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State Attorney General Price Gouging Claims Find New Life – Antitrust, EU Competition

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Last month, we discussed the broad authority
that State Attorneys General have in enforcing price gouging laws
– many of which remain in effect given the number of states
that are still under some state of emergency. We noted the
significant expansion in recent AG enforcement, and observed that
at least two courts had pushed back on these efforts, dismissing
cases brought by the Texas and New York Attorneys General. Just a
short month later however, both cases have now been reinstated by
appellate courts, again raising the prospects that AGs will
continue to push the boundaries in price gouging enforcement,
especially while consumers are struggling to deal with high prices
due to labor shortages and inflation.

Texas v. Cal-Maine Foods,
.: In this case, Attorney General
Paxton sued one of the largest egg producers in the country for
raising prices in sales to grocery stores in the early days of the
Covid-19 pandemic. Cal-Maine moved to dismiss the case raising both
constitutional challenges to Texas’ price gouging law as well
as asserting that Texas had no legal or factual basis for the
claim. Cal-Maine’s primary argument was that the price gouging
law was unconstitutional for three reasons: 1) it is vague (Texas
law prohibits “excessive” or “exorbitant”
pricing without defining those terms), 2) it violates the Dormant
Commerce Clause (since Cal-Maine sells to national chains, they
would be unable to adjust their pricing to be state-specific), and
3) it is a regulatory taking (by forcing Cal-Maine to sell eggs
below the price they paid). Cal-Maine further asserted that because
it was merely pricing eggs using the same methods it always did
– through a price index – it could not have “taken
advantage of an emergency” as required for price gouging under
Texas law. The trial court agreed with Cal-Maine, and entered an
order dismissing the case, without providing a written opinion
explaining the basis. Texas then appealed.

On August 16 the First District Court of Appeals reversed and
remanded. The court’s focus was on the standard necessary to
dismiss an action under Texas Rule of Civil Procedure 91a, which
requires the petition have “no basis in law or fact.”
Noting there is nothing interpreting what “excessive” or
“exorbitant” means under Texas’ law, the court
seemingly adopted the parties’ general assertion that there
must be a comparison between the price charged during the emergency
and what is “usual, proper, necessary, or customary.” In
a motion to dismiss however, the Court did not need to decide the
appropriate time period to analyze Cal-Maine’s pricing
increase, finding that under any reading the State had made a claim
that should survive a 91a motion. In reviewing the three
constitutional affirmative defenses raised by Cal-Maine, the Court
found each to be premature, noting that while Cal-Maine may
ultimately have a colorable claim, the record on appeal of a motion
to dismiss was insufficient to make that determination.

New York v. Quality King Distributors,
Inc. and King
: Switching gears from
eggs to Lysol, Attorney General James also brought an early case in
response to Covid-19 under New York’s price gouging law. The
State sued Quality King, a wholesale distributor to grocery and
discount stores, over its higher prices of Lysol products,
increasing its profit margin 75% from November 2019 to March 2020.
On a motion to dismiss, the Court granted the motion finding that
as a matter of law, Quality King did not charge unconscionable or
extreme prices, as there wasn’t a large disparity between its
pricing right before and after the emergency declaration, and
because its pricing was in line with, and even less than, other
competitors. New York appealed.

Just as in Texas, the First Judicial Department in New York
reversed and remanded. To show a price gouging claim, New York
needed to show 1) an abnormal disruption of the market, 2) that the
good or service in question is vital to the health, safety, and
welfare of consumers, and 3) the price charged was unconscionably

Looking at a variety of Covid-19 emergency declarations, the
Court ultimately found that February 26, 2020 was the date of the
onset of the market disruption, as that was the date the CDC found
Covid-19 to pose an imminent threat. In finding the second
“vital good” prong met, the Court examined the products
at issue in the eyes of the consumer at the time of the
market disruption – it didn’t matter that scientific
hindsight questioned whether Covid-19 could be transmitted from
surfaces, since consumers believed they needed the products at that
time. For the third “unconscionably excessive” prong, the
Court compared prices charged on February 26 to those charged a
month later and found significant increases. Like the Cal-Maine
case, the Court made clear this wasn’t a definitive finding of
a violation of law, but rather showed that the State had met its
prima facie burden to proceed with its case. Unlike Cal-Maine
however, the Court squarely addressed constitutional vagueness
claims raised by Quality King. While noting that the statute
doesn’t provide any metrics for calculating what
“unconscionably excessive” pricing means, the Court
nonetheless found that the statute met the relaxed standard
provided to civil laws, and that it did not encourage arbitrary or
discriminatory enforcement.

While both appellate courts have breathed new life into these AG
enforcement actions, it remains to be seen whether either or both
companies will ultimately be held liable under those laws. In the
meantime there are some notable takeaways:

  • All levels in the supply chain may be on the hook under
    certain price gouging statutes
    . Both enforcement actions
    here concerned businesses that do not sell directly to the end
    consumer. This indirect relationship nonetheless provides grounds
    for certain AGs to enforce, and companies should take note that if
    they ultimately impact consumers prices, they may be on the hook
    for price gouging enforcement.

  • In an increasingly partisan space, price gouging
    remains completely bipartisan
    . The fact that two states
    like Texas and New York, who are at opposite ends of the political
    spectrum, could bring similar cases shows the importance that AGs
    will put on pricing issues in the face of emergencies.

  • Challenges to vagueness of price gouging laws may not
    New York’s survival of the constitutional
    challenge to the vagueness of its price gouging law is an important
    precedent as businesses and enforcers alike struggle with what
    constitutes price gouging in each state. As we discussed in our webinar, many states include similar
    descriptors of “excessive” or “exorbitant”
    without specific definition, leaving companies in the challenging
    position of determining what type of price increase, if any, is
    permissible during an emergency or market disruption. Seeking legal
    guidance on price changes during an emergency declaration is even
    more advisable given these terms were held, at least in one
    instance, not to be unconstitutionally vague.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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