Henry Gale was having difficulty leasing his modest four-bedroom house in North Dallas. But his fortunes changed when multiple tornadoes blew through the city in late October, damaging multiple nearby homes. Suddenly faced with several offers, Henry doubled his rental rate and signed a twelve-month lease with the Diggs, a family whose home was undergoing a lengthy restoration due to tornado damage. But Henry’s elation turns to despair the next month when the Diggs sue him for “price gouging.” Are dark skies ahead for Henry?
Price Gouging under Texas Law
Texas is one of 34 states that have enacted price gouging laws to protect consumers after a disaster. The Texas Deceptive Trade Practices—Consumer Protection Act (DTPA) lists “price gouging” as one of the prohibited false, misleading or deceptive acts or practices. Under the DTPA, “price gouging” is taking advantage of a disaster declared by the Governor or the President by either: (1) “selling or leasing fuel, food, medicine, lodging, building materials, construction tools or another necessity at an exorbitant or excessive price;” or (2) “demanding an exorbitant or excessive price in connection with the sale or lease of fuel, food, medicine, lodging, building materials, construction tools or another necessity.”
At What Point Does a Price Increase Become Price Gouging?
The DTPA does not flatly prohibit merchants from increasing their prices for necessities after a disaster. Rather, it prohibits them from charging “exorbitant” or “excessive” prices, that is, prices that go beyond what is reasonable or customary.
Attempting to determine the reasonable or customary price to use as a yardstick raises a host of questions. Should we use the price before the disaster (when the demand for the goods was lower) or should we account for the increased demand? If the former, is the price immediately before disaster the appropriate comparator or should we use an average price over a period preceding the disaster? Should we factor in any geographical differences in price?
Determining how much deviation to allow from the reasonable price is no easier. Most statutes from other states say that a 10% increase is excessive. Others allow a 20% or 25% increase. Unfortunately, the DTPA provides no guidance, and no court has interpreted that provision either.
Ultimately, the question of whether a price was “exorbitant” or “excessive” will likely be answered by the jury on a case-by-case basis. And juries are unlikely to sympathize with merchants, such as Henry, who increase their prices during a time of need.
When Does the Law Apply?
The DTPA prohibits price gouging during a “designated disaster period.” That period being on the earlier of (a) the date the disaster occurs; (b) the date of the Governor’s proclamation or executive order declaring the disaster; or (c) the declaration of the disaster by the President if any part of Texas is included within the federally declared disaster area. The period ends on the 30th day after the disaster declaration expires or is terminated.
In our example above, Governor Abbot declared a state of disaster the day after the tornadoes touched down in North Texas, triggering the price gouging law and Henry’s potential liability for violating it.
Where Does the Law Apply?
Even though disaster declarations typically specify the counties included within the disaster area, the DTPA is not so limited, and merchants in other counties can be held liable for price gouging. One of the Attorney General’s recent enforcement actions is illustrative. In July 2018, the Attorney General announced the resolution of 48 price gouging cases involving gas stations in the aftermath of Hurricane Harvey, under which the owners agreed to pay more than $166,000 in restitution. But none of those gas stations were in the area affected by the hurricane – 42 were in the Dallas-Fort Worth metroplex and the other 3 were in Central Texas.
What Are the Consequences of Price Gouging?
The consequences of price gouging are severe. While it is not a crime, the Attorney General’s consumer protection division investigates and enforces the price gouging law. Violators may be required to reimburse the buyers, and they may be liable to a civil penalty of up to $10,000 per violation and an additional penalty of up to $250,000 if the buyers were elderly.
In addition, the buyers can sue for violating the price gouging provision of the DTPA and recover their actual damages, treble damages if the merchant knowingly or intentionally violated the DTPA, court costs, and their reasonable and necessary attorney’s fees.
Does the Price Gouging Law Actually Help Disaster Victims?
While opportunistic landlords like Henry garner little sympathy, Texas’ price gouging law, like most anti-market measures, probably does more harm than good. Preventing price increases removes suppliers’ incentives to ship necessities into the areas affected by the disaster. In a free market, the higher demand after a disaster would naturally cause the prices of goods to rise, encouraging the suppliers of those goods to move them from other regions. But limiting the price increases removes that incentive. At the same time, the disaster will likely increase the suppliers’ shipping costs, which they cannot recoup by increasing the price. The likely result is a shortage.
The likelihood of a shortage is compounded by the hoarding tendency often seen after a disaster. For example, motorists in Dallas, Austin and San Antonio rushed to the gas pump after Hurricane Harvey, even though they were hundreds of miles away. As a result, numerous gas stations ran out of fuel. Allowing the prices increases would encourage disaster victims to share the scarce resources with each other, and consumers not directly affected by the disaster (such as the motorists in Dallas, Austin and San Antonio) would respond to the increased prices by temporarily reducing their consumption of the goods, allowing more of them to flow to the people who actually need them. While buyers may be upset at paying a higher price after a disaster, they are better off with goods purchased at a high price rather than no goods for sale at all.
Moreover, price controls typically create black markets. People will purchase the goods at a legally permitted price and then re-sell them to make a profit. Black market prices are higher than both the price authorized by law and the price that the free market would set since it must account for the legal risks.
Tilting the Scales in Your Favor
If you sell necessities, such as food, fuel, medicine, lodging, tools or building materials, be wary of any price increases in the aftermath of a declaration of a disaster in Texas, even if your business is not in the disaster area. You can also assist in combating the hoarders by limiting the number of goods sold to each customer.