Price gouging: Ex-AG explains what is being looked for — and how firms can protect selves

Price gouging. Businesses have so many questions during a state of emergency. How is it defined? How often is it prosecuted? And what do you need to do if you’re being investigated for it?

We went to Chris Porrino, a partner at Lowenstein Sandler and a former attorney general for New Jersey. Porrino was in charge of the Attorney General’s Office when it investigated many of the price gouging claims that came out of Superstorm Sandy.

“People think if you raise your prices after an emergency, you’ve price-gouged,” he said. “It’s not that simple.”

We asked Porrino to explain that — and a whole bunch of other questions. The interview is edited for content and clarity.

ROI-NJ: Let’s start with the definition. What does the state mean when it talks about price gouging?

Chris Porrino: In New Jersey, it has a specific meeting. It occurs if you raise your price 10% within a certain amount of time after a state of emergency, like the executive order that was just issued declaring a state of emergency. That’s price gouging. But even that isn’t simple. It doesn’t mean you can’t have a reasonable price increase, depending on other factors.

Has the commodity gone up in price in general? Has the supply become more expensive? Are there things that you have to do as a business owner that you didn’t have to do before that drives your costs up? All those kinds of things can take you out of jeopardy, but you have to know what the rules are before you embark on raising prices.

ROI: Is ignorance a good defense? How do you protect yourself?

CP: What I heard all the time when I was on the enforcement side — and now I’m hearing it a lot on the defense side in the calls we’re getting — is, ‘We didn’t realize.’ They’ll say, ‘We didn’t understand, or our salespeople didn’t understand.’

That’s not an excuse. You need to be proactive and make sure that your employees understand what the rules of the road are. And, if you have locations in other states, you have to know that the rules are different in other places. In New York, for instance, there’s not a stated percentage. So, a business owner has to make sure they are up to speed on the rules.

ROI: OK, let’s say I get accused of breaking those rules. What do I do if I get a notice saying I’m being investigated?

CP: You can’t change what has happened. You can’t unring the bell. And you can’t reverse time. But you will be judged in part on how you react to being made aware of there being a problem. So, if you receive an investigative demand from the Attorney General’s Office or the consumer protection division, one of the things that AG’s offices will usually take into account is, how responsible were you when you realized there was a problem? Did you immediately notify the folks who were making the pricing mistakes or engaging in this conduct? Or did you let it go for another week so you could get more profits?

The quick response is something that can be offered in mitigation, and often will result in a much simpler resolution. Know that the penalties that are assessed are discretionary in large degree. That’s the advice we’re giving to our clients who are calling. This is the advice that every general counsel, CEO and business owner should give to their staff: ‘Let’s avoid the mistake, but if we made a mistake or we think there’s a possibility we’ve made a mistake, let’s make sure we rectify it.’

Companies need to do this in a crisp and clear way — and one with a timestamp, such as an email to all parties. If the regulators do come knocking on your door, at least you can say, ‘We took steps to make sure the conduct was stopped immediately.’

ROI: We’re guessing it’s probably smart to investigate yourself rather than wait for notification?

CP: Absolutely. Companies that are concerned that they might have crossed the line need to consult the rules, make a quick assessment as to whether they did or could have, and then take immediate steps to rectify it. And, again, the steps should be loud. So, it’s an email that goes to your entire sales force, or a letter that goes to the employee who was not in compliance. Something that you’ll be able to point to later with a timestamp on it that says to the regulators, ‘We corrected this as soon as we realized it was a problem.’

ROI: Let’s get back to the idea of price gouging. We get that you can’t sell toilet paper for $10 a roll or water for $20 a case. But, then again, why can’t you make a little extra money when you have what others want? Isn’t that just smart business?

CP: I get it. The law of supply and demand is that, when demand goes up, you should raise your price to the maximum amount that the market will bear, right? For starters, it probably means your prices were too low. That’s the law of economics. The trouble is, the law of economics runs right into the law of consumer protection, which precludes you from doing that to a point.

ROI: Let’s move to New Jersey in the past week. Where are you getting calls regarding price gouging situations?

CP: The medical supply items certainly is where we’re seeing a lot of this activity. But supermarkets have to be careful, too. This might be a case where supermarkets are simply passing on increased prices to customers. And that’s OK to do.

But understand, I can guarantee you that people are making complaints like crazy and that the complaints are flowing into the AG’s office faster than they can read them. People assume that, if a price went up, it’s price gouging. And that, of course, is not necessarily true, but it won’t stop people from reporting you.

ROI: What about the good Samaritans? Like the manufacturers who are helping to produce much-needed products. They don’t usually sell them. How are they to know the usual prices?

CP: This is a common question. Let’s take the example of someone now in the business of selling Personal Protective Equipment, when they had not sold it previously. They don’t have a price history or a cost history to draw from. The statute in New Jersey doesn’t directly deal with that circumstance. In other states, they’re going to say, if you haven’t sold the product before, we’re going to look at the going rate for (what) that product was priced before the state of emergency was declared.

At the end of the day, you don’t want to be making a guess. The safest thing you can do is try to price things fairly consistent with what your costs are, consistent with what your prior practice has been, and consistent with what you understand to be going on in the marketplace. And if you still have questions and you’re not sure about how the rules apply, get the opinion of a lawyer. And then, if the state AG comes calling, you can at least say you consulted counsel and counsel gave you the following advice. It’s not a defense, but it will be a significant mitigating factor.

ROI: How many actual cases do you think there will be?

CP: I’m guessing there will be thousands of price gouging complaints. After Sandy, we had crew in the office, not working 24/7, but spending a lot of time chasing folks who we believed engaged in price gouging. But we only prosecuted dozens of cases.

I would guess the AG’s office will file less than a hundred complaints against companies who they believe or which they believe engaged in price gouging. Just because the price went up doesn’t mean a company is guilty of price gouging. But people are going to complain and you, as a company or a seller of goods, needs to make sure that you’re on the right side of that line.

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