In March 2020, New York City (NYC) was fast becoming the epicenter of the COVID-19 outbreak, and many of its residents were in an outright panic. Late that month, New York State implemented stringent measures to stop the rapid spread of the virus. The NYC Department of Consumer and Worker Protection (DCWP) by that time was already seeing a record number of price gouging complaints.
August 10, 2022 Feature
City Limits: How the Largest City in America Tackled Price Gouging During a Global Health Pandemic
By Tamala Boyd
When the complaints started pouring in, DCWP already had in place a rule (Rules of the City of New York (RCNY) § 5-38, Goods Temporarily in Short Supply) that prohibited businesses from “increas[ing] prices in excess of an amount reflecting normal market fluctuations” for products declared by DCWP to be in short supply.1 The rule had been promulgated decades earlier pursuant to DCWP’s authority under the New York City Consumer Protection Law, but DCWP attorneys could find no evidence that it had ever been used. While Rule 5-38 proved a useful tool at the start of the crisis when complaints about price gouging centered on two or three products, there were important shortcomings that made it an imperfect enforcement vehicle as COVID-19 continued to spread and businesses began illegally increasing prices on dozens of products. This rampant price gouging changed the game, requiring DCWP to change its enforcement tactics.
Different Rules for a Different Game
In early March 2020, following dozens of complaints and news stories about the unavailability and high cost of face masks, which were considered vital to help stop the spread of COVID-19, DCWP dusted off Rule 5-38. This rule makes it an unconscionable sales practice to, among other things, increase the price of items declared by DCWP’s commissioner to be temporarily in short supply above “an amount reflecting normal market fluctuations.”2 The rule exempts increases shown to be the result of additional costs in providing the item (for example, increased production costs) or the seller’s attempt to give consumers additional opportunities to purchase the item (for example, increasing the hours during which an item can be purchased). The exemption applies only to increased cost incurred by the seller and only where such increase is through no fault of the seller.3
To use the rule, DCWP had to establish a process for determining and documenting the actual availability of affected items. Consider the case of face masks. DCWP’s legal team first researched face masks to develop a full understanding of the types, brands, and costs, then created checklists and talking points for use by DCWP inspectors in the field. The legal team also mapped out where the inspectors should go and what types of stores they should visit. Their work included all five boroughs and all types of retail establishments, from drug stores, to supermarkets, to big-box stores such as Walmart and Target. Armed with their instructions, DCWP’s inspectors and other city personnel visited dozens of retail stores across NYC, noting what they were finding (or not finding) on store shelves, talking to store managers about whether additional stock was expected, and taking photos. This exercise resulted in a March 5, 2020, declaration by DCWP’s commissioner that face masks were temporarily in short supply, and this declaration triggered the prohibitions in 6 RCNY § 5-38.4
On March 9, after several hundred more consumer complaints, news stories, and site visits by city personnel, DCWP’s commissioner signed a second short-supply declaration that expanded the list of items subject to the prohibitions of Rule 5-38 to include hand sanitizer and disinfectant wipes.5
By that point, the rule’s central shortcoming was apparent: For a product to be covered by Rule 5-38, DCWP would need to go through the monumental effort of researching, creating checklists, and sending more than 30 individuals crisscrossing NYC in search of evidence of short supply before issuing a new declaration. The rule also had other serious flaws. First, each declaration had to be renewed after 30 days and could only be renewed once, meaning the rule could apply to a product for a maximum of 60 days. Finally, the rule did not define “normal market fluctuations.”6
To remedy these shortcomings, on March 15, 2020, DCWP promulgated an emergency rule that was better targeted to address the issues raised by a global health pandemic. That rule, 6 RCNY § 5-42, declared it “an unconscionable trade practice for a merchant to sell or offer for sale covered goods or services with an excessive price increase during an imminent threat to public health.”7 The rule defined “covered goods or services” as those “reasonably believed by a consumer to aid in diagnosing or monitoring disease symptoms, preventing the spread of disease, or treating disease” or “marketed by a merchant as aiding in diagnosing or monitoring disease symptoms, preventing the spread of disease, or treating disease.”8 The definition of covered goods and services greatly expanded the scope of the rule and included many products that were increasingly the subject of consumer complaints, such as disinfectant spray, bleach, gloves, paper towels, and rubbing alcohol.9
The emergency rule replaced “normal market fluctuations” as the trigger for excessive price increases with “10 percent or more above the price at which the same or similar good or service could have been obtained by consumers in the City of New York 30–60 days prior to the adoption of this rule.”10 Finally, the rule offered an exemption for merchants who could show that the increase in price charged to the consumer was directly attributable to additional costs the merchant incurred to obtain the goods (increased supplier costs) or provide the goods to consumers (increased opening hours).11
Although the emergency rule proved to be a better enforcement tool than Rule 5-38, emergency rules expire under the Citywide Administrative Procedure Act after 60 days and can only be renewed once before a permanent rule must be promulgated.12 Additionally, because the rule would be permanent, it had to be drafted to apply to any emergency, not just one related to public health. To that end, on June 26, 2020, DCWP promulgated a permanent rule that replaced the emergency rule.13 The permanent rule:
- Made it “an unconscionable trade practice for a merchant to sell or offer for sale covered goods or services at an excessive price during a declared state of emergency in the City of New York.”14
- Redefined “covered goods and services” as those that are “essential to health, safety or welfare, or are marketed or advertised as such, including but not limited to staple consumer food items such as milk, eggs and bread, goods or services used for emergency cleanup, or emergency supplies such as water, flashlights, radios, batteries, candles, blankets, soaps, diapers, toiletries, medical supplies such as medications, bandages, gauze, isopropyl alcohol, medical masks, and antibacterial products, or gasoline or other motor fuels.”15
- Changed the prohibited conduct from selling with an “excessive price increase” to selling at an “excessive price,” which was defined as “10 percent or more above the price at which the same or similar good or service could have been obtained by a buyer in the City of New York 30–60 days prior to the declaration of a state of emergency.”16 The Department made this tweak to deprive so-called new entrants into the market from any argument that they did not violate the rule because, if they did not sell certain products prior to the state of emergency, they could not have “increased” the product’s price.
- As with the emergency rule, the permanent rule allowed exemptions where increased costs incurred by the business are merely passed on to consumers.17
Thousands of Price Gouging Complaints
Between early March and June 2020, when DCWP promulgated its permanent rule, the agency received more than 11,000 complaints about price gouging—a staggering number when compared with the usual 15,000 to 20,000 complaints DCWP typically receives annually across all categories.18 Because these complaints were arriving amid a global health pandemic with NYC at the epicenter and most of DCWP’s employees working remotely without access to the usual supplies and equipment, addressing these complaints required creativity and determination.
DCWP’s goal was to short-circuit the widespread illegal conduct as quickly as possible, so complaints were not mediated (a process that can take several weeks). Instead, DCWP’s Consumer Services Unit reviewed the complaints for relevance and completeness before forwarding them to an attorney in the General Counsel Division, who considered several factors, including the number of complaints against a single business, the age of the complaint(s), and the egregiousness of the asserted price gouging, to determine whether an inspection of the business should occur. Once a business was flagged for inspection, a request was sent to DCWP’s Enforcement Division to have an inspector visit the location. This triaging process was necessary because the overwhelming number of complaints, combined with DCWP’s finite, pandemic-impacted resources, meant that it would be impossible to address each complaint individually.
DCWP also worked with the New York Attorney General’s Office, referring complaints either not covered by the city’s applicable rules or already being handled by the Attorney General, for example, those related to staple food items. DCWP also accepted complaint referrals from the Attorney General and other government agencies. This map shows the breakdown of price gouging complaints by community district as of March 12, 2021.19
DCWP’s Enforcement Efforts
When DCWP’s Enforcement Division received a request for an inspection, an inspector was sent to the location to determine whether the business should receive a summons for price gouging. To make this determination, inspectors used an evidence packet and checklist created by DCWP attorneys. If, based on the checklist, the inspector observed price gouging, the inspector would issue a summons to the business under investigation, identifying each item, including details about what was observed and the section of the law or rule suspected of being violated. Once summonsed, the business had two options: admit guilt and settle the charge(s) with DCWP for a reduced penalty, or participate in a hearing with the city’s administrative tribunal, the Office of Administrative Trials and Hearings (OATH). All price gouging hearings were conducted by OATH remotely with evidence submitted by email. DCWP was represented by a General Counsel Division attorney and DCWP inspector. Businesses could represent themselves or be represented by counsel.
To prove the violations at hearing, DCWP created and submitted into evidence price packets for each of the products covered by the rules. The packets included screenshots of pricing information from the websites of various retail establishments as well as photos of pricing information from NYC store shelves. Each packet also included an aggregate table identifying dozens of different brands, sizes, and quantities for each product and the corresponding prices at which they were offered for sale to New Yorkers. Together, this information was used to establish baseline prices for covered goods.
The business could challenge the summons, for example by providing evidence that the business met one of the exemptions provided by the rule (i.e., the business was merely passing on increased costs to the consumer).
Businesses found to be recidivist, that is, those who continued to engage in price gouging after summonses were issued and alleged violations adjudicated, were subject to reinspection and increased penalties for “knowing” violations. Those businesses were also considered for enforcement through attorney-driven summonses filed by DCWP’s General Counsel Division, which generally included restitution for price gouging victims.
DCWP has successfully prosecuted several hundred price gouging summonses at OATH, and such hearings are still ongoing. In addition, the General Counsel Division’s settlement unit resolved approximately 200 cases before hearing; in these cases the business acknowledged the violation(s) and agreed to pay a reduced penalty.
During the height of the crisis in NYC, DCWP inspectors visited dozens of stores each day to check for price gouging violations. This map shows the breakdown of price gouging violations by community district as of March 12, 2021.20
What about Suppliers and Distributors?
The scope of Rule 5-42 is broad, covering not only retail stores but also their upstream suppliers and distributors.21 During hearings and in response to notices of violation, businesses argued that their higher prices were directly attributable to increased costs in obtaining such products from suppliers.22 Many businesses produced invoices showing their increased costs. DCWP attorneys withdrew summonses or consented to dismissals where retailers established that their higher prices were a result of increased supplier costs. Investigating several claims by retailers that they were being gouged by suppliers, DCWP issued document requests to several upstream businesses and settled with one supplier. But retailers remained the primary focus of DCWP because, as a municipal consumer protection agency that received thousands of complaints from consumers across the city, it was best positioned to address the brick-and-mortar businesses that were directly price gouging New Yorkers. Also, because other government entities were focusing on suppliers, DCWP did not want to expend its limited, pandemic-constrained resources duplicating others’ efforts.
Egregious Violation
DCWP encountered several instances of egregious price gouging. For example, DCWP received more than 40 complaints alleging that a business sold 15-count packages of face masks for $50. DCWP inspected and issued a summons charging that business with 25 violations of the price gouging rule. The charges were sustained by OATH, and the business was ordered to pay $8,750 in civil penalties.23
In another instance, DCWP issued a summons to a hardware store charging $18.99 for 500-ml bottles of hand sanitizer, $5.99 each for KN95 disposable masks, and $15.99 for 121-ounce bottles of bleach. The violations were sustained by OATH.24
DCWP also issued a violation to a small supermarket charging $27.99 for eight-ounce bottles of hand sanitizer. The charges were sustained at OATH, and the business was ordered to pay civil penalties and restitution to the consumers who overpaid for the sanitizer.25
Dozens of Settlements
DCWP settled several hundred price gouging violations.26 In one case, a drug store agreed to pay a total of $25,900 in civil penalties and consumer restitution, and in another, a food market agreed to pay a total of $16,625 in civil penalties and in consumer restitution.27
Conclusion
At the beginning of the pandemic, many consumers were faced with a tough choice: pay exorbitantly high prices for potentially lifesaving products or stand on principle and do without. Other consumers, those who were elderly, immunosuppressed, or otherwise highly compromised, did not have any choice at all. It is unfortunate that some businesses attempted to take advantage of these consumers. Fortunately, DCWP was able to use the tools at its disposal, along with a little creativity and a lot of determination, to help address an unprecedented problem during an unprecedented time. DCWP’s efforts were successful. Within months of these sustained efforts and the significant press they generated, there were massive decreases in the number of price complaints received, and inspectors found significantly less price gouging on patrol.
Although it is impossible to ever be prepared for a truly unprecedented event, DCWP has taken steps that, it is hoped, will make the complaint intake process more seamless during the next state of emergency. For example, DCWP has created and adopted a protocol specific to addressing price gouging complaints that includes the criteria to be used when triaging complaints. DCWP is also working on technological solutions designed to increase speed and efficiency at all stages of the complaint and inspection request process.
Endnotes
1. 6 RCNY § 5-38.
2. Id.
3. Id.
4. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., Department of Consumer and Worker Protection Declares Face Masks Temporarily in Short Supply to Protect New Yorkers from Price Gouging (Mar. 4, 2020), https://www1.nyc.gov/site/dca/media/pr030420-DCWP-declares-face-masks-in-short-supply.page.
5. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., Department of Consumer and Worker Protection Declares Hand Sanitizer and Disinfectant Wipes Temporarily in Short Supply (Mar. 9, 2020), https://www1.nyc.gov/site/dca/media/pr030920-DCWP-Declares-Hand-Sanitizer-and-Disinfectant-Wipes-Short-Supply.page.
6. 6 RCNY § 5-38.
7. Id. § 5-42.
8. Id.
9. Id.
10. Id.
11. Id.
12. N.Y.C. Citywide Administrative Procedure Act § 1043(i)(2).
13. 6 RCNY § 5-42.
14. Id. § 5-42(b)(1).
15. Id. § 5-42(a).
16. Id.
17. Id. § 5-42(b)(2).
18. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., Department of Consumer and Worker Protection Settles Price Gouging Case with Metro Drugs (June 26, 2020), https://www1.nyc.gov/site/dca/media/pr062620-DCWP-Settles-Price-Gouging-Case-Metro-Drugs.page.
19. See N.Y.C. Dep’t of Consumer & Worker Prot., Comparison of NYC Neighborhoods Hit Hard by COVID-19 and Price Gouging (Sept. 2020), https://www1.nyc.gov/assets/dca/downloads/pdf/partners/PriceGougingAnalysis.pdf.
20. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., Federal Court Dismissed Challenge to NYC’s Price Gouging Rule (Nov. 23, 2021), https://www1.nyc.gov/site/dca/media/pr112321-Federal-Court-Dismisses-Challenge-Price-Gouging.page.
21. 6 RCNY § 5-42(a).
22. See Jessica Fu, New York Accuses One of the Nation’s Largest Egg Producers of Price Gouging During the Pandemic, Counter (Aug. 13, 2020), https://thecounter.org/hillandale-farms-price-gouging-eggs-new-york-letitia-james.
23. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., Department of Consumer and Worker Protection Prosecutes Three More Repeat Price Gougers (Apr. 28, 2020), https://www1.nyc.gov/site/dca/media/pr042820-dcwp-prosecutes-three-more-price-gougers.page.
24. Id.
25. Id.
26. Press Release, N.Y.C. Dep’t of Consumer & Worker Prot., supra note 18.
27. Id.