Shopify's and 3M's Efforts Against Price Gouging and Counterfeiting During the COVID-19 Pandemic.

The pandemic fundamentally altered the way people engage in commercial transactions. As cities imposed lockdown orders and people quarantined at home in large numbers, consumers and small businesses quickly began to look to e-commerce to make purchases and satisfy the basic needs of everyday life. During the pandemic, e-commerce has grown exponentially; e-commerce spending in the United States increased 36 percent from 2019 to 2020, and it still has not returned to pre-pandemic levels. According to the Organization for Economic Co-operation and Development, online orders by the end of May 2020 had more than doubled in the United States since the same time in 2019, while increasing by more than 50 percent in Europe.

One reason that this shift was possible on such a short timeline was the existence of large online e-commerce platforms that small businesses could use to pivot their business to quickly sell goods and services online. These platforms include traditional consumer-facing e-commerce marketplaces such as Amazon, eBay, and Etsy, which enable independent businesses (i.e., “third parties” independent of the marketplaces themselves) to identify and sell to a captive audience of consumers. Indeed, 60 percent of third-party online marketplaces have experienced an increase in sales since the beginning of the pandemic.

Other platforms such as Shopify focused on offering small businesses the infrastructure to build and maintain an independent online presence and to reach consumers through any online channel or marketplace. These types of platforms—which often offer a range of services from hosting online content, to enabling consumers to check out on a site, to helping with shipping and fulfillment or marketing—were critical to enabling hard-hit small businesses to fundamentally change their business models without needing to learn how to code.

Unfortunately, the recent growth of e-commerce has also given rise to increasing numbers of bad actors looking to take advantage of consumers online through conduct such as price gouging, counterfeiting, and other types of fraudulent and deceptive practices. To take advantage of the surge in demand for personal protective equipment (PPE) and other essentials during the pandemic, online sellers have attempted to flood the Internet with counterfeit products at exploitative prices, often trying to use consumer-facing e-commerce marketplaces such as Amazon or eBay or tools provided by infrastructure platforms such as Shopify to do so.

Increasing Regulatory Scrutiny into E-Commerce Marketplaces

The prevalence of price gouging and counterfeit products online has unsurprisingly caught the eye of both federal and state regulators. The White House and federal agencies have sought to increase online marketplaces’ responsibilities in preventing counterfeiting and price gouging on their platforms as well as impose liabilities should they fail to do so.

On January 24, 2020, the Department of Homeland Security (DHS) published a report that listed best practices that e-commerce marketplaces should immediately adopt, including (a) adopting comprehensive “terms of service” agreements that also list the potential consequences sellers face for violations; (b) vetting third-party sellers; (c) limiting high-risk products; (d) establishing efficient notice and takedown procedures; (e) engaging in enhanced post-discovery actions; (f) maintaining indemnity requirements for foreign sellers; (g) clearing transactions through banks that comply with U.S. enforcement requests; (h) conducting pre-sale identification of third-party sellers; (i) establishing marketplace seller identification; and (j) requiring clearly identifiable country of origin disclosures.

On March 25, 2020, the attorneys general of 33 states and U.S. territories wrote a letter to Jeff Bezos, CEO of Amazon, urging the e-commerce marketplace (and, by extension, other marketplaces such as Facebook, eBay, Walmart, and Craigslist) to monitor price gouging on the platform more rigorously. The letter recommended several changes that these companies could make to protect consumers from price gouging. Such recommendations included setting policies and enforcing restrictions on “unconscionable price gouging” during emergencies, triggering price gouging protections prior to an emergency declaration, and maintaining a complaint portal for customers to report potential price gouging incidents.

Furthermore, on October 13, 2020, President Donald Trump signed a “Memorandum on Stopping Counterfeit Trafficking on E-Commerce Platforms Through Fines and Civil Penalties,” which sought to hold these online marketplaces accountable when they act as intermediaries between buyers and sellers. The memorandum instructed the Secretary of Homeland Security to seize counterfeit goods imported into the United States in connection with a transaction on an online e-commerce platform. Furthermore, it directed the Secretary to impose the maximum fines and civil penalties permitted by law on any marketplace that directs, assists, or is involved with importing counterfeit products into the country. The memorandum also instructed the Secretary to work with the U.S. Attorney General to develop a legislative proposal that holds online e-commerce platforms liable for counterfeit products sold on their marketplaces.

Congressional Activity Regarding E-Commerce Marketplaces

Consequently, bipartisan members of both chambers of Congress introduced the Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce Act (the SHOP SAFE Act of 2020) and the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (the INFORM Consumers Act) to further incentivize online marketplaces to help reduce the presence of counterfeit goods on their platforms.

The SHOP SAFE Act of 2020 was introduced to the House of Representatives on March 2, 2020. The bill was then reintroduced to the full Congress in May 2021. Section 2 of the Act would amend Section 32 of the Trademark Act of 1946 to hold e-commerce marketplaces contributorily liable for third-party counterfeiting activities while using these platforms—unless these marketplaces satisfy certain statutory requirements, such as

• verifying the seller’s identity, location, and contact information;
• requiring the seller to verify and attest that its goods are not counterfeit;
• conditioning the seller’s platform use on agreeing not to sell counterfeit products and consenting to be sued in U.S. courts;
• displaying the seller’s identity, location, and contact information, as well as where the goods are made and from where the goods will be shipped;
• requiring the seller to use images that accurately depict the actual goods offered for sale and that the seller owns or has permission to use;
• using technology to screen for counterfeits before a seller’s goods appear on the platform;
• implementing a timely takedown process for removing listings of counterfeit goods;
• terminating sellers that have listed or sold counterfeit goods three times;
• screening sellers to prevent terminated sellers from rejoining or remaining on the platform under a different alias or storefront; and
• sharing an infringing seller’s information with law enforcement and, upon request, the owner of the registered trademark.

Shopify’s Efforts to Curtail Price Gouging During COVID-19

Although legislative and regulatory attention has largely focused on e-commerce marketplaces, Shopify voluntarily responded to the unprecedented levels of counterfeiting and price gouging proactively by undertaking the following definitive measures to deter such misconduct.

Rules of engagement for the sale of COVID-19-related products. At the outset of the pandemic, Shopify implemented a robust set of rules of engagement that prohibit businesses using its software tools from charging excessive prices or engaging in deceptive pricing practices for essential COVID-19-related products (for example, medical-grade respirators, toilet paper, hand sanitizers, etc.). These rules also require Shopify’s merchants to support any medical, scientific, or other claims with documentary evidence. Additionally, merchants must obtain all applicable licenses or permissions for the products that they sell, including all applicable licenses, approvals, and authorizations for medical or health-related products. Shopify reserves the right to suspend or terminate the accounts of merchants that violate these rules and to remove their products from the marketplace.

Clear notice and takedown procedures. Shopify actively worked with regulators and law enforcement during the pandemic, soliciting any complaints about merchants engaged in problematic conduct through its Acceptable Use Policy portal, which allows anyone to submit a complaint that a store violates Shopify’s Acceptable Use Policy (including its COVID-19 Rules of Engagement).

Shopify also encourages anyone to submit a Digital Millennium Copyright Act (DMCA) notice or trademark notice to the company’s designated agent if that person believes a merchant on the platform is infringing his or her intellectual property rights. Upon receiving such a notice, Shopify may remove or disable access to the items found to infringe on copyright.

Terminating violating accounts. Only a few months into the pandemic, Shopify announced that it had terminated more than 5,000 merchant accounts for charging unfair prices or making false claims about COVID-19-related products. While most of these terminations were proactive as part of active screening by Shopify, some of these accounts were terminated at the request of third parties.

Monitoring. Throughout the pandemic, Shopify independently monitored its online merchants’ promotion of COVID-19-related products to ensure that the merchants complied with the platform’s rules regarding fair pricing. Shopify is also assisted by Acceptable Use Policy reports from both regulators and the general public regarding the sale of such products. Should it identify any products set at exploitative prices, Shopify will promptly remove such products.

Educating its users. Shopify has also worked continuously to engage merchants in order to help customers identify and avoid counterfeit products. On its website, Shopify has identified ways in which merchants can build customer trust and allow customers to make informed decisions when purchasing products on the platform. Such advice includes: writing clear and thorough product descriptions, including their own photographs of products; educating customers on how to identify authentic goods; and obtaining reviews on which customers can rely.

Obstacles to Shopify’s Efforts to Curtail Price Gouging

As a global e-commerce platform that hosts more than a million businesses in nearly 175 different countries, Shopify has faced challenges in determining how to comply with each jurisdiction’s price gouging standards. At times, regulatory guidance has been inconsistent as regulators around the world tackle a common problem in different ways. A few examples highlight the problems Shopify faced while trying in good faith to meet regulators’ expectations.

Lack of federal anti-price-gouging statute and lack of clarity or uniformity in state laws. One significant challenge that e-commerce platforms such as Shopify faced in their efforts to combat price gouging has been the lack of clarity as to what exactly qualifies as price gouging in the United States. There is currently no comprehensive federal legislation that addresses this issue. Due to this gap in federal law, Shopify has looked to state law for guidance on how to identify and prevent price gouging.

Unfortunately, state anti-price-gouging laws lack uniformity, and, therefore, companies such as Shopify had to adhere to a patchwork of laws that vary in how they are written, what they cover, and how they are applied by each state’s attorney general. Many states do not address this issue at all. At least 39 states have price gouging statutes, but they all vary significantly; some states prohibit all price increases during a state of emergency while others prohibit price increases over a set amount. Other states prohibit only “unconscionable” price increases, providing minimal guidance to platforms such as Shopify and requiring them to make their own determinations as to what constitutes prohibited price gouging. Furthermore, some state laws cover only materials necessary for emergency response while others apply to more commonplace goods and services. Thus, the lack of a comprehensive federal anti-price-gouging law and the lack of uniformity or clarity in state laws posed significant challenges to Shopify in its efforts to deter price gouging.

Unclear and inconsistent laws across jurisdictions. Similar to the lack of consistency and clarity between states, countries also provided conflicting guidance to e-commerce platforms such as Shopify. Some countries, such as France, set price caps on certain essential products during the pandemic. On March 5, 2020, after receiving widespread reports of price gouging since the beginning of the COVID-19 outbreak, France adopted a decree that set a price cap on hand sanitizers. Applied through May 31, 2020, the decree capped the price of a 50 ml bottle at 2 euros, a 100 ml bottle at 3 euros, a 300 ml bottle at 5 euros, and a liter bottle at 15 euros. Many other nations did not set such price limits or provide much guidance for e-commerce platforms.

The difficulties posed by applying broad and often ambiguous sets of sometimes conflicting rules and standards are particularly acute in the increasingly cross-border world of online commerce. Increased cooperation between regulators and online platforms to identify and discuss these types of complex concerns would make it easier for platforms to consistently apply price gouging rules fairly.

3M’s Efforts Against Price Gouging and Counterfeiting During the Pandemic

In addition to e-commerce platforms, manufacturers of essential supplies needed to combat COVID-19, such as 3M, have also taken active steps to prevent exploitive practices by others. During the pandemic, 3M made a proactive effort to prevent third parties from price gouging its products and taking advantage of the global pandemic to enrich themselves. Price gouging crucial medical supplies at a time when people most need them strains the limited resources available to protect the public health. Furthermore, such deliberate profiteering can spark public outrage and cause consumers to associate price gouging with legitimate manufacturers such as 3M, thereby potentially inflicting irreparable harm to a company’s reputation, and, in the case of 3M, a nearly 120-year-old brand.

At times, attorneys have even gotten caught up, either innocently or intentionally, in such schemes. In some cases, for example, attorneys have served as intermediaries or brokers, trying to facilitate what were discovered to be fraudulent transactions. In other cases, attorneys helped set up and manage the escrow accounts that were used in connection with the fraudulent transactions. And in most cases where attorneys have been involved, the mere fact of their involvement has lent credibility to the bad actors and their fraudulent transactions—especially when they invoke the name and reputation of a large, prestigious law firm. In at least one case, for example, a young associate at a large law firm, eager to help with new business, got entangled in a fraudulent scheme to sell PPE. When 3M learned of his involvement, 3M notified the law firm, and the law firm quickly managed the situation. Other attorneys have been reported to their state bars for violations of various ethical rules and could potentially face disbarment as a result of their involvement in these types of activities.

As a result of the wide variety of misconduct 3M has encountered in connection with sales or purported sales of its PPE throughout the pandemic, 3M has vigorously defended its brand and fought against these bad actors through various methods, including those described below.

Cooperating with law enforcement authorities. 3M has actively worked with law enforcement authorities, including the U.S. Attorney General, state attorneys general, and local authorities. In March 2019, the company’s chief executive officer, Mike Roman, sent a letter to U.S. Attorney General William Barr and Maryland Governor Larry Hogan, president of the National Governor’s Association, offering 3M’s partnership with the government to combat price gouging. Throughout the pandemic, 3M cooperated with the Department of Justice’s COVID-19 Hoarding and Price Gouging Task Force, as well as other state and local task forces.

Partnering with retail partners and others. Through collaboration with retail partners, e-commerce platforms, and others, 3M has worked cooperatively to combat price gouging of the company’s products—most notably the 3M brand N95 respirators. By working closely with these partners, 3M has successfully obtained the removal of more than 39,000 fraudulent e-commerce offerings, more than 32,200 false or deceptive media posts, and more than 420 deceptive Internet addresses.

Informing the public and consumers. 3M has also actively worked to educate the public in readily detecting fraudulent or counterfeit products. Indeed, at the outset of the pandemic, 3M took the unprecedented step of publishing a list of prices for many of its most common respirator models sold in the United States so that customers can reference these prices and detect when a merchant sets exploitative pricing. The company actively publishes additional information on its website, including a form that customers can use to report suspected incidents of price gouging and counterfeiting. Similarly, 3M has also created a fraud “hotline” that the public can call to report potentially exploitative pricing and also to obtain guidance on detecting counterfeit products.

Pursuing legal action. In addition to the aforementioned efforts, 3M has filed more than 41 lawsuits to stop fraudulent and counterfeit activity in connection with 3M products during the COVID-19 pandemic. Examples include:

On April 10, 2020, 3M brought a lawsuit against Performance Supply, LLC, in the Southern District of New York for trademark infringement, unfair competition, false association, false endorsement, false destination of origin, trademark dilution, and false advertising under the Trademark Act of 1946. Additionally, 3M brought claims for deceptive acts and practices and false advertising under New York State law. 3M alleged that Performance Supply, which had no authority or right to use 3M’s trademark, deceived the New York City Office of Citywide Procurement by offering to sell millions of 3M-brand N95 respirators at grossly inflated prices. Performance Supply caused New York City officials to believe that it was an authorized 3M distributor by reproducing the 3M trademark in multiple documents sent to these officials. Performance Supply’s quote of $6.05 per 3M-brand N95 Model 8120 respirator was approximately 600 percent greater than 3M’s suggested list price of $1.02 to $1.31 per unit; its quote of $6.35 for the 3M N95 Model 1860 respirator represented a 500 percent increase over 3M’s list price of $1.27 for those products.

On April 14, 2020, 3M brought a similar lawsuit alleging the same misconduct against Geftico, LLC, in the U.S. District Court for the Middle District of Florida. On March 31, 2020, Geftico, which was not an authorized 3M distributor, contacted the Center for Disease Control and Prevention’s COVID-19 Emergency Response Detail with the Division of Strategic National Stockpile (DSNS) and offered to sell various 3M-brand respirators. Geftico incorporated the 3M trademark into a PowerPoint presentation provided to the DSNS and offered to sell 15 million 3M-brand N95 respirators. Geftico offered to sell each N95 Model 1860 respirator for $6.77, which was more than 500 percent higher than 3M’s suggested list price of $1.27 per unit. On April 6, 2020, Geftico contacted the DSNS again, this time offering an additional 10 million units of the same 3M respirators for $3.60 per unit, which was almost three times 3M’s suggested list price.

On September 29, 2021, 3M applied for an order to seize counterfeit masks and recovered a huge stash. Based on three different tips to the 3M Fraud Hotline regarding three different transactions, 3M applied in the U.S. District Court for the Central District of California for an order to seize counterfeit masks that 3M had reason to believe were being stored in Solaryna Energy’s warehouse in Ontario, California. The court issued the order, and on October 5, 2021, the U.S. Marshals Service seized 139 pallets containing approximately 1.4 million counterfeit masks from Solaryna’s warehouse. The court, which had also issued a temporary restraining order against Solaryna, then granted a preliminary injunction restraining Solaryna from further distribution of counterfeit 3M masks and authorized the destruction of the seized masks to protect the public. Finally, after Solaryna failed to appear, the court granted default judgment in favor of 3M, including awarding a permanent injunction, 3M’s costs and fees, and $600,000 in statutory damages in recognition of the harm to 3M and to deter pandemic profiteering and to “ensure that those who rely on the 3M Marks’ reputation for their health and safety do not receive inferior products.” 3M intends to donate the damages award to COVID-19-related charitable organizations.

Conclusion

Manufacturers and e-commerce marketplaces, such as 3M and Shopify, have undertaken significant efforts to combat price gouging during the COVID-19 pandemic. While 3M has primarily focused its efforts on aggressively pursuing legal action against counterfeiters, Shopify has taken steps to deter and remove price gouging using its platform. Although both continue to face many challenges in their efforts, their actions have proven to be indispensable in protecting the public at its most vulnerable time.