Amended Law Increases Civil Penalties for Greed During Crisis

June 9, 2020 | Michael Vanunu | Commercial Litigation

As New York gradually reopens, our “new normal” has created increased demand for personal protective equipment (PPE) and cleaning supplies. In my previous bulletin, I addressed the potential criminal consequences that federal prosecutors could impose as a result of price-gouging or hoarding of scarce and essential materials, including PPE and certain cleaning supplies, due to the current pandemic. This bulletin addresses a recently amended statute that now provides potentially astronomical fines to those that sell PPE or other essential goods or services at an “unconscionable” price.

In addition to criminal penalties brought by the United States Attorneys’ Offices, the New York State Legislature amended the General Business Law to authorize the New York Attorney General’s office to impose drastic civil fines against individuals or entities who attempt to significantly profit from selling essential goods and services during the current pandemic. On Saturday, June 6, 2020, Governor Andrew Cuomo signed a law that amended Section 396-r of the General Business Law, entitled “Price gouging”. The original price-gouging law was enacted to punish businesses from substantially increasing the cost to consumers for essential household items during an “abnormal disruption of the market” due to, among other reasons, a national or local emergency or “other cause . . . which results in the declaration of a state of emergency by the governor.”

Business owners should be aware of the amendments to the price-gouging law as the changes significantly broaden the type of items protected and the civil penalties for price-gouging. New York Attorney General Letitia James publicly stated that price-gouging will not be tolerated and has made price-gouging cases a priority.

As an initial matter, the law protects a larger class of people. Previously, the law only protected “consumers,” i.e. individuals in a personal, family or household setting. Effective immediately, this law protects the “public at large.” This change provides the Attorney General with the ability to seek penalties against companies who sell specific items to hospitals, localities or other businesses.

The amendments also broaden the classification of “essential goods or services” that cannot be sold or attempted to be sold at an “unconscionably excessive price.” Previously, the law applied only to “essential consumer goods and services” used, bought or rendered primarily for personal, family or household purposes. Now, the price-gouging law includes, in addition to consumer goods or services: (i) “essential medical supplies and services used for the care, cure, mitigation, treatment or prevention of any illness or disease”; and (ii) “any other essential goods and services used to promote the health or welfare of the public”. For example, during this pandemic, the price-gouging law could have been construed to apply to PPE and certain cleaning supplies sold to consumers for home use. The Attorney General will now enforce price-gouging of those same items when sold to consumers, hospitals, localities or other businesses.

The most impactful change to the price-gouging law is the potential for astronomical civil fines to individuals or businesses that violate this law. The Attorney General has the power to enforce this statute by seeking a court order to stop a business from selling essential goods or services and  issue a fine. Effective immediately, the maximum fine is now the greater of: (i)$25,000 per violation; or (ii) three times the gross receipts for the relevant goods or services. Previously, the maximum fine was $25,000.

It is significant that “per violation” is not clearly defined, and that each unit of a product sold or attempted to be sold in violation of the price-gouging law could be construed as “per violation.” Under that position, selling or attempting to sell low-cost items at an “unconscionable” mark-up would likely result in millions of dollars in fines. It is this writer’s belief that the Attorney General will take the position that each unit sold or marketed for sale is a violation of the price-gouging law because the Attorney General has already stated her intention and taken steps to curb price-gouging.

It is also of note that this statute, unlike the potential criminal penalties previously discussed, applies only to individuals or businesses that sell or attempt to sell the essential goods or services. While this statute does not penalize those who hoard essential goods like PPE, the purchase of an excessive amount of essential goods may be construed to be for the purpose of selling those goods.

If you have received correspondence from the New York State Attorney General relating to a product that you sell or service you provide, contact an attorney immediately, as there are certain protections built into the price-gouging law. If you have been selling or are looking to sell PPE, certain limited-quantity cleaning supplies, or other items that are in short supply due to the COVID-19 pandemic, you should contact an attorney to help you take precautionary measures to make sure that you do not violate New York’s price-gouging statute, as amended.

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