As the retail pharmacy industry responds to the COVID-19 pandemic, companies in this space have had to keep in mind a variety of regulatory and enforcement concerns. Top among those are the threat of both government enforcement actions and private party civil litigation raising allegations of price gouging.
In addition to forcing operational modifications to allow social distancing and compliance with regulatory changes around prescribing and dispensing medications, the pandemic has also had a significant impact on the retail pharmacy supply chain, as demand spiked for certain drug products and medical supplies like masks and gloves. Indeed, concerns about the drug and medical supply chain led the Federal Drug Administration to issue a statement on March 28 that the FDA “is continuously examining the global supply chain to identify any concerns and assess the availability of the products Americans need most.”
The COVID-19 pandemic has also increased demand for other consumer products like hand sanitizers, cleaning products and even toilet paper, resulting in shortages of these products at the retail level. In turn, widespread and highly publicized shortages of high-demand products have led to allegations of price gouging — well founded or not.
This article will discuss how the COVID-19 pandemic’s disruption of the supply chain has increased the potential for regulatory or administrative action by federal and state authorities related to price gouging allegations, as well as the potential for civil litigation. It will also highlight steps that retailers should take to reduce these risks.
State Law Concerns
Under state law, limitations on retail price increases can arise from executive orders, price gouging statutes and other consumer protection laws. These laws are generally enforced by state attorneys general and can result in civil or even criminal liability. In addition, consumers in some states can invoke these statutes and file civil lawsuits based on allegations of price gouging.
In response to the COVID-19 pandemic, many state governors have invoked emergency powers and issued a variety of executive orders to protect the public health. A number of these executive orders directly imposed restrictions on price increases. For example, on April 1 the governor of Illinois issued a proclamation invoking his emergency powers and prohibiting “increases in the selling price of goods or services, including medical supplies, protective equipment, medications, and other commodities intended to assist in the prevention of treatment and recovery of COVID-19.” In Maryland, the governor issued an order prohibiting retailers from raising the sale or rental price of certain products to a price that increases the retailer’s profit by more than 10%. The prohibition applies to a broad range of products, including medicine, hygiene and personal care products, medical supplies or equipment, cleaning products, food, water, beverages, pet food, and batteries.
In other states, these executive orders triggered price gouging laws that control the prices businesses may legally charge during declared emergencies. For example, in California, the state price gouging statute prohibits charging “a price 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” unless the increase is “directly attributable” to additional costs. The executive order provided that the price gouging prohibition will remain in effect until September 4 with regard to “medical supplies” and “emergency supplies,” which include prescription and nonprescription medications, isopropyl alcohol, antibacterial products, water, soap, diapers, toiletries and various other products. As another example, during an emergency, Texas prohibits selling products including food and medicine “at an exorbitant or excessive price.” Similarly, New York prohibits selling “consumer goods and services,” which means “those used, bought or rendered primarily for personal, family or household purposes” for “an unconscionably excessive price.”
Allegations of price gouging present a risk even in states that do not have executive orders prohibiting price increases or specific statutes prohibiting price gouging. All 50 states and the District of Columbia have a consumer protection law. In addition to prohibiting certain specified activities, these state statutes typically also prohibit any kind of conduct that is deemed to be “unfair” or “unconscionable.” New Mexico and Washington are among the states that do not have specific price gouging statutes, but the attorneys general of both states have announced their intent to investigate and prosecute price gouging pursuant to the general provisions of their states’ consumer protection acts. Ohio also lacks a price gouging statute, but the attorney general recently filed an enforcement action against an Ohio seller who allegedly sold N95 respirator masks online for an average of more than $36 per mask. The enforcement action invoked the state’s Consumer Sales Practices Act as well as various other theories.
Regardless of whether they are enforcing an executive order, a price gouging statute, or the consumer protection statute, state attorneys general typically have significant enforcement power. Civil penalties can be as high as $50,000 for each individual violation, and violations carry criminal penalties in some states. In addition to the potential for an enforcement action by a state attorney general, some states allow consumers to file individual or class-action lawsuits.
Price gouging is also illegal under the federal Defense Production Act, and federal prosecutors have indicated that price gouging cases will be a priority.
In addition to enabling the president to order private manufacturers to produce necessary goods and equipment, the Defense Production Act makes it illegal to obtain designated items “in excess of the reasonable demands of business, personal or home consumption” or to sell them above market value. Violations of the act are criminal, and punishable by a fine of up to $10,000, up to a year in prison, or both.
On March 23 the president issued Executive Order 13910 and authorized the Department of Health and Human Services to designate the products to which the statute will apply. HHS subsequently issued a Notice designating 15 items, including masks and other PPE, as materials that are “scarce” or that are threatened by hoarding or price gouging.
On March 24 the Department of Justice issued a memo creating a nationwide task force of federal prosecutors to address COVID-19-related market manipulation, hoarding and price gouging and stating that “where appropriate, the Department will investigate and prosecute those who acquire vital medical supplies in excess of what they would reasonably use or for the purpose of charging exorbitant prices to the health care workers and hospitals who need them.”
The first federal enforcement action was filed on April 24. Federal prosecutors in New York charged a retailer with violations of the Defense Production Act, alleging that the retailer hoarded tons of masks, surgical gowns and hand sanitizer and sold the items at huge markups. More federal charges were filed on April 28 when two individuals were arrested and charged with conspiring to violate the Defense Production Act by seeking out potential investors to sell 1 million respirator masks for double or triple the purchase price.
Other Potential Civil Liability
In addition to the potential for criminal and civil liability for violations of the laws discussed above, there is a whole host of other civil claims that may arise from allegations of price gouging, including some novel theories.
For example, 3M filed recently suit against a New Jersey company for violating federal and state trademark laws by selling 3M masks to New York City at an inflated price. Similarly, a manufacturer of COVID-19 test kits filed a federal trademark suit against a company for marketing test kits directly to consumers. Accordingly, companies need to be alert to the potential for trademark civil claims when distributing or reselling medications and other health and medical products.
In addition, there is potential liability under the False Claims Act if medications or products enter into the stream of commerce paid for by the government. Specifically, medications or products that are sold to the federal or state government may lead to FCA liability, which puts defendants at the risk of treble damages and substantial civil penalties. For instance, if a medication or product is sold at an inflated price to a federal or state medical facility there is a potential false claim against the seller. Moreover, medications or products sold to private entities, such as hospitals, clinics, pharmacies, skilled care nursing facilities and others, may lead to false claims liability to the extent the medications or products are billed to Medicare or Medicaid. For example, a medication that is sold to a private hospital and later billed to Medicare may give rise to a potential FCA claim. And due to the substantial damages and civil penalties that can result in an FCA case, we expect that the plaintiffs’ bar will be aggressive in attempting to identify potential price gouging that may give rise to an FCA claim.
Importantly, the possibility of potential FCA liability is heightened by the tragic reality that initial medical reports suggest COVID-19 is disproportionately impacting older and poorer populations, which increases the odds that COVID-19 patients are participants in a government health benefits program such as Medicare or Medicaid.
For the above reasons, there are significant regulatory and civil risks relating to price gouging allegations for medications and products as a result of the current pandemic. These heightened risks warrant a close reexamination of any retail pharmacy’s compliance program to determine what additional proactive steps may protect the company going forward. There are several specific considerations to note.
First, companies should ensure they maintain clear documentation for all pricing decisions, including the specific reasons for any increase, such as changes in overhead, supplier costs or labor costs. To be sure, documentation for why a price is increased is a key defense in a price gouging investigation or civil action.
Second, companies should be familiar with the myriad federal, state and local price gouging laws. Those laws are now being revisited in several states, with some states having pending legislation that would amend the price gouging and/or consumer protection laws. Companies should monitor those important potential changes and ensure that their compliance programs are updated and their personnel training is refreshed.
Third, companies should conduct frequent audits of the prices charged to customers to ensure compliance with applicable price gouging laws. This is especially true for any sales to a federal or state authority or for a product that ultimately may be reimbursed by Medicare or Medicaid. Routine audits will allow for a company to proactively identify and remediate any potential overpayment before an FCA action can be filed or before the Centers for Medicare and Medicaid Services can take action.
Sadly, the COVID-19 pandemic appears likely to continue its impact for some time. As laws and regulations adapt, so too should companies adapt on the compliance front. Doing so will mitigate the likelihood of future government enforcement and civil claims. And in the event that such claims are brought, a living and breathing compliance regime will serve the company well in defense.
Zachary Fardon is managing partner of King & Spalding’s Chicago office and can be contacted at [email protected] Chris Burris is a partner in King & Spalding’s Atlanta office and can be contacted at [email protected]