Article The Energy Antitrust News

State Price Gouging Legislation: Compliance Difficulties and Counterproductive Overdeterrence

Fuel prices tend to receive increased scrutiny during periods of declared emergency, particularly when the emergency involves a hurricane threatening the Gulf Coast region. The increased scrutiny is prompted in part by the so-called price gouging statutes. See Federal Trade Comm'n, Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases 190 nn.25-27 (2006) (hereinafter, "FTC Report") (listing the price gouging statutes that were in place as of spring 2006). These statutes exist in the majority of states and typically are triggered by the declaration of an emergency.

The price gouging statutes purport to protect citizens from opportunistic price increases by sellers during times of emergency. Most of the statutes, however, couple uncertain standards and unclear defenses with significant potential exposure. Consequently, the statutes may overdeter, thereby resulting in artificially low prices and attendant shortages that are particularly counterproductive during an emergency.

Uncertain Standards and Related Compliance Difficulties

Most price gouging statutes provide little guidance to those making pricing decisions. In large part, the statutesinvoke terms such as "excessive," "exorbitant," "unreasonable" or "unconscionable." These terms, which require subjective interpretation, make compliance difficult. The lack of precedent interpreting such terms compounds the difficulty. The Federal Trade Commission, which studied price gouging after Hurricane Katrina, noted that, "on the infrequent occasions when the question of defining unconscionability has been presented in court, judges typically have based decisions on a case-by-case factual analysis, and those definitions have not been particularly consistent." FTC Report at 191. In fact, the FTC was "able to identify only five decisions [all from New York State] addressing such language in any price gouging statute, none of them addressing gasoline." Id. at 191-92.

Many price gouging statutes do attempt to provide at least some guidance by outlining price comparisons to be considered. Where relevant, such inquiries typically involve comparison of a seller's price to some form of (1) the seller's pre-emergency price, (2) the trade area/market area pre-emergency price or (3) both. However, even when a statute does set forth a comparison to be considered, it rarely provides quantitative guidance regarding the permitted level of deviation between the compared quantities. Thus, in most cases, there is no simple formula that a seller can use to ensure compliance and minimize risk.

For sellers operating in multiple jurisdictions, compliance difficultly is further compounded by the lack of uniformity among different statutes as to the standard to be applied or the price comparisons, if any, to be considered. Even if a multi-jurisdictional seller attempted to overcome the lack of uniformity by instituting a general policy of freezing all prices from the beginning of any declared emergency until the end, such a policy would ensure compliance with only a limited number of statutes. Freezing prices may not be an effective strategy in the majority of jurisdictions, including those where:

 - the statute focuses not on whether the seller increased its price from the price charged immediately pre-emergency, but instead on whether there was an increase from some longer "look-back" period (e.g., the average price during the 60 days before the disaster);

 - the existence of an increase from pre-emergency prices is relevant but not dispositive;

 - the focus is not on whether the seller's price has increased, but rather on whether the seller's price exceeds the trade area/market area pre-emergency price;

 - the existence of a violation depends on a look-back at both the seller's own pre-emergency price and the trade area/market area pre-emergency price;

 - it is unclear whether a violation depends on a comparison to the seller's own pre-emergency price, the trade area/market area pre-emergency price, or some combination of the two; or

 - the prohibition refers to charging an "excessive," "exorbitant," "unreasonable," or "unconscionable" price during an emergency, regardless of whether there has been an increase from the pre-emergency period.

In addition to being largely ineffective in terms of ensuring compliance, such a price freeze policy also would be difficult to administer, as prohibitions in different states remain in effect for different lengths of time. Although most prohibitions become effectiveupon the occurrence of a specified trigger event, they continue for hours, days, or months thereafter, depending on the jurisdiction. Furthermore, some statutes allow for time period extensions while others do not. Finally, in addition to any administrative difficulties, it also would be financially difficult for a seller to disregard the impact of intervening market movements—and instead continue a price freeze—in those jurisdictions with long prohibition durations.

Unclear Defenses

Uncertain standards and other compliance difficulties aside, most price gouging statutes do recognize a partial or full defense based on increased cost. Accordingly, if a seller can prove its price increases is explained by increase in its input costs, it may have an opportunity for minimizing exposure in the largest number of jurisdictions. Unfortunately, the jurisdictions that recognize the defense provide little guidance as to the sort of evidence required to assert it successfully. Such lack of clarity may not be particularly problematic for independent retailers, as their costs are relatively easy to quantify. However, a number of jurisdictions do not limit potential liability to the retail level. In those jurisdictions where liability also may attach upstream—where costs are not as readily apparent or quantifiable—lack of guidance regarding proper use of this potentially valuable defense can be troublesome. The FTC recognized the issue in its post-Katrina report and suggested that operating margin and raw material cost information may be useful to an integrated oil company pursuing an increased cost defense. See FTC Report at 138, 140. However, it is unclear whether or not state price gouging statutes will adopt the FTC's point of view. Furthermore, even if certain statutes do consider operating margin and raw material cost in analyzing the increased cost defense, the exact scope and specificity of the evidence required, as well as the framework that will be used to assess it, remain undefined.

Another potentially useful defense—one based on consistency with the market—is available in only a few jurisdictions. Where it is available, it suffers from the same lack of clarity as the increased cost defense. For example, those few jurisdictions recognizing the defense do not specify how the relevant market level or market trend will be constructed, nor how a seller's price will be compared to it. Furthermore, to the extent that certain statutes limit the defense to consistency with national or international trends (as opposed to, regional, state, or local trends), it is unclear whether or not such a comparison provides meaningful protection.

Significant Potential Exposure

Despite their uncertain standards and unclear defenses, a number of price gouging statutes nonetheless make noncompliance a criminal offense. Furthermore, in addition to the government actions for penalties that are contemplated by all of the statutes, many jurisdictions allow private actions for damages, with some allowing class actions as well. In the most aggressive jurisdictions, potential exposure involves the three-fold threat of criminal liability, individual actions for damages, and government actions for penalties.

Counterproductive Overdeterrence

By combining uncertain standards and unclear defenses with significant potential exposure, many price gouging statutes create a serious risk of overdeterrence. Sellers facing potential liability under such statutes have a strong incentive to press their prices to artificially low levels in an attempt to ensure compliance. However, without a price increase to indicate that the emergency has increased demand and created a need for additional supply, it is unlikely that supply will be diverted to the area impacted by the emergency. Thus, the artificially low prices that are promoted by many price gouging statutes may lead to unintended consequences of supply shortages at particularly inopportune times.

Conclusions

Although vague statutes are a significant obstacle to compliance in many jurisdictions, there are some measures that sellers can take in certain jurisdictions to reduce their potential price gouging exposure. For example, in the relatively few jurisdictions that do provide

quantitative pricing guidance, sellers obviously should make every effort to set prices in accordance with that guidance. Furthermore, in those jurisdictions that recognize defenses based on increased cost or consistency with the market, sellers should attempt to identify and gather evidence most likely to support those defenses.

Most importantly, sellers should advocate for improvements to the many vague price gouging statutes. Improved statutes that contain concrete and economically realistic standards and well-defined and useful defenses will still prevent opportunistic price increases. At the same time, however, they also will better facilitate compliance and will reduce counterproductive overdeterrence.

Reprinted with permission from The American Bar Association. All rights reserved. Further duplication is unlawful.