Given the current and turbulent Covid-19 crisis, state attorneys general are increasing their efforts to protect consumers from unfair, unconscionable, harmful, fraudulent, or deceptive business practices that take advantage of them.
The states are focused on a multitude of topics to protect their constituents. The following areas are currently of paramount concern by many states:
- Price Gouging: Attorneys general are actively ensuring consumers are not being price gouged for products and services in high demand. They are focused on both retailers and companies in the supply chains, for both brick-and-mortar and online retailers. Attorneys general are also working with online platforms for third-party sellers to stop price gouging.
- False Advertising: Many states have sounded the alarm on product claims that either prevent or cure Covid-19 and/or related health claims. A company should expect scrutiny by attorneys general any time they claim the value of their products or services is related to the virus. Some states have also identified scammers, including falsely offering credit for Covid-19 testing kits, to induce consumers into providing their account information and mailing addresses.
- Refunds and Cancellations: Many attorneys general are seeking to protect consumers from a diminution or cancellation of on-going contracts for goods and services that are interrupted based on an inability to perform. This includes asking businesses and financial institutions to forbear collection efforts for 90 days to give consumers relief.
- Charities: Attorneys general are also issuing warnings to consumers of fake charities raising money for victims of the Covid-19 disease. They will also look closely at promotional sales alleged to benefit charities when retailers promise to donate a portion of each sale’s proceeds to a charity.
To address these broad concerns, state attorneys general have many legal weapons and resources at their disposal to protect consumers. It is clear from their recent press releases that right now they are laser focused on doing just that.
Businesses must understand this to protect themselves against government enforcement actions, covering not only these areas of concern, but others that will likely develop over the next few weeks, while the nation remains effectively locked down to combat the virus.
Many states have specific laws prohibiting price gouging, especially during emergencies. Some states expressly state certain percentage increases for various goods and services is tantamount to price gouging.
For example, California law states price increases on certain goods and services “of more than 10% greater than the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency” is unlawful.
The District of Columbia and Maryland have similar 10% thresholds, while Pennsylvania has a 20% threshold. Laws in other states, such as Idaho, Iowa, New York, and Rhode Island, are vaguer on price gouging, where their laws make it unlawful to engage in unconscionable or excessive price increases.
However, businesses engaging in sales and other business activities in states without price gouging laws should not pursue those activities with any level of comfort that they can ignore their pricing (both direct to consumers and in supply chains).
‘Unfairness Standards’ Are Vague
Indeed, states that do not have price gouging laws, can (and likely will) pursue claims against businesses under an unfairness standard for price gouging as well as any other unfair business activity. Most state unfair and deceptive trade practices (UDAP) laws prohibit any unfair business behavior.
This standard is not constrained by traditional deception, fraud, or misrepresentations to the public. This broad standard is designed to protect against other forms of business conduct that harms consumers unfairly when deception or fraud are not prevalent. Businesses, therefore, will be held liable for unlawful conduct even if they do not engage in any deception, fraud, or misrepresentations whatsoever.
Cases of unfairness are very fact intensive and turn on broad discretion by courts, including in some instances any broad business conduct that a court in equity could deem unfair.
Legislative history from the Federal Trade Commission’s standard for unfair competition magnifies the difficulty of defining what is unfair conduct, leaving businesses withering in a legal no-man’s land, wondering if their conduct could expose them to liability: “It is impossible to frame definitions which embrace all unfair practices. There is no limit to human inventiveness in this field. Even if all known practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the method of definition, it would undertake an endless task.”
Unfairness standards do not even require an intent to harm consumers in any way, and are not limited to anti-competitive activities either. Since the standard is very fact intensive, it is usually not ripe for summary judgment if litigation ensues after a regulatory enforcement matter.
In addition to the unfairness standard, unconscionability is another bullet in the legal chamber of most state attorneys general, and they won’t be shy to pull the trigger if a company finds itself in their crosshairs.
Some state UDAP laws expressly forbids unconscionable conduct. The unconscionable standard is also liberally construed by regulators and the courts to protect consumers, and will similarly turn on the facts of each case.
This could include prices that grossly exceed pricing of similar services available to consumers; if consumers do not receive a substantial benefit from the transaction; there is no reasonable probability that the consumer could pay; or transactions that are so one-sided they benefit the retailer or supplier at the expense of the consumer.
Since state attorneys general have broad statutory authority and powers to commence regulatory enforcement actions to protect consumers, retailers and suppliers should engage their outside counsel early and often during the current Covid-19 crisis to avoid exposing their organizations to liability that could have been either avoided or even mitigated as they continue to operate.
While these legal standards are not new, the factual scenarios resulting from the current crisis certainly are, given the unprecedented closure of our economy as we combat the virus.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Yaghi is a partner in the Advertising and Media Group and the State Attorneys General Enforcement and Investigations practice at Crowell & Moring, residing in the firm’s Orange County, Calif., office. He represents high-profile clients in regulatory enforcement investigations.