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, Inc.: 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 excessive.

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 succeed. 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.

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