• Price Gouging - What is a Fair Price?
  • December 28, 2012 | Author: William McDonald
  • Law Firm: Ruskin Moscou Faltischek, P.C. - Uniondale Office
  • On November 29, 2012, Attorney General Eric Schneiderman announced that his office filed twenty-five enforcement actions against gas station owners for illegal price gouging. This effort highlights that authorities remain watchful for price gouging in Hurricane Sandy’s wake. New York business owners should know New York’s price gouging law to help prevent meritless accusations, and they should also know how to preserve claims for restitution against other merchants who illegally engage in price gouging.

    New York’s price gouging law prohibits parties from charging "unconscionably excessive" prices for goods or services during an "abnormal market disruption." While "abnormal market disruptions" are defined within the statute, whether someone is charging "unconscionably excessive" prices is a question of law for the court.

    New York’s price gouging statute is déjà vu all over again. The legislature passed it following the gas crises of the 1970s. The law is codified in General Business Law ("GBL") § 396-r. The law prohibits price gouging and subjects offenders to civil penalties, but it stops short of making gouging a crime. The Attorney General is empowered to bring civil enforcement actions in Supreme Court against violators. Enforcement actions may seek injunctive relief to prohibit further gouging activity, and they may obtain restitution for gouging victims. Violators also face a civil penalty of up to $25,000.

    In the legislative findings contained within the statute, the legislature defines, "price gouging" as activity that occurs during periods of "abnormal disruption of the market." In GBL § 396-r(2), "abnormal disruption of the market," is defined as:

    Any change in the market, whether actual or imminently threatened, resulting from stress of weather, convulsion of nature, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, or other cause of an abnormal disruption in the market which results in the declaration of a state of emergency by the governor.

    The price gouging prohibitions apply to all parties within the chain of distribution, including manufacturers, suppliers, wholesalers, or distributors. The prohibitions even extend to repairs made to consumer goods by a party within the chain of distribution as a result of such abnormal disruption of the market.

    Pursuant to GBL §396-r(3)(a), when the Attorney General brings an action alleging price gouging, the court must issue findings determining whether:

    • The amount of the excess in price is unconscionably extreme; or

    • There was an exercise of unfair leverage or unconscionable means; or

    • A combination of both of these factors.

    Prima facie proof of gouging violation shall include evidence that:

    • The amount charged represents a gross disparity when compared with the price of goods or services immediately prior to the abnormal market disruption; or

    • The amount charged grossly exceeded the price at which the same or similar goods or services were readily obtainable by other consumers within the trade area.

    The statute allows a merchant to rebut a prima facie case with evidence that additional costs outside of its control were imposed on the defendant for the goods or services. However, a merchant pursuing such a defense bears the burden of proof.

    New York’s price gouging statute was challenged in a case decided by the New York State Court of Appeals in People by Abrams v. Two Wheel Corp., 71 N.Y.2d 693(1988). In this case, the Attorney General sued a generator distributor for price gouging following Hurricane Gloria, which left Long Island without power from September 27 through October 8, 1985. The facts showed that the defendant sold about 100 generators during September 26 through October 5, 1985 for prices ranging from 4% to 67% over the distributor’s base prices before the hurricane.

    In its analysis, the court held that gouging occurs when a merchant enjoys a temporary imbalance in bargaining power by virtue of an abnormal level of demand. Id. at 697. This bargaining imbalance grants a merchant certain leverage to extract a higher price. The court said that when gross price disparity exists, coupled with proof that the disparity is not attributable to supplier costs, it raises a presumption that the merchant used the leverage from the market disruption to extract a higher price. The use of this leverage constitutes price gouging. Id. at 698.

    The defendant, Two Wheel Corp., offered a contract law analysis in its defense. It argued, that, as a whole, the Attorney General could not demonstrate unconscionable contract terms for each disputed sale. Chief Judge Wachtler rejected this defense and said the contract terms were not dispositive. Instead, he said the contract formation was paramount, and he applied common law unconscionability analysis to the issue. Thus, regardless of what the contract terms were, if the negotiation featured a grossly uneven bargaining table, it could form a prima facie gouging case. To sum up the court’s inquiry, Judge Wachtler asked, "was the excess [price] obtained through unconscionable means?" Id. at 699.

    The lesson from Two Wheel Corp. tells merchants to analyze the shape of the bargaining table. If the prima facie elements are present to establish a violation of the price gouging statute, even a 1% increase in the price charged could result in liability. According to Two Wheel Corp., the liability stems from the unfair advantage that the merchant enjoys, not from the amount by which it increases price. Therefore, to avoid price gouging liability, a business must demonstrate that any increase in prices of a subject good or service during an abnormal market disruption is due to increased costs. Failure to do so will result in liability and subject a business to civil penalties and a potential restitution order.

    Restitution for price gouging offenses was addressed in another post-hurricane court case. In People ex. rel. Spitzer v. Weaver Petroleum, 419 Misc.3d 491(Sup.Ct. Albany 2006), the court addressed allegations of price gouging by an ExxonMobil station following Hurricane Katrina. The Weaver case is important for two reasons: 1) it held that Katrina created a national petroleum market disruption, and therefore a declaration of a state of emergency by New York’s governor was not necessary to prove that a party violated New York’s price gouging statute; and 2) because the complaint did not identify consumers harmed by the ExxonMobil station’s price gouging, it could not order restitution. Id. at 494.

    The Weaver court noted that generally, consumers seeking restitution for price gouging injury submit affidavits in support of the Attorney General’s petition, or they are specifically identified in the petition as consumers who have suffered harm. Neither of these conventions were followed in the Weaver case. Therefore, businesses or consumers seeking restitution for harms suffered by price gouging must be vigilant and ensure that they are somehow identified in the petition that the Attorney General ultimately files in court to punish those who violate the price gouging statute.

    Those with price gouging concerns, whether to defend against accusation or to obtain restitution, should contact competent counsel quickly to preserve defenses or remedies available under the price gouging statute.