When the COVID-19 pandemic began, and consumers swarmed the stores for disinfectant sprays, masks, and household items, state price-gouging laws grew increasingly relevant as sellers sought to cash in on the heightened demand.
In May 2020, New York Attorney General Letitia James took action against Quality King Distributors, Inc., a wholesaler that, according to James, illegally increased its prices to sell Lysol disinfectant products to neighborhood grocery and discount stores in New York. A New York state court tossed the case a few months later, finding that Quality King did not “uniformly raise their prices on Lysol products to these customers.” This week, a New York appellate court disagreed.
No federal law explicitly prohibits such conduct, so price-gouging cases are typically brought under state laws. Section 396-r of the New York General Business Law prohibits sellers of goods and services that are “vital and necessary for the health, safety and welfare of consumers or the general public” from selling such goods or services “for an amount which represents an unconscionably excessive price.” This prohibition applies to any party “within the chain of distribution of such goods or services,” and applies specifically “[d]uring any abnormal disruption of the market.”
Section 396-r further lays out what constitutes prima facie proof that a violation occurred: evidence of a “gross disparity between the price of the goods or services” currently at issue and “the price at which such goods or services were sold…by the defendant in the usual course of business immediately prior to the onset of the abnormal disruption of the market.”
In her May 2020 complaint, James alleged that Quality King increased the price of Lysol Disinfectant Spray from about $4.25 per 19-ounce can to as much as $9.15 per can during the period between January and April of 2020. The price hikes allegedly occurred despite Quality King incurring no increased costs for the product. According to the complaint, consumers ultimately bore the expense, paying as much as $16.99 for one can of Lysol that had previously cost $5 to $8 at retail.
The trial court did not believe James met her steep burden of showing the price was “unconscionably excessive.” In September 2020, the court acknowledged that “there may have been isolated instances of price increases,” but nonetheless held that Quality King's pricing as a whole showed no “use of unfair leverage” or “abuse of bargaining power or unconscionable means.”
This week, a four-judge panel in New York's First Judicial Department of the Appellate Division ruled that James did in fact make a prima facie case that Quality King engaged in price gouging activities, by establishing the claim's three elements.
First, the New York appellate court concluded that James showed that the Lysol product experienced an “abnormal disruption of the market” due to the “public health crisis stemming from a unique virus,” that strained the market when there was a sudden skyrocketing demand for disinfectants.
Moreover, although there was a chain of events that occurred since the World Health Organization's January 30, 2020 designation of COVID-19 as a “Public Health Emergency of International Concern,” the appellate court determined that for the purposes of the specific litigation, the “abnormal disruption of the market” occurred on February 26, 2020, when the Centers for Disease Control and Prevention (CDC) warned that COVID-19 posed a threat as a national emergency, which is an enumerated cause that allows for the application of Section 396-r.
Second, the appellate court concluded that under Section 396-r, James established the Lysol product was “vital and necessary for the health, safety and welfare of consumers.” The appellate court concluded that from the consumers' point of view during the early days of the pandemic, “disinfectants, in general, and Lysol products, specifically, were a necessity, not a convenience.”
Third, when looking at James's evidence, the appellate court found that she “demonstrated, prima facie, that Quality King sold the Lysol product at unconscionably excessive prices on at least several occasions.” James's evidence demonstrated that “the amount charged during the period of market disruption represents a gross disparity” when the Lysol product's “pre- and post-onset prices” were compared. Specifically, James submitted evidence showing that several purchasers saw an increase in prices of between 34% to 94% per case.
Finally, the New York appellate court reversed the order that effectively dismissed the case in 2020, after determining that further proceedings are warranted by the lower court and that James did not need to show a “uniform price-gouging practice,” but rather that there was “any instance of price gouging.” The appellate court considered and completely rejected Quality King's void-for-vagueness argument because Section 396-r is “not unconstitutionally vague under the federal Constitution” and because Quality King's failure to cite precedent suggesting that Section 396-r could be unconstitutionally vague under the New York state constitution.
This case serves as a reminder that price gouging laws may continue to apply, and sellers and marketers of products should stay vigilant. Even though these days, the general public appears to have moved beyond the expectation that COVID-19 remains a national emergency, courts that interpret price gouging laws like those of New York in the age of COVID-19 may give new life to past claims.
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