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Law360 (August 28, 2020, 5:10 PM EDT) --
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| George Korenko |
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| Matthew Milner |
While price-gouging is often addressed through enforcement, three consumer class actions have recently been filed in the U.S. District Court for the Northern District of California alleging, in part, violations of California's Unfair Competition Law:
The plaintiffs in Fraser v. Cal-Maine Foods Inc. allege that egg producers and grocery retailers "participated in the price-gouging resulting in a near-tripling of egg prices in the past 30 days."[3]
The plaintiffs in Mercado v. eBay Inc. allege that eBay encouraged price-gouging by sellers and benefited from elevated prices such that:
Plaintiff and the Class are left with no choice but to purchase essential goods like N-95, N-100 and surgical masks; hand sanitizer and gel; disinfectants like Lysol; disinfecting wipes; toilet paper; gloves; paper towels; baby formula; baby wipes; tampons; and diapers from online marketplaces like eBay.[4]
Redmond v. Albertsons Companies Inc. involves a suit brought on behalf of national and California consumer classes for purchases of:
any consumer food items or goods, goods used for emergency cleanup, emergency supplies, medical supplies, home heating oil, or other goods or service ... at a price 10 percent greater than the price charged [prior to the state declarations of emergency].[5]
Primer on the Economics of Class Certification
For class certification, economists are often asked to testify on issues relating to predominance. A key issue is whether plaintiffs have proffered a common methodology capable of demonstrating all or nearly all class members were impacted by the alleged conduct or if individualized issues predominate. Another central issue is whether the methodology is formulaic and reliably estimates classwide damages.
The framework for the analysis compares the prices a customer actually paid to the prices paid in the world absent the alleged price-gouging — i.e., the but-for world. Since we cannot observe prices in the but-for world, economists model what prices would have been absent the alleged conduct. If the prices actually paid are higher than prices in the but-for world, then the consumer was harmed. Economic damages are the quantification of the injury.
Economic Issues in Price-Gouging Class Actions
The determination of impact requires a rigorous analysis of data and information in the case. The economic analysis to determine injury is fact-specific and depends on the allegations, the supply and demand conditions in the industry, the nature of the products at issue and real-world events during the relevant period.
Rigorous analysis and testing are required to model impact and damages.
Economists often use a statistical tool, known as regression analysis, to assess impact and quantify a potential elevation in prices from alleged conduct. In the context of price-gouging, a regression may be used to estimate the effects of various relevant market factors, such as costs of the products and changes in the demand, on prices paid by members of the proposed class. If the model is properly specified, regression models may identify the elevation in prices due to the alleged conduct.
For example, one approach may be to use an overcharge variable that takes on a value of 1 for prices in the alleged conduct period and a value of 0 for prices in a competitive benchmark period either before or after the alleged price-gouging.The regression then estimates the average overcharge during the conduct period relative to the benchmark period, controlling for the relevant contemporaneous supply and demand factors.
If price-gouging allegations involve multiple levels of the supply chain, e.g., manufacturers and retailers, an additional analysis assessing pass-through of the overcharge will be required. This analysis estimates the extent to which price-gouging by a manufacturer is passed through the distribution chain to individual consumers.
Some of the issues that must be considered in a price-gouging class action case can be framed using the allegations in the complaints listed above. While regression can be a useful tool for assessing impact and damages, rigorous testing is required to determine the appropriate modeling choices.
Econometric models need to control for factors affecting prices paid by consumers.
An appropriate model of but-for prices must distinguish economic factors that affect prices in the normal functioning of the market from the effects of the alleged conduct.
To illustrate this issue, consider the Cal-Maine case. Here, the allegations are that price-gouging by egg producers and grocery retailers resulted in a near-tripling of egg prices in the 30 days following the governor's declaration of a state of emergency.[6] However, it is not clear whether the increase in egg prices was due to price-gouging behavior or other factors.
Data from the U.S. Department of Agriculture shows that there was a substantial increase in the price of eggs in the spring when the pandemic initially spiked in the U.S.[7] However, the data also show that there was a substantial increase in the price in 2018 as well and that this price increase was contemporaneous with an increase in U.S. egg demand.
The indices are one piece of evidence that may help assess how supply and demand factors affect the industry. Notwithstanding this, national indices have limited value in showing what consumers actually paid in stores located in different regions, states and counties across the country.
The determination of economic impact must isolate the alleged price-gouging.
In a price-gouging matter, a reliable economic model must not only isolate the purported conduct from other unrelated contemporaneous factors, but also identify the sources of the price elevation. For there to be injury to consumers, it is necessary that some amount of the alleged overcharge from the price-gouging is passed through to plaintiff purchasers.
Several factors can affect pass-through, including the number of firms at each level of the supply chain, industry-specific facts, cost or supply factors, and the nature of demand. For example, in industries where pricing is characterized by menu costs, i.e., sticky prices; focal-point pricing, e.g., prices that end in $0.99; or extensive bargaining, cost pass-through may not occur at all, much less on a uniform, classwide basis.
As relates to price-gouging, under certain state laws, entities may defend themselves against price-gouging accusations by providing a justification for any price increase, such as by demonstrating that they are passing along cost increases from an upstream entity.
For example, in the eBay case, an economist must distinguish between the price increase due to the internet platform from an elevation caused by the third-party seller. If the internet platform did not cause all the cost increase, then damages will need to be apportioned between the seller and the platform.
For example, class plaintiffs in the eBay case may attempt to show that eBay's arrangement with the seller caused that seller to pass on a higher commission to the consumer. To support the allegation, there must be economic evidence and empirical support that the seller increased its price by some amount due to the commission to eBay and that price increase was passed on to all or substantially all members of the proposed class.
Average prices do not necessarily explain prices paid by consumers.
Regression models can be used to estimate average overcharges. A single regression model, by design, combines the experiences of different customers.
For example, if customer 1 suffered no overcharge but customer 2 suffered a 10% overcharge, a single regression model would calculate an overcharge of 5% for both customers, obscuring the fact that customer 1 was not, in fact, injured. If the average overcharge is not representative of the experience of many class members, then it may be the case that more individualized models are required, e.g., one for customer 1 and one for customer 2.
Rigorous testing is needed to determine whether the average is a reliable measure of prices to members of the proposed class. If prices paid by purported class members varied widely, the regression model's predictions of prices will be correct for an individual purchaser only by chance and potentially highly misleading for many individual purchasers.
To illustrate this issue, consider the eBay case. Here, the allegations are that consumers were price-gouged on a diverse set of items including surgical masks, hand sanitizer, disinfectants, toilet paper, gloves, paper towels, baby formula, baby wipes, tampons and diapers. Testing is required to determine if all customers should be pooled into one regression model or if multiple models are needed.
It is incorrect to assume without testing that a single regression model can show that all relevant products, sold to different customers often at different times in different locations, suffered the same overcharge. If different class members face different supply and demand conditions, have different substitution preferences, or have alternative suppliers outside the defendants, a single model may not be capable of reliably measuring the overcharge for all class members.
Assess injury from price-gouging for different proposed classes.
States and localities have different standards for measuring price-gouging. California defines price-gouging as when the price is greater than 10% for the same goods or services relative to the price before the emergency proclamation.[8]
In the Albertsons case, the allegations are that two classes — all consumers in California and across the country — were subject to price-gouging. Under the California statute, assessing the 10% threshold requires a comparison to prices for the same goods or services.
Given that the proposed classes in the Albertsons case includes purchasers of "any consumer food items or goods, goods used for emergency cleanup, emergency supplies, medical supplies, home heating oil, or other goods or services," each item would need to be compared to the same good or service.[9]
Can the same economic evidence be used across a wide range of products and customers in different locales to show that all purchasers were harmed by the alleged price-gouging? The complexity of the required analysis is substantial, as economic models would need to assess supply and demand conditions across a wide range of products and isolate where in the supply chain price-gouging may have occurred for each good or service.
Conclusions
Recent price-gouging class actions filed in California raise interesting issues relating to the determination of economic impact and estimation of damages. In our view, rigorous analyses are required to show if classwide impact can be determined based on common evidence and whether damages can be reliably estimated on a formulaic basis.
Because of the nature of the allegations and pricing across different levels of supply chain, the inquiry into fact of injury involves modeling the effects of price-gouging from upstream entities and retailers and estimating what overcharge, if any, was passed through to consumers.
The determination of pass-through relies on a thorough understanding of the conduct at issue and modeling the factors that affect prices, which may vary across product dimensions and geographically. As these cases move forward and new cases are filed, it will be imperative for economic experts to apply rigorous analysis and testing to their models in this unique context.
George Korenko, Ph.D., and Matthew Milner are partners at Edgeworth Economics LLC.
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] "Governor Newsom Declares State of Emergency to Help State Prepare for Broader Spread of COVID-19," Office of Governor Gavin Newsom, March 4, 2020. https://www.gov.ca.gov/2020/03/04/governor-newsom-declares-state-of-emergency-to-help-state-prepare-for-broader-spread-of-covid-19/.
[2] "Proclamation of a State of Emergency," Executive Department State of California, executed on March 4, 2020. https://www.gov.ca.gov/wp-content/uploads/2020/03/3.4.20-Coronavirus-SOE-Proclamation.pdf.
[3] Adrienne Fraser v. Cal-Maine Foods, Inc., Case 3:20-cv-02733, United States District Court for the Northern District of California, filed April 20, 2020, ¶1.
[4] Jeanette Mercado v. eBay, Inc., Case 5:20-cv-03053, United States District Court for the Northern District of California, filed April 4, 2020, ¶1.
[5] Eleisha Redmond v. Albertsons Companies, Inc., Case 3:20-cv-03692-JSC, United States District Court for the Northern District of California, filed June 3, 2020, ¶29.
[6] Adrienne Fraser v. Cal-Maine Foods, Inc., ¶1.
[7] USDA, https://www.ams.usda.gov/sites/default/files/media/Egg%20Markets%20Overview.pdf.
[8] See California Penal Code 396, https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=396.&lawCode=PEN.
[9] Eleisha Redmond v. Albertsons Companies, Inc., ¶29.
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