NY AG Loses Lysol Price-Gouging Case Against Wholesaler

By Bryan Koenig
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Law360 (September 23, 2020, 6:46 PM EDT) -- A New York state court judge on Wednesday highlighted some of the limits enforcers face in pursuing accusations of pandemic-related price-gouging when she threw out a case over a wholesaler's alleged doubling of the price for Lysol Disinfectant Spray.

What New York Attorney General Letitia James had called "appalling" profiteering by Quality King Distributors Inc. and its CEO Glenn Nussdorf, state Supreme Court Judge Eileen A. Rakower wrote off Wednesday as not "unconscionable or overall extreme" when comparing Lysol products sold before and after Gov. Andrew Cuomo issued an emergency declaration March 7.

"While there may have been isolated instances of price increases for Lysol 19 to certain customers which were seemingly increased to the extreme, Quality King did not uniformly raise their prices on Lysol products to these customers," Judge Rakower said in one of the first price-gouging enforcement lawsuits to reach a decision in the novel coronavirus era.

When looking at "the panoply of Lysol products" on sale at the time, including both wipes and spray cans other than the 19 oz. cans at the center of the AG's case, Judge Rakower held that the wholesaler's pricing on the whole showed no "use of unfair leverage" or "abuse of bargaining power or unconscionable means."

Nor did Quality King's pricing "represent a gross disparity" between price and value based on what the Lysol products were sold for right before the March declaration, according to the two-page ruling.

In addition, Judge Rakower said Quality King showed that its rates "were competitive and even lower than [its] competitors," and that the company also demonstrated an increase in its own costs to purchase the Lysol spray.

The finding that Quality King's costs went up as COVID-19 ravaged New York state early in the pandemic — which has now claimed over 200,000 American lives — runs directly contrary to what James and her office said in announcing the lawsuit at the end of May.

"Between January 2020 and April 2020, Quality King increased the price of Lysol Disinfectant Spray from about $4.25 per 19-ounce can to as high as $9.15 per can, even though the company did not incur increased costs for the product," the AG's office said in announcing the suit at the time.

"The stores purchasing Lysol products from Quality King then passed on those increased prices to their customers, forcing them to pay far higher prices for Lysol products than they did before the pandemic," it added. "Consumers were charged as much as $16.99 for one can of Lysol that was previously sold at a retail price range of $5 to $8."

After the suit was tossed, an attorney for Quality King hailed Judge Rakower for nixing the "ill-conceived and factually misleading" complaint that he argued was brought under New York's "vague and ambiguous anti-price-gouging statute."

"If it is proven, price-gouging is a serious problem. But Quality King voluntarily and responsibly worked with the attorney general's office to supply information and answer questions, and ask for guidance about the vague and ambiguous law. Instead of engaging in good faith, the attorney general chose to sue," Mintz Levin Cohn Ferris Glovsky and Popeo PC's Anthony J. Viola said in a statement.

He added: "Ultimately, the court analyzed hundreds of pages of legal arguments and evidence and concluded that the attorney general had not pled a case against Quality King's CEO at all. It also concluded that the overall conduct by Quality King did not violate the anti-price-gouging statute given all of the facts and circumstances."

The AG's office said it was mulling all of its options, including the possibility of an appeal.

The Quality King lawsuit was just one of multiple private and public price-gouging enforcement actions to spring from the pandemic as consumers rushed to buy everything from masks and disinfectant to basic household goods.

James' office alone has counted thousands of consumer complaints of hiked prices and so far brought two gouging cases, with the second filed in August against major national egg producer Hillandale Farms. That case remains pending.

Most price-gouging cases have been brought under different state laws that typically only prohibit the practice in times of emergencies and often target only certain kinds of goods. In New York's case, Cuomo in June signed a new law that expanded the kinds of products covered to also include medical supplies.

Those cases, however, face steep burdens of proof, according to Robert M. McKenna, a former Washington State attorney general who now leads the state attorney general team at Orrick Herrington & Sutcliffe LLP.

According to McKenna, states typically require that price hikes be "unconscionable."

"That's a high standard," McKenna told Law360 in an interview Wednesday.

New York's laws make price-gouging cases particularly difficult, according to McKenna, because while some states' laws focus only on specific rates of price increases, the Empire State also has the concept of abusive bargaining power.

Avoiding price-gouging accusations, McKenna said, is at least partially dependent on tying prices directly to a company's own costs going up. If an entire markup is based on that increase, he said, "you're completely safe," while a partial tie-in to cost increases can also help.

Even when price hikes do attract enforcer attention, McKenna said that most never see a courtroom.

"A lot of the enforcement takes place through issuing warnings and trying to bring a company into line," McKenna said.

Federal price-gouging cases are trickier. No federal statute explicitly bans the practice, although President Donald Trump's March invocation of the Defense Production Act has allowed prosecutors to go after the sale of certain "essential" products such as disinfectants and protective gear above market prices.

Former senior U.S. Department of Justice antitrust official Ann O'Brien, now a partner with BakerHostetler, said in April that price-gouging enforcement is a "tricky" situation based on hard-to-navigate rules with differing state and federal definitions that run at odds with typical antitrust regulations that give merchants broad freedoms over the prices they charge.

While the Quality King case indicates that increasing prices alone won't be enough to ground a case, it also includes one positive for James' office. Even as she tossed the case, Judge Rakower refused to do so on the grounds that New York's price-gouging statute is unconstitutional.

The defendants are represented by Anthony J. Viola and Andre K. Cizmarik of Mintz Levin Cohn Ferris Glovsky and Popeo PC.

New York is represented by Attorney General Letitia James along with Jane M. Azia, Laura J. Levine and John P. Figura with the AG's office.

The case is People of the State of New York v. Quality King Distributors Inc. and Glenn Nussdorf, case number 451296/2020, in the Supreme Court of the State of New York, New York County.

--Additional reporting by Al Barbarino and Stewart Bishop. Editing by Philip Shea.

For a reprint of this article, please contact reprints@law360.com.

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