11 minute read | April.06.2023
In June 2020, former Governor Andrew Cuomo signed into law legislation amending New York’s price gouging statute. One provision granted the attorney general broad authority to promulgate rules “necessary to effectuate and enforce the provisions” of the price gouging statute.[1]
In March 2022, Attorney General Letitia James initiated the rulemaking process by soliciting “comments, data, and other information” to assist her office in writing rules to further prevent price gouging. According to the press release, the rulemaking process would “examine and address new evidence that some of the recent price hikes by big corporations were driven by profit and not increased costs.”
On March 3, 2023, Attorney General James issued a proposed rule, opening a 60-day public comment period. According to Attorney General James, the proposed rule “will make it more straightforward to investigate and combat price gouging by setting clear guardrails against price increases during emergencies.”
This article describes eight provisions in the proposed rule that every business needs to know and understand during a declared state of emergency to avoid potential price gouging violations in New York.
1. Creates a Presumptive Gross Disparity for Price Increase Greater than 10 Percent
Unlike most other price gouging statutes, New York’s statute currently lacks an explicit threshold percentage. The proposed rule would change that by adopting a 10% threshold.
According to the Attorney General, her office settled on the 10% threshold because many other states have adopted a similar threshold and because it is easily administrable. Additionally, the Attorney General notes that 10% is merely a presumption – a price increase under 10% may still be price gouging due to “unfair leverage” or excessive pricing due to other facts and market circumstances.
2. Costs “Not Within the Control of the Defendant”
New York’s price gouging statute provides that a prima facie case is established by showing either the increased prices are a “gross disparity” or “grossly exceeded the price at which the same or similar goods or services were readily obtainable in the trade area.”[2]
The statute further provides that a defendant may rebut this prima facie case with evidence that:
The proposed rule clarifies 1) what constitutes a “cost” for purposes of an affirmative defense; 2) the period over which the cost and price increases should be calculated; and 3) that the use of an index or other external indicators in a contract to set prices is not a defense to price gouging.
Specifically, the proposed rule makes the following changes:
1. What constitutes a “cost”:
According to the Attorney General, “cost” is not a technical term and firms may use different accounting systems. Thus, this rule clarifies that in the context of a defense to a prima facie price gouging case, “cost” should be interpreted narrowly. For example, “costs” are “additional,” meaning only those costs that arose after the market disruption. Additionally, the Attorney General explains “costs” include only those which are “for” the “goods and services” whose price increased, not for the business as a whole. The Attorney General further states that product-specific losses accrued during a market disruption must be costs specific to the product whose price was increased. Losses on sales of a business’s other products may not be included in the cost justification.
2. “Additional costs not within the control of the defendant”
The Attorney General explains that the statutory defense, “additional costs not within the control of the defendant,” excludes discretionary capital expenditures or the discharge of pre-disruption existing debts. For example, some companies might consider capital expenditures or research and development a “cost.” However, the Attorney General explains that because these are costs within the control of business, they are not a “cost” for purposes of the affirmative defense.
Another example involves transfer pricing – an accounting practice whereby one division in a firm charges another division for goods and services using an internally set price. Some firms may treat transfer prices as “costs” for internal accounting purposes. However, the Attorney General explains that such costs are an “abstraction” that does not capture the costs outside the control of the firm that were actually incurred in producing the good or service. Thus, the Attorney General explains that such “costs” represented by payment of transfer prices are “within the control” of the party and do not provide a defense under the statute.
3. Costs shall be calculated over the same time period as the time period of the market disruption.
The proposed rule clarifies that costs accrued after the abnormal disruption has begun can be used as a defense under the price gouging statute. While most disruptions are short, e.g., a storm and/or flooding, other disruptions may persist for a long time, such as the recent Covid pandemic. Longer disruptions may cause confusion for businesses as to whether costs within the same calendar or fiscal year may be included among the costs relevant to price gouging.
The rule clarifies that costs incurred prior to the abnormal disruption cannot be used as a defense for price gouging. However, if there is a disruption followed by an immediate cost increase first, which the seller seeks to recoup by imposing a price increase sometime later, the seller may use the increased costs to justify the subsequent price increases.
In the case of a lengthy abnormal disruption, the costs incurred to acquire or produce a good or service may first increase, then decrease. According to the Attorney General, the product-specific losses accrued during an abnormal market disruption are costs specific to that product.
Using apartment rentals as an example, the Attorney General explains that a rent increase several months into an abnormal disruption may be justified by lost revenue for that apartment complex earlier in the market disruption. According to the Attorney General, while such a rent increase would not be justified by attempting to recoup pre-disruption costs, the total “costs not within the control of the defendant” would include all the costs related to maintaining that apartment during the disruption.
4. The existence of a customary or industry practice of employing an external index for pricing shall not establish that a seller’s charging of that index price is a cost-based price.
The Attorney General explains that for some vital and necessary goods, such as commodities, there is a common industry practice of setting prices based on indices. A price index is a composite number designed to reflect the average value of a set of individual prices. The Attorney General explains that some businesses use the index in ongoing supply contracts, or they use the index as a benchmark to form a one-off price. According to the Attorney General, these customary uses of index prices can confuse firms into thinking that they are not “setting” prices, because they use an external indicator, thus do not follow under the New York price gouging statute. However, the Attorney General explains that an increased index price does not necessarily indicate increased costs, but instead may merely indicate a supply crunch or demand spike. According to the Attorney General, index prices may reflect other firms’ prices but are not useful tools for assessing price gouging.
Thus, a firm that buys at an inflated index price can correctly count that purchase as an increased cost, but a firm that chooses to sell at an index price cannot use the mere existence of the index as a defense.
4. Clarifies That New Products During an Abnormal Disruption Is Not a Defense
The purpose of this proposed section is to:
According to the Attorney General, her office received numerous complaints during the Covid pandemic about price gouging for goods and services introduced to combat the pandemic, including at-home tests, vaccinations, and medical treatments.
The Attorney General explains that a challenge of evaluating price gouging for new products is that a straightforward comparison of pre- and post-disruption pricing is not possible. Thus, the proposed rule specifies that margins of existing similar products – in percentage terms – may be used as evidence of price gouging in the case of new products. For example, a new product sale can be unconscionably extreme if the baseline profit margin is much higher than the profit margin of a similar product.
5. Clarifies Circumstances That Could Constitute “Unfair Leverage”
The price gouging statute provides that when determining whether a business has violated the law, one of the factors it must consider is whether there was an “exercise of unfair leverage or unconscionable means.”[3]
The proposed rule states that “unfair leverage or unconscionable means” includes, “but is not limited to, the use of unequal bargaining power, high pressure sales techniques, confusing or hidden language in an agreement or in price setting.”
According to the Attorney General, the purpose of this language is to put firms and customers “on notice” of the conduct that constitutes unfair leverage by giving examples from judicial history.
6. Creates Presumption of “Unfair Leverage” Based on Company’s Annual Revenue, Market Share, and Market Concentration
The proposed rule contains three provisions creating a presumption of “unfair leverage” based on thresholds related to 1) annual revenue, 2) market share, and 3) market concentration. According to the Attorney General, “firms in concentrated markets pose a special risk of price gouging” because they “can use their pricing power in conjunction with an abnormal market disruption to unfairly raise prices.”
Under the rule, “unfair leverage” will be presumed when 1) a seller with at least 30% market share raises prices, and 2) a “significant competitor” in a market for vital and necessary goods and services with five or fewer significant competitors raises prices for such goods or services. A firm with above a 10% market share will be presumed to be a “significant competitor.”
The Attorney General’s rule establishes a 0% threshold for non-cost-based price increases. Firms covered by the rule are presumed to be price gouging if they raise their prices at all during an abnormal market disruption. This presumption can be rebutted by proving that the company maintained the same profit margins as it had before the disruption or that increased costs post-disruption explain their price increases.
7. Application of Price Gouging Prohibition to Parties Within Chain of Distribution
The proposed rule provides as follows:
All parties within the chain of distribution, including manufacturers, suppliers, wholesalers, distributors, or retail sellers of goods, are subject to the statute with respect to products sold in the state.
The purpose of this rule is to clarify that the price gouging statute applies to all parties in the supply chain whose products are sold in the state.
8. Creates a Presumption of Comparable Pre-Disruption Price for Sellers Who Use Automatic Dynamic Pricing
The proposed rule provides as follows:
The pre-disruption price for sellers who use dynamic pricing can be determined by using the median price for the same good or service at the same time one week prior to the abnormal disruption of the market. A seller who would be liable for price gouging due to this provision may affirmatively defend against a price gouging claim by proving that the aggregate profit divided by the aggregate units sold is the same as the aggregate profit divided by the aggregate units sold a week prior during the same time period.
Dynamic pricing occurs when a seller increases prices in response to supply and demand. Automatic dynamic pricing occurs without human decision-making and is decided by algorithms. Examples include ridesharing companies and online retailers.
According to the proposed rules, rulemaking for dynamic pricing is needed because it may be unclear what baseline price can be used to determine whether a price increase is unconscionably excessive. The proposed rule uses a presumption of the median cost of the commodity or service sold in the same geographic area at the same time a week prior to the abnormal market disruption.
Given the significant changes contemplated in New York’s proposed price gouging rule, companies doing business in New York should closely review its language. The new rule provides the Attorney General significant and expanded authority to enforce against alleged price gouging. Orrick’s State Attorney General team is available to help businesses navigate the price gouging statute and new rules.