Court of Appeals to Decide Whether Kentucky Price Gouging Statute Violates Commerce Clause

November.11.2020

The Sixth Circuit Court of Appeals later this year will hear oral arguments in an important case deciding whether a lower federal court correctly enjoined the Kentucky Attorney General from applying the State’s price gouging law against Amazon suppliers during the Covid-19 pandemic.

State Attorneys General have actively enforced their states’ price gouging and consumer protection statutes throughout the pandemic. One such case involved a price gouging investigation by Kentucky Attorney General Daniel Cameron into prices charged by suppliers on Amazon’s online platform. Kentucky’s price gouging law becomes activated when the governor has declared a state of emergency. Under the statute,[1] no person may sell a good or service which is “grossly in excess of the price prior to” the state of emergency. The statute provides that a price does not constitute price gouging if it is “ten percent or less above the price prior to the declaration.”[2]

After Attorney General Cameron filed his complaint for alleged price gouging, a separate lawsuit was filed by the Online Merchants Guild, the online supplier industry association. The lawsuit sought a motion for a temporary restraining order enjoining the Kentucky Attorney General from applying the price gouging law against its member suppliers. The Merchants Guild argued the Attorney General’s application of the price gouging statute violates four constitutional provisions: 1) the dormant Commerce Clause; 2) the First Amendment; 3) the Due Process Clause; and 4) the Equal Protection Clause.

Federal District Court Decision

On June 23, 2020, the U.S. District Court in the Eastern District of Kentucky agreed with the Merchants Guild and enjoined the Kentucky Attorney General from enforcing the price gouging statutes against Amazon suppliers as a violation of the dormant Commerce Clause.

Analyzing the dormant Commerce Clause, the court explained certain state economic activities that regulate interstate commerce are constitutionally invalid; specifically, those state laws that regulate “extraterritorial commerce.” The court explained that a statute has an impermissible extraterritorial effect if it “directly controls commerce occurring outside the boundaries of a State [and] exceeds the inherent limits of the enacting State’s authority.”[3]

The court explained that the Merchants Guilds members are merely suppliers to Amazon and provide the product and recommend a price but have limited control over the final price set by Amazon. Additionally, the court noted that the suppliers have no control over where the product is sold.

The court further explained that because the Attorney General seeks to enforce the price gouging statutes against the suppliers for their listings on Amazon, an interstate marketplace, “the Attorney General’s actions have the practical effect of controlling the price of transactions that occur wholly outside the state.”[4] The court held that Kentucky’s “price gouging statutes to transactions that occur on Amazon have the inevitable effect of regulating the price charged outside of Kentucky. In other words, the Attorney General’s actions effectively dictate the price of items for sale on Amazon nationwide.”[5]

The court noted pitfalls associated with online suppliers having to comply with differing state price gouging laws. For example, the state of Alabama’s price gouging law provides that increases of 25% or less are presumptively lawful, while Kentucky’s price gouging law allows a safe harbor if the price is 10% or less. According to the court, if “various states’ price gouging laws were applied to products listed on Amazon then it would [be] incumbent on the suppliers to check with each state before listing to avoid the potential for liability.”

The court ultimately held that the “inevitable effect of the Attorney General regulating Amazon suppliers is to control commercial conduct beyond Kentucky’s borders. Consequently, Merchants Guild has succeeded in proving a likelihood of success on the merits.”[6]

Bipartisan State Attorneys General File Amicus Brief Supporting Kentucky’s Price Gouging Law

In September 2020, a bipartisan group of 31 states and the District of Columbia, led by Illinois Attorney General Kame Raoul, filed an amicus brief with the Sixth Circuit Court of Appeals supporting the Kentucky price gouging statute.

The state Attorneys General argue the dormant Commerce Clause grants states regulatory authority to protect the public health and safety. According to the state Attorneys General, the “modern” dormant Commerce Clause is concerned with “economic protectionism” and “regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.”

The Attorneys General argue that regulating and enforcing price gouging statutes is a valid, non-protectionist exercise of their broad state police powers. Further, the states argue that the dormant Commerce Clause’s “extraterritoriality doctrine” does not limit their authority to regulate price gouging within their own borders.

Potential Impact on State Price Gouging Laws

If the lower court’s decision is upheld by the Sixth Circuit Court of Appeals, it could significantly limit state Attorneys Generals’ power to enforce price gouging laws against suppliers and wholesalers that sell their products on on-line platforms. As the states highlight in their brief, as a result of the Covid-19 pandemic, more consumers have turned to online sellers for food, medicine, clothing, and other essential items.

Although the case hasn’t received a lot attention, it could have a significant impact on the ability of state Attorneys General to enforce price gouging laws. Orrick’s Attorney General Practice Group will continue to monitor the case as it proceeds before the Sixth Circuit Court of Appeals.



[1] KRS § 367.374.

[2] KRS § 367.374(1)(c).

[3] Online Merchants Guild v. Daniel Cameron, Civil No. 3:20-cv-00029-GFVT, p. 18, citing Healy v. Beer Inst., Inc., 491 U.S. 324, 336 (1989).

[4] Online Merchants Guild, p. 20.

[5] Id. at 21.

[6] Id. at 24.