DOJ is Taking Aggressive Steps to Enforce the DPA
There is currently no case law construing the provisions of the DPA discussed above (e.g., what constitutes “in excess of reasonable demands” or “in excess of prevailing market prices”). However, this is about to change with the current landscape of the COVID-19 pandemic, and specifically, the government’s response to the “bad actors who treat the crisis as an opportunity to get rich quick.” On March 24, 2020, Attorney General Barr issued a memorandum describing President Trump’s Executive Order invoking the DPA, and also announced “the immediate creation of a task force to address COVID-19-related market manipulation, hoarding, and price gouging.” According to the memorandum, the task force will be led by the U.S. Attorney in the District of New Jersey, and each U.S. Attorney’s Office was “directed to designate an experienced attorney to serve as a member of the task force.”
Indeed, at least two criminal complaints have been filed to date. See, e.g., U.S. v. Singh, No. 20-MJ-326 (E.D.N.Y. Apr. 24, 2020) (charging defendant with “knowingly and intentionally” accumulating numerous scarce materials, including masks, respirators and thermometers, for the purpose of resale in violation of 50 U.S.C. § 4512); U.S. v. Bulloch, No. 1:20-mj-00327-CLP (E.D.N.Y, Apr. 27, 2020) (charging defendants with conspiring “to accumulate, for the purpose of resale at prices in excess of prevailing market prices” various scarce materials in violation of 50 U.S.C. § 4512 such as KN95 Masks). It is likely that more criminal charges will be forthcoming in the near future.
Similarly, DOJ is using search warrants to seize these scarce materials. For example, in early April 2020, the Department of Justice (DOJ) filed applications for a search warrant with the Southern and Eastern Districts of New York to search the car of a retail pharmacy owner for N95 facemasks (both surgical-grade masks and commercial masks).1 The DOJ alleges that an undercover agent discovered evidence that the owner of a retail pharmacy was selling these masks to New York residents at up to 15 times their ordinary price. Based on the allegations contained in the search warrant application, it appears that the pharmacy owner was attempting to sell personal protective equipment (PPE) in bulk and that he kept boxes of PPE in his car.
Thus, engaging in the sale of these scarce materials can subject businesses to criminal liability and search warrants. Businesses could also be subject to time-consuming demands, such as DOJ subpoenas seeking company records to explore price gouging.
In “Excess” of “Prevailing Market Rates”
While the statute appears straightforward, there will likely be various issues in cases arising under the DPA. For instance, while the purpose of the statute and Executive Order 13910 is to prevent hoarding, the statute requires—under one prong—that the hoarding be for “the purpose of resale at prices in excess of prevailing market prices[.]” But what is the standard for setting the “market price”?
If, under the DPA, it is the government who sets the market price, then the current prevailing market price would be rather high, as the federal government reportedly recently submitted a bid with “unproven vendors” for more than $110 million in masks at approximately $6 per mask. If it is not the government who sets the market price, then a vital issue in determining liability will be how the courts arrive at the “prevailing market prices” of scarce materials. This issue is very important, as any person who is found to have violated the DPA is subject to criminal liability. And although the penalty—imprisonment for up to a year—is a misdemeanor, the Government may invoke other federal statutes that could result in felony convictions. (See 50 U.S.C. § 4513.)
Notably, various states have provided guidance on what they consider to be “excessive” in violation of state consumer protection statutes. However, states’ legislation on this issue varies significantly—from 10%, 20%, or “gross disparity”—which only makes things more complex for business operators conducting business across numerous states.2 These standards are also changing with the times.3 Thus, the question remains: where is the line to be drawn with “excessive”? To the extent sellers and retailers can demonstrate increased costs (e.g., shipping), those records will serve to demonstrate that the price charged was not “excessive.”
In Excess of “Reasonable Demands” of “Business, Personal or Home Consumption”
Another troubling issue is what would be considered in excess of “reasonable demands” for “business, personal or home consumption.” It appears that the nature of the targeted business will be a crucial factor here. For instance, in the Singh case, the government took great lengths in its complaint to describe Singh’s business pre-COVID-19 as a traditional retail store (e.g., selling sneakers and clothes), noting that Singh only started selling medical materials in mid-March 2020 (i.e., after the COVID-19 outbreak).
Thus, if you are a business who was not engaged in the sale of medical supplies (e.g., masks, respirators, thermometers) prior to the outbreak of COVID-19, it is important to consider the potential implications of selling medical supplies during the current pandemic. While it is certainly not illegal to divert your business interests toward a particular market during this time, businesses should be careful not to sell these “scarce” materials at an above-market price that could be perceived to be in “excess” of “prevailing market rates.” Understanding the market is key and, as noted above, the government has submitted numerous bids for masks to “unproven vendors”—possibly “new” vendors in this market—at what is reportedly well above average prices and thus, are arguably setting the market.
Additionally, businesses should be wary of associations during these hectic times. For example, a Texas-based company engaged in auctioning off items to the public has been sued by the Texas Attorney General for price gouging, allegedly because the company took advantage of the COVID-19 pandemic by “offering for sale, and/or selling, necessities such as face masks, hand sanitizer, and cleaning supplies at exorbitant or excessive prices[.]” This company was providing a forum for others to sell the scarce materials and may now be at risk of being sued by buyers and consignors, as the auction house has reportedly not been allowed to collect any money for sales of masks. Businesses should thus take note of the potentials risks of civil liability arising from indirectly participating in the sale of scarce materials and should carefully monitor market prices and the changing federal and state legal requirements.
Based on the foregoing, businesses can expect increased scrutiny at both the federal and state level regarding the sale of “scarce” materials under Executive Order 13910. Businesses should continue to monitor the federal government’s response to the COVID-19 crisis and should be careful not to stray too far from federal objectives regarding price gouging under the DPA. Finally, businesses are encouraged to keep detailed records of all costs associated with acquiring these scarce materials to justify prices charged.
For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.
Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.
 See In re: Application of the United States of America for a Search and Seizure Warrant for a Silver Audi Car, No. 1:20-mj-00307-CLP (E.D.N.Y. Apr. 10, 2020).
 For example, a price increase in excess of 10% above “the price at which the good or service was sold ... by the seller in the usual course of business immediately prior to the state of emergency,” is presumed to be an “[e]xcessive price increase” under the New Jersey price gouging statute. See N.J. Stat. Ann. § 56:8-108 (2002). However, the Pennsylvania Price Gouging Act provides that a price which “exceeds an amount equal to or in excess of 20% of the average price” shall be considered prima facie evidence of an unconscionably excessive price. See 73 Pa. Cons. Stat. § 232.4(b) (2007). Florida’s price gouging statute merely provides that a price is prima facie unconscionable if “[t]he amount charged represents a gross disparity between the price of the commodity ... and the average price at which that commodity ... was rented, leased, sold, or offered for rent or sale in the usual course of business during the 30 days immediately prior to a declaration of a state of emergency[.]” See Fla. Stat. § 501.160(b)(1) (2011).
 While New York law does not provide a specific formula for determining price gouging, and only prohibits the sale of goods at an “unconscionably excessive price”, a recently proposed bill in New York seeks to provide clarity on this point, stating that a price is not “unconscionably excessive” if it is “ten percent or less above the price charged by that seller for such consumer medical supplies immediately prior to the public health emergency.” See S.B. S08189.