extreme; or (ii) that there was an exercise of unfair leverage or unconscionable means; or (iii) a combination of both factors.” GBS §396-R. This is a high standard to meet because, in the case of many wholesalers, the price markup can be tied to the company’s own costs increasing, which may defeat an unconscionability argument.

New York Attorney General’s Price-Gouging Allegations Against Quality King
At the outset of the pandemic, the Office of the New York Attorney General (the NYAG) announced that “price gouging will not be tolerated,” and that the NYAG would use its authorities to enforce laws against price gouging.  The NYAG publicized certain cease-and-desist letters that it served on retailers.  Then, on May 27, 2020, the NYAG announced litigation against Quality King Distributors Inc. (Quality King), a privately held distributor of more than 5,000 health and beauty products and grocery items with more than 900 employees in Bellport, New York.  The NYAG alleged that Quality King had increased the price of Lysol Disinfectant Spray from about $4.25 per 19-ounce can to up to $9.15 per can between January 2020 and April 2020.  The NYAG deemed the wholesaler’s conduct “profiteering” and called it “appalling” and “unconscionable.”

But Quality King quickly defeated the NYAG in court.  The court focused on a few key points: (i) that Quality King had not uniformly raised prices on all Lysol products, (ii) that Quality King’s prices were lower than competitors offering the same products, and (iii) that Quality King’s own expenses had increased.  The court also measured the change in pricing before and after the onset of the pandemic and concluded there was no gross disparity in pricing.  For those reasons, the court found inadequate evidence of price gouging.

The Quality King case illustrates the aggressive posture that the NYAG and other enforcers have taken during the pandemic, as well as the burden enforcers face in prosecuting price-gouging cases under New York law.  For retailers and wholesalers, the case is a reminder that increasing prices on scarce goods during a pandemic carries obvious risks—both reputational and legal.  Before implementing significant price increases, sellers should consider these risks. 

HSE attorneys can advise organizations on the New York’s price-gouging and consumer protection laws. If you would like our assistance, or if you have any questions about this LEGALcurrents, please contact any member of our Government and Internal Investigations practice group.

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