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Price Gouging

In addition to being a global pandemic that has infected and killed thousands of people worldwide, COVID-19 has created shortages of necessities, such as toilet paper, and medical supplies, such as protective masks. To capitalize on the demand for these goods, some individuals and merchants have hoarded them and are now selling them at increased – and sometimes, exorbitant – prices.

Is this legal?

The Debate Over “Price Gouging”

At the outset, we note that there is an ongoing debate over raising prices on necessary goods in times of crisis. On one side of this debate are economists such as Art Carden, who recently wrote that “higher prices serve a crucial social role by asking people to think a little harder about whether or not they really need that much hand sanitizer or toilet paper, or whether they might be able to get by with a little less.” (Those Shelves Wouldn’t Be Empty If We Hadn’t Stopped ‘Capitalism’, available Online)

On the other side are those against “price gouging.” This group includes California Attorney General Xavier Becerra, who recently issued a consumer alert advising that California law contains a price gouging statute, which “protects people impacted by an emergency.” (Mar. 4, 2020 Press Release, available at Online)

Penal Code Section 396

Regardless of where you stand on the wisdom of laws prohibiting price gouging, in California, profiteering after an official declaration of an emergency by raising prices on certain goods may be charged as a criminal offense. California law, specifically, Penal Code section 396, prohibits increasing prices on certain goods by more than 10 percent within 30 days after a “state of emergency” has been declared by the President of the United States or the Governor of California, or a “local emergency” has been declared by a city or county’s executive official, board, or governing body. This time period can be extended by additional 30-day periods.

The goods covered under Penal Code section 396 include “consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels.” (Pen. Code § 396, subd. (b).) Protective masks are covered under the term “medical supplies.” And the capacious term “consumer food items or goods” includes a wide variety of necessities, including pet food and toiletries such as toilet paper.

The price increase prohibited under Penal Code section 396 is calculated from “the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency.” (Ibid.)

A violation of Penal Code section 396 is a misdemeanor punishable by a sentence of up to one year and/or a fine of up to $10,000.

It should be noted that Penal Code section 396 does not preempt city and county price gouging ordinances. Some of these ordinances may impose more severe penalties for the price increases prohibited under section 396.

Defenses

The principal defenses that can be raised against alleged violations of Penal Code section 396 are set out in the statute.

As noted, the price increase prohibited under Penal Code section 396 is calculated from the price charged immediately prior to the emergency declaration. Thus, a business can defend itself against an alleged violation of Penal Code section 396 if it can show that it was offering a covered good or service at a discounted price immediately prior to the emergency declaration, and the allegedly unlawful price was not more than 10 percent from the price at which the business usually sells the good or service.

In addition, a business can justify a price increase of more than 10 percent under certain circumstances. This justification, however, cannot be by mere reference to economic theory – i.e., that a law prohibiting price gouging is an affront to capitalism. Rather, a greater-than-10-percent price increase of a covered good or service is lawful if made pursuant to a pre-existing contract or regularly scheduled seasonal adjustment. Such an increase is also lawful if “directly attributable to additional costs” imposed by a supplier, or for goods, labor, or materials.

Protect yourself by contacting Coimbra Law Firm

The need to increase prices at this time is understandable; many businesses are facing extraordinary financial pressure as a result of the ongoing COVID-19 crisis. But as we have explained, California’s price gouging statute imposes a stiff criminal penalty and fine.

If you have been accused under the statute, or a local price gouging ordinance, contact one of our experienced attorneys right away.

Better yet, protect yourself beforehand. Before increasing prices on goods and services, consult with one of our attorneys familiar with the federal, state, and local laws regulating price increases in emergency conditions.