The COVID-19 pandemic has brought out the best in many and as with any crisis, it has attracted bad actors looking to capitalize on the situation.  In response, the United States Department of Justice (DOJ) (along with many states) have targeted certain activities to ensure the availability of sufficient personal protection equipment (PPE).  To accomplish this task, the Criminal Division of the DOJ has focused its efforts on price gouging and has weaponized a federal hoarding law, the Defense Production Act (DPA).  But this anti-hoarding provision is not clear as to its boundaries; meaning there is little to no guidance on what is permissible.  This results in companies left with the uncertainty of having to make basic business decisions under the threat of federal prosecution.

The DPA prohibits the accumulation of goods designated as scarce (1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices.  In March, the Department of Health and Human Services (HHS) designated certain categories of products (i.e. PPE) as “scarce” triggering the DPA’s prohibitions.  Pursuant to the DPA, potential criminal exposure includes up to one year of imprisonment and/or a $10,000 fine for a willful violation.  Additionally, the DPA forbids an individual from delivering goods if he or she “knows or has reason to believe that the item will be accepted, redelivered, held, or used in violation of the [DPA].”

To enforce the DPA, the DOJ formed the COVID-19 Hoarding and Price Gouging Task Force, and just this past April, announced the filing of its first criminal complaint against an individual in New York for PPE related price gouging using the DPA.  According to the complaint, Amardeep Singh was charged with accumulating PPE in quantities that far exceeded “reasonable demands” and for selling “scarce” designated items “in excess of prevailing market prices.”  In support of the complaint, authorities indicated that Singh purchased N95 masks at a per unit cost of $2.50 and later resold such masks for between $3.99 and $4.99, which equates to a 59% to 99% markup.  Shortly after, a second criminal complaint was unsealed against two other individuals in New York for conspiring to violate the DPA.  In this case, Kent Bulloch and William Young agreed to sell masks at a 50% markup.  As discussed above, these individuals now potentially face one year in prison and/or a substantial fine.

In addition to the DOJ led task force, the Federal Trade Commission (FTC) has entered the price gouging arena and initiated investigations.  The ramp up of FTC activities was spurred by several members of Congress in April asking the FTC to step up its enforcement efforts.  In addition, Congress also introduced a new bill in the house that would give the FTC and state attorney generals broader powers to go after price gouging.  This proposed bill is entitled the “COVID-19 Price Gouging Prevention Act.”  While previously, price gouging has not been a focus of the FTC, it is anticipated that the FTC will be far more focused given Congress’ outreach.

The DPA provides little to no guidance, and Attorney General William Barr has yet to add much input into what specific conduct the DOJ is targeting.  Enforcement actions such as these lead to a high level of uncertainty and raise many questions for business owners.  The bottom line…business owners need to do as much due diligence as possible and take certain precautions to avoid potential exposure.  This means staying up to date on all federal and state laws.  Notably, in contrast with federal authorities, some states have issued guidance on what is considered excessive.  When contemplating whether to sell “scarce” items, state regulation would be a great barometer and starting point when navigating these waters.  Second, in order to gauge the market for current rates, review bids submitted by other vendors to federal and state governments, which would arguably set the market rates.  Finally, businesses should maintain detailed records for all expenses to be prepared to provide price justification in response to any challenges by government regulators.

 

If you have any questions regarding the DPA, please do not hesitate to contact attorney Matthew M. Fischer (mfischer@zplaw.com).  Matthew is a partner with  Zumpano Patricios, P. A.  resident in its Miami office.  Matthew specializes in health law related issues and is a former Assistant General Counsel at the FBI and Senior Attorney Advisor at the U.S. Department of Health and Human Services.