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Law360 (May 6, 2020, 5:07 PM EDT) --
The first results of this enforcement push are in. On April 24, prosecutors in the Eastern District of New York filed a complaint charging Long Island retailer Amardeep Singh with hoarding critical medical supplies in violation of the Defense Production Act of 1950, specifically Sections 102 and 103 of the act.
On April 28, again in the Eastern District of New York, a complaint was unsealed charging Arizona-based businessman William Young Sr., and California attorney Kent Bulloch under U.S. Code Title 18 Section 371 with participating in a price-gouging conspiracy in contravention of Section 102 of the Defense Production Act.
In each case, the complaint affidavit details facts suggesting that the defendants made themselves inviting targets. Nevertheless, the prosecutions raise questions about how such charging decisions will track statutory elements — particularly at a moment when there is understandable pressure to make examples of "bad actors."
The anti-hoarding provision that Singh allegedly violated is found in Section 102 of the Defense Production Act:
In order to prevent hoarding, no person shall accumulate (1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices, materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation.
Under Section 103, willful violations are misdemeanors carrying a maximum prison term of one year and a maximum fine of $10,000.
On March 23, citing the national emergency arising from the COVID-19 pandemic, President Donald Trump issued an executive order delegating to the secretary of health and human services the authority to designate materials subject to the anti-hoarding provision.
On March 30, the U.S. Department of Health and Human Services issued a notice designating, effective March 25, 15 categories of "scarce or threatened" materials, including N-95 and other respirators, ventilators, drugs with chloroquine phosphate or hydroxychloroquine HCl as active ingredients, disinfecting devices, medical gowns, surgical masks, face masks, and other personal protective equipment.
The Singh Complaint
According to the criminal complaint against Singh, even before the HHS designation, he began marketing and selling "COVID-19 Essentials" such as N-95 respirators, face masks, and clinical-grade disinfectants through retail businesses he owned that previously sold only sneakers and apparel.
This activity attracted the attention of the Nassau County, New York, Department of Consumer Affairs, which in March repeatedly cited a Singh business for allegedly unconscionable trade practices, and the New York state attorney general, which in early April sent another Singh company a cease-and-desist letter based on information suggesting it might be violating New York's price-gouging statute.
The federal complaint alleges that, following the March 25 effective date of the HHS designation, Singh violated both prongs of the anti-hoarding provision — that is, he allegedly accumulated designated materials in excess of the "reasonable demands" of his business, and resold those materials at prices "in excess of prevailing market prices."
The Bulloch and Young Complaint
The allegations against Bulloch and Young are more tangled. The case arises out of a larger investigation into a scheme to con would-be victims into purchasing largely nonexistent respirators and face masks. Prosecutors in the Eastern District of New York have charged two scheme participants in a separate case, in which Young and Bulloch are referred to as "Co-Conspirator-1" and "Co-Conspirator-2."
In the case against Young and Bulloch, the complaint alleges that they took steps to facilitate the purchase of personal protective equipment, and to conceal what they believed to be plans to resell that equipment at inflated prices. (The putative purchaser was, unfortunately for Young and Bulloch, an undercover FBI agent.) Given Young's and Bulloch's involvement in the separately charged wire fraud scheme, the government's decision to pursue them for conspiracy to price gouge, a seemingly lesser offense, is interesting.
Unlike in Singh's case, the complaint against Young and Bulloch focuses only on the excessive price prong of the anti-hoarding provision, not the "reasonable demands" prong.
Accumulation in Excess of Reasonable Demands
As to the charge that Singh accumulated designated materials in quantities exceeding his businesses' reasonable demands, the government does not attempt to provide a benchmark of reasonableness. Rather, the government relies on the fact that Singh had not previously sold health or medical supplies. The complaint alleges that the execution of search warrants at Singh's retail store and warehouse recovered medical resources "far exceeding the reasonable demands of [his] sneaker and apparel business."
On examination, this theory of reasonableness is not self-evident. The complaint alleges that Singh set aside a portion of his store for the sale of "COVID-19 Essentials," which he also marketed over social media. It would seem odd for the government to suggest that an anti-hoarding statute prevents a business from repurposing itself to meet demand for "scarce or threatened materials." In determining what is "reasonable," therefore, Singh's "sneaker and apparel business" — as opposed to his new, "COVID-19 Essentials" business — may not furnish an apt benchmark.
The government may believe that selling medical-grade items at retail diverts critical resources from front-line health care workers. But the Defense Production Act does not purport to criminalize sale through a particular distribution channel or to a particular class of customers.
As the attorney general noted in his March 24 memorandum, to the extent the appropriate deployment of critical resources is the issue, the Federal Emergency Management Agency's administrator has "authority under the Stafford Act to seize necessary healthcare and medical items, where appropriate, and to redeploy them to the people who need them most." Moreover, the complaint alleges that, in addition to selling at retail, Singh sold at wholesale, albeit at inflated prices, "to uniquely vulnerable populations."
To be fair, the complaint alleges that Singh stockpiled what seem like eye-poppingly large volumes of medical equipment, and attempted to acquire even more. But, apart from the claim that those materials exceeded the demands of Singh's pre-pandemic business, there does not appear to be any attempt to delineate a reasonableness standard. Does a business exceed its reasonable demands when it accumulates more than it can reasonably expect to use or sell in a given period? Or perhaps when it accumulates atypically large inventory volumes relative to past practice? Because the complaint sidesteps the question, it does not hint at an answer.
Accumulation for Resale at Prices in Excess of Prevailing Market Prices
The government alleges that Singh resold designated materials, as well as other health and medical resources, "at prices in excess of prevailing market prices." Likewise, the government charges that Bulloch and Young conspired to accumulate designated materials for this purpose.
Yet the Singh complaint does not leave one with a firm sense of how to determine "prevailing market prices," or what it means to "accumulate ... for the purpose of resale at prices in excess of prevailing market prices." (Recall that the statute prohibits accumulating with that purpose, not selling at inflated prices.)
Instead, the complaint alleges that Singh resold materials at very large markups. It is not obvious, however, that the price Singh paid is an appropriate proxy for "prevailing market prices." Based on allegations in the complaint, it appears that at least some of the materials Singh accumulated came from the People's Republic of China. Should the prices Singh paid to a Chinese supplier be considered the prevailing market price in the New York metropolitan region? Should Singh's shipping costs or other expenses be taken into account?
The Singh case or some future case may sketch out answers to these questions. As it stands, the Singh complaint seems simply to assume that a large markup equates to an illegally inflated sale price.
The complaint against Bulloch and Young supports the charge that they conspired to sell at prices above prevailing market prices largely by comparison to pre-pandemic prices. For example, the complaint affidavit alleges that the defendants and the undercover agent discussed selling face masks at prices representing "a 300% to 400% increase in prices of these items as compared to their price in the market prior to the COVID-19 pandemic."
The affidavit also includes information about benchmark prices 3M recently established for KN95 respirators, as well as anecdotal information concerning prices for face masks in the Los Angeles area (where the materials purportedly were warehoused). Using either point of comparison, Bulloch and Young allegedly contemplated sales at inflated prices.
State statutes offer various answers to the question of what constitutes price gouging during an emergency. Not surprisingly, many state statutes use pre-emergency pricing as a reference point. At least some of those statutes recognize, however, that price-gouging restrictions are a departure from market-determined pricing.
Notably, Section 104(a) of the Defense Production Act provides that nothing in the act "shall be interpreted as providing for the imposition of wage or price controls without the prior authorization of such action by a joint resolution of Congress." Perhaps for that reason, or because of the focus on accumulation, the federal statute does not provide a similar standard for determining "prevailing market prices." Congress may have envisioned a situation in which a business believes that, by hoarding a critical material, it will have power to influence price, or to take advantage of future price increases.
At this early stage, based on the charges against Singh, Bulloch and Young, it is not clear how the government believes the Defense Production Act's use of the phrase "prevailing market prices" should be understood. Future court rulings will likely provide more clarity. For now, though, potential targets of the COVID-19 task force must navigate uncertain terrain.
The U.S. Department of Justice is seeking to prevent bad actors from exploiting a national emergency. That is commendable. Nevertheless, these first pandemic-related cases are reminders that, as much in moments of crisis as in ordinary times, criminal prosecutions, especially for willful violations of law, should be grounded in statutory proscriptions that can be understood in advance by those who are expected to obey them.
Dylan Smith is a partner at Freeborn & Peters 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.
 Office of the Attorney General, Memorandum for All Heads of Department Components and Law Enforcement Agencies, March 24, 2020 (available at https://www.justice.gov/file/1262776/download) (last visited May 1, 2020).
 United States v. Amardeep Singh, 20-MJ-326 (SIL) (E.D.N.Y.) (complaint available at https://www.justice.gov/usao-edny/press-release/file/1271156/download) (last visited May 1, 2020).
 United States v. Kent Bulloch and William Young, Sr., 20-MJ-327 (E.D.N.Y.) (complaint available at https://www.justice.gov/usao-edny/press-release/file/1271741/download) (last visited May 1, 2020).
 Executive Order 13910, Mar. 23, 2020, 85 Fed. Reg. 17001.
 See 85 Fed. Reg. 17592.
 United States v. Donald Allen and Manuel Revolorio, 20 MJ 318 (RLM) (E.D.N.Y.) (complaint available at https://www.justice.gov/usao-edny/press-release/file/1271476/download) (last visited May 1, 2020).
 See, e.g., N.J.S.A. 56:8-108 (defining "excessive price increase" as "price that is excessive as compared to the price at which the consumer good or service was sold or offered for sale by the seller in the usual course of business immediately prior to the state of emergency").
 See, e.g., N.J.S.A. 56:7-107 ("While the pricing of merchandise is generally best left to the marketplace under ordinary conditions, when a declared state of emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified price increases in the sale of certain merchandise be prohibited.").
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