How Sellers Can Avoid Price-Gouging For 'Essential' Cannabis

By Joshua Mandell and Evelina Gentry
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Law360 (April 9, 2020, 3:31 PM EDT) --
Joshua Mandell
Joshua Mandell
Evelina Gentry
Evelina Gentry
As the COVID-19 pandemic has impacted daily life across the globe in new and profound ways, the nascent cannabis industry suddenly and unexpectedly finds itself in a position previously unthinkable — being labeled essential and allowed to operate while state and local governments order traditional businesses to close and residents to stay home.

With this new status comes responsibility — avoiding violations of the price-gouging statutes and the severe penalties imposed by them.

In efforts to mitigate the spread of COVID-19, state and local governments are issuing new orders daily that direct residents to stay home and nonessential businesses to close. These stay-home orders contain lists of exceptions for those services or goods that are deemed essential and thereby permitted to stay open.

In many jurisdictions, dispensaries and operators are now among these essential businesses even despite the continuing federal illegality of cannabis as a Schedule I drug.

Summary of State Orders

In California, the governor issued an executive order providing that workers supporting cannabis retail are an essential workforce. California's three state licensing agencies then issued their own statements that require cannabis operators to implement social distancing and anti-congregating measures and to also follow the interim guidance for businesses and employers to plan and respond to coronavirus disease issued by the U.S. Centers for Disease Control and Prevention.

Likewise, in New York, Illinois, New Jersey, Ohio, New Mexico, Washington and Pennsylvania, dispensaries are deemed essential services and, thus, exempt from mandatory closures. Pennsylvania and New Mexico allow for curb-side pickups, eliminates background checks for caregivers' renewal applications, allows for remote consultations and extends dispense limits to a 90-day supply. Similarly, Washington, Michigan and Maryland each allow for parking lot sales and curb-side pickups.

In Colorado, in addition to curb-side pickups, doctors are permitted to issue medical cards remotely. In Oregon, in addition to outside and drive-through pickup, temporary rules increase the amount medical marijuana cardholders and caregivers can purchase to 24 ounces per day and no more than 32 ounces per month.

In Massachusetts, medical cannabis dispensaries were advised to consider enlarging the delivery areas and to encourage patients to place larger individual orders. Massachusetts, however, has closed adult-use recreational sellers. In Louisiana, new guidance allow delivery of cannabis to a patient's location.

In Florida, rules regarding telemedicine have been relaxed to allow existing medical marijuana patients to see their physicians via video call. Medical marijuana dispensaries are considered an essential service to be treated like retail pharmacies. Many of the dispensaries use delivery service to get medication to patients and offer drive-thru windows and online ordering.

Delivery drivers are also carrying a letter signed by Surgeon General Scott Rivkees that says the business "performs a critical role in providing healthcare delivery services" and authorizes drivers to "travel outside of established curfews during the declared State of Emergency related to COVID-19."

While delivery and curb-side pickup ramp up, Florida licensees are taking great care to disinfect stores and cultivation facilities (which have also ramped up production) and outfit employees with personal protective equipment.

Increased Consumer Demand

Facing the prospect of staying at home for several weeks, consumers are stockpiling cannabis like other goods. According to data by cannabis analytics company Headset Inc., sales of legal cannabis have increased exponentially in Colorado, Oregon, California, Washington, Alaska and Nevada as people stock up amid the COVID-19 pandemic.

For instance, on March 16, sales in California were 159% greater than sales a year ago on the same day; in Oregon, sales were 75% higher than average, with the price of the average single order up by more than $10; and in Washington, sales jumped 33% compared to a week earlier.

The Risks of Price-Gouging

Cannabis operators should resist any temptation to raise their prices and take advantage of the increased consumer demand for cannabis. Price-gouging occurs when prices relating to goods or services are unconscionably raised following a declaration of a state of emergency or local emergency.

Price-gouging laws vary from state to state. For instance, under California law, after a state of emergency is declared, prices on goods or services must not be raised "more than 10 percent greater than the price charged ... immediately prior to the proclamation or declaration of emergency."[1]

Michigan executive order 2020-18 prohibits the resale of a product at a price that is "grossly in excess of the purchase price" and bans the sale of a product "at a price that is more than 20% higher" than the price charged for that product as of March 9.[2]

In contrast, Florida law does not include a specific percentage increase to determine whether price-gouging has occurred. Instead, during an emergency, it prohibits to charge unconscionable prices, i.e., prices in gross disparity to the average prices in the 30-day period immediately preceding a declaration of a state of emergency.[3]

Under New York law, retailers are prohibited from selling goods or services at an unconscionably excessive price during a declared state of emergency. However, the New York statute reserves the right to the courts to determine, based on various factors whether a price is unconscionably excessive.[4]

Notwithstanding these restrictions, not all price increases are prohibited during a state of emergency. Florida's price-gouging statute, like California's statute, carves out an exception for increase in pricing that is attributable to additional costs "incurred in connection with the rental or sale of the commodity."[5]

Typically, price-gouging laws are enforced by state or local officials. The penalties vary from state to state but can be severe to act as a deterrent. For instance, in California, if a seller is convicted of price-gouging, the seller may be imprisoned for up to one year in jail or fined up to $10,000.[6] In Michigan, price-gouging is penalized up to $25,000 per violation.[7]

In Massachusetts, price-gouging is punishable by a civil penalty of up to $5,000 per violation.[8] And Florida classifies price-gouging as a second-degree misdemeanor that is punishable by imprisonment of up to 60 days and/or a fine of up to $1,000 for the first offense and $25,000 fines for subsequent violations within a 24-hour period.[9]

Since the declarations of emergencies in response to COVID-19, for example, the attorneys general of several states have warned all businesses that the price-gouging laws will be strictly enforced against those who unconscionably increase prices on necessary products. In addition, consumers often enjoy private rights of action to invoke the price-gouging statutes within their jurisdiction and can often download complaint forms from the office of their respective state attorney general.

Strategies for Compliance with Price-Gouging Laws

To the extent cannabis businesses utilize pricing policies or software that incorporates surge pricing, this may inadvertently lead to a price-gouging violation. In general, surge pricing relates to automatic increases in prices of goods and services due to consumer demand.

However, once the state price-gouging laws are triggered (via a declaration of emergency from the president of the U.S. or the state's governor), those automatic price increases should be reviewed carefully to ensure they are not unconscionable.

Unless the price increase is due to an increased cost of supply or doing business, demand-based price increases during an emergency may trigger a violation of the law. Operators should therefore retain all records and documentation related to any price increase, especially those records that demonstrate a price increase was the result of an increase in costs as opposed to increased consumer demand.

Conclusion

Although raising prices based on demand is lawful in normal times, once an emergency has been declared, retailers must be careful to avoid triggering violations of price-gouging laws. Now that cannabis businesses have been declared essential businesses around the country and are experiencing a sudden surge in consumer demand, cannabis retailers should carefully consider any price increases and be certain to preserve all records, especially those concerning their own increased costs.



Joshua Mandell is a partner and Evelina Gentry is an associate at Akerman LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See Cal. Penal Code § 396.

[2] See Mich. Exec. Order 2020-18.

[3] See Fla. Stat. § 501.160.

[4] See N.Y. Gen. Bus. Law § 396-r.

[5] See Fla. Stat. § 501.160(1)(b)(1.) (2020); see also Cal. Penal Code § 396(b).

[6] See Cal. Penal Code § 396.

[7] See Mich. Comp. Laws § 445.905(1).

[8] See 940 Mass. Code Regs. § 3.18.

[9] See Fla. Stat. § 501.160.

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