DOJ Use of the Defense Production Act to Combat Alleged Price Gouging During the COVID-19 Pandemic Raises Significant Questions for Unwary Vendors
As predicted on this site, state criminal statutes outlawing price gouging during the current crisis have become a key arrow in state prosecutors’ quivers. [1]
05.04.20
And, while federal antitrust and fraud statutes were always available to federal prosecutors to prosecute a wide range of criminal conduct including price gouging, we could not have predicted that federal prosecutors would employ a new weapon in the form of a 70-year-old statute known as the Defense Production Act of 1950 (the “DPA” or the “Act”) to form the statutory basis for similar enforcement efforts. Yet, that is exactly what happened this past week when the U.S. Attorney for the Eastern District of New York instituted two price gouging prosecutions relying primarily on violations of the DPA.
As its name implies, the DPA was a cold war statute modeled on the War Powers Act, which granted President Roosevelt sweeping authority to regulate the domestic economy during WWII. Though not as broad in its grant, the current iteration of the DPA still gives the executive branch substantial powers to: direct private companies to produce goods for the federal government; allocate materials, services, and facilities for national defense purposes; and take actions to restrict hoarding of needed supplies.
At the end of March, President Trump issued an Executive Order pursuant to the DPA, designating all health and medical resources necessary to respond to the spread of Coronavirus Disease 2019 (COVID-19) as “scarce” commodities under the Act. The Order expressly made such supplies subject to the hoarding prevention measures authorized under the Act. It further delegated the power to identify which supplies were subject to the anti-hoarding provisions of the Act to the Secretary of Health and Human Services, which published a list of various items (e.g., PPE, certain drugs, disinfectants ventilators, respirators, etc.). [1] As a result, anyone who engages in the willful accumulation of any designated products either: (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, would upon conviction, face up to a year in prison and a $10,000 fine.[2]
Though both recent EDNY prosecutions ostensibly rely upon the same statutory scheme, the factual differences between the criminal complaints highlight the problems that can arise from the first-time use of this cold war vintage statute to pursue a novel prosecutorial theory. Broad and undefined statutory language such as “reasonable demands” and “prevailing market prices” raise serious due process concerns, not the least of which are the potential for lack of fair notice and the delegation of practically unbridled prosecutorial discretion in the charging decision.
For example, in the first case filed at the end of April, a sneaker salesman was charged with trying to sell surgical masks, disposable gloves, and other medical resources designated as “scarce” under the DPA to the public at markups of up to 1330%. Before being charged, the defendant had also received a cease and desist letter from the New York AG’s office as well as citations from a local county consumer affairs bureau. Given the alleged unconscionable markup and prior notice of wrongdoing, it is not difficult to understand the charging decision.
In a second case, however, two defendants, one of whom was a lawyer, were charged with conspiracy to violate the Defense Production Act by seeking to resell one million KN95 protective masks in New York City at a 50 % mark-up. Though the criminal complaint also alleges attempts to sell the items at markups of two or three times the cost, it is far from clear how a “reasonable person” would have notice that selling goods at a 50% markup would expose that person to criminal liability.[3]
Conversely, the federal government, pursuant to relaxed procurement rules mandated by the DPA, recently agreed to pay a 300 percent markup for protective masks. Moreover, the vendor had no prior experience as either a manufacturer or a vendor of medical supplies.[4]
These three examples highlight serious due process concerns and raise the obvious question of where the line is drawn between appropriate markup and price gouging. They also highlight the issue of who is drawing that line and the apparent lack of standards in doing so. It is black letter law that criminal statutes that lack sufficient definiteness or specificity are subject to constitutional scrutiny under the “void for vagueness” doctrine.[5] Such legislation may run afoul of the Due Process Clause because it fails “to advise defendants of the nature of the offense with which they are charged.” Persons “of common intelligence cannot be required to guess at the meaning of [an] enactment.”[6] The doctrine also prohibits statutes that are so vague as to invite arbitrary enforcement. Plainly, a statute that rewards a government contractor with a 300 percent profit yet potentially imposes a criminal sanction upon a different vendor for the same or similar conduct must be considered constitutionally suspect.
So, what is a conscientious businessperson to do? We suggest that you look to your state statutes for guidance. Because unlike the DPA, these statutes were drafted with a specific purpose in mind–namely to criminalize price gouging–and are likely to provide more clear guidance on where the line is drawn. For example, the Pennsylvania price gouging statute prohibits pricing that is ‘unconscionably excessive” and goes on to provide that “[i]t is prima facie evidence” that a price runs afoul of the statute if it “exceeds an amount equal to or in excess of 20% of the average price . . . during the last seven days immediately prior to the declared state of emergency.”[7] New Jersey caps the markup at 10% from cost, compared to the markup customarily applied by the seller in the usual course of business immediately prior to the state of emergency. [8]
Because the DPA has never been used to prosecute price gouging before, questions abound, including what conduct constitutes a violation of the Act and whether vendors have fair notice that their conduct crossed the line. These and other questions will pervade the medical supply business environment until answered by the courts. Until then, it is not the buyer but the seller who now must beware.
If your business has questions or concerns regarding compliance with these various regulatory schemes, please contact a member of the white-collar defense & government investigations practice group for needed guidance.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
For more information contact Mark Sheppard or Meredith Lowry in the white-collar defense & government investigations practice group at Klehr Harrison.