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ANALYSIS: Feds Seize PPE Using Unlitigated Hoarding Statute

April 22, 2020, 4:02 PM

Federal law lacks an explicit statute against price gouging, which is the subject of a patchwork of state laws. However, the Department of Justice has developed a task force against hoarding and price gouging, and has begun seizing medical supplies and investigating cases.

Based on communications from the Department of Justice, the task force is using a federal hoarding law that enforcement agencies may use as a back door to punish price gouging. That statute, however, is virtually unlitigated, meaning there is little for legal counsel to tell businesses that legitimately need to source scarce materials about what is permissible behavior.

That leaves businesses in an unprecedented position of having to make basic business decisions under threat of prosecution or seizure of desperately needed equipment.

Hoarding Law Triggered

The Defense Production Act (DPA) includes an anti-hoarding provision. That section forbids anyone to accumulate materials designated as scarce "(1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices.”

In March, the Department of Health and Human Services designated a list of 15 categories of products as “scarce,” triggering the DPA’s hoarding and price-gouging prohibitions regarding those products. Attached to the law, at 50 U.S.C. § 4513, is a criminal penalty provision providing for up to one year of imprisonment and/or $10,000 fine for willfully violating the Act. Furthermore, implementing regulations for the DPA make it illegal for a person to deliver an item if the person “knows or has reason to believe that the item will be accepted, redelivered, held, or used in violation of the Defense Production Act.”

Those designations subject anyone accumulating the listed materials to potential scrutiny under the DPA. For example, what if a hospital or state believes personal protective equipment (PPE) is needed beyond what the Trump Administration agrees is necessary? What is the prevailing market price for materials going by auction to the highest bidder? What due diligence should a supplier or distributors do before filling orders for PPE?

Unfortunately, because the DPA has never been used in these circumstances and the hoarding provision has never meaningfully been litigated, we don’t know for sure what its limits are, or even if it would stand up in court as a criminal offense.

Frequently Used Act, Unused Provision

The federal government frequently invokes the DPA’s Title I priority and allocation provisions, which allow specific federal agencies to step in front of private parties to get contracts fulfilled. The Defense Department uses the DPA’s priority allocation provisions to move to the head of the line in placing orders about 300,000 times per year, according to the latest report of the Defense Production Act Committee to Congress. The Federal Emergency Management Agency (FEMA) invokes the Act frequently during disaster relief, placing at least 1,300 prioritized orders during 2018.

The DPA also includes Title III powers that expand domestic production and supply for national defense purposes, which is periodically invoked. For example, the Trump Administration used the DPA in July 2019 to expand supply of rare earth minerals for military applications.

But while the DPA extends to public health emergencies, it had never been used for a public health emergency before the Covid-19 crisis, according to the Congressional Research Service. So we are in uncharted waters in using the Act to broadly reshuffle health care markets, as the federal government appears to be doing with designated scarce materials.

And the hoarding and pricing provisions of the DPA, found in Title I at 50 U.S.C. § 4512, are not frequently used. A search for cases invoking the statute turns up nothing substantively invoking § 4512 since the DPA’s enactment in 1950. So there is no court guidance interpreting the provision’s language or providing context on what constitutes a “willful” violation of the provision.

Considering that there is no explicit federal price gouging law, this provision seems to at least forbid buying up scarce materials for price-gouging purposes. But no court has made that call.

Enforcement Ongoing

The statute and case law provide little guidance, but Attorney General William Barr has made a few remarks about what conduct he intends to target with the DOJ’s hoarding and price gouging task force.

At a press conference on March 23, Barr said the task force isn’t interested in “consumers or businesses stockpiling supplies for their own operations.” Barr said his prosecutors are concerned instead about “people hoarding these goods and materials on an industrial scale for the purpose of manipulating the market and ultimately deriving windfall profits.”

So far, enforcement actions that the DOJ has publicized fit that mold. On April 2, the HHS announced distribution of medical supplies that the HHS and DOJ alleged were hoarded for the purpose of price gouging. The amounts were sizable: 192,000 N95 respirator masks, 130,000 surgical masks, and 598,000 medical-grade gloves were among the items seized. The HHS said it would pay “fair market value” for the haul.

“This is the first of many such investigations that are underway,” the administration’s DPA Policy Coordinator, Peter Navarro, said in the announcement. He added that the FBI is “tracking down every tip and lead they get, and are devoting massive federal resources to this effort.”

“All individuals and companies hoarding any of these critical supplies, or selling them at well above market prices, are hereby warned they should turn them over to local authorities or the federal government now or risk prompt seizure by the federal government.”

Attorney General Wiliam Barr has also said, repeatedly, that the DOJ’s hoarding and price gouging task force has multiple ongoing investigations. Therefore, litigation is likely to eventually provide more guidance on what the law means. But for now, the sizable health care supply market is operating on very thin information in a unique situation.

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