By Bryan Koenig

Law360 (April 30, 2021, 9:02 PM EDT) -- Kentucky's attorney general can resume price-gouging investigations into Amazon sellers after a Sixth Circuit panel held Thursday that the prospect of one state impacting national online sales isn't an "inevitable" result of state-level price-gouging probes but is instead "entirely dependent upon Amazon's independent decisionmaking."

Amazon chose to prohibit its merchants from restricting their sales to certain states or from varying their prices across state borders, the panel said, meaning that a Kentucky federal judge was wrong to halt the Kentucky enforcer's investigations based on the Constitution's dormant commerce clause, which prohibits state regulation from crossing borders.

U.S. District Judge Gregory F. Van Tatenhove of the Eastern District of Kentucky was wrong to find that the Online Merchants Guild, a trade group seeking the preliminary injunction against the probe would have been likely to secure a permanent halt to the investigation  the judges said.

According to Thursday's published opinion, the state attorney general would have had no problem going after price-gouging by brick-and-mortar stores within the state. Yet, the circuit court noted, the district judge found that same enforcement, here via civil investigative demands and subpoenas, would be unconstitutional if applied to Amazon merchants based in Kentucky and selling to consumers within the state

Furthermore, the appeals court said the trade group, which has argued price-gouging enforcement should focus on Amazon itself because the online giant has ultimate authority over its retailers' prices, has offered no reason why online sellers "should afford a business added protection in these circumstances."

"Yes, the choice to sell through Amazon's online marketplace means that merchants may need to consider Kentucky's price-gouging laws when they propose a price for their goods. But that is not inevitable, nor is it the direct result of the statute's express terms," Circuit Judge Karen Nelson Moore said for the panel. "Rather, it is dependent on Amazon's decision in how it structures its marketplace, which is not enough to limit the attorney general's authority to enforce the commonwealth's consumer protection laws to protect Kentuckians against price gouging."

While the dormant commerce clause prohibits states from projecting their legislation across borders, "it does not invalidate a state law when some private third-party has done the projecting of its own accord," Judge Moore continued.  

The case now goes back on remand to Judge Van Tatenhove, who issued the preliminary injunction last year barring the Kentucky enforcer from applying the state's price-gouging statutes, "including by subpoena, investigation or prosecution, to Amazon suppliers in connection with offers or sales on Amazon."

That order — which could have impacted enforcement nationwide if upheld on appeal — left intact all other price-gouging investigations under the state's emergency declaration for the COVID-19 pandemic.

The distinction didn't seem to sit well with Judge Moore in March oral arguments. At the time, the judge asked why "mom-and-pop" retailers selling through Amazon should be treated differently than physical stores. The metaphor carried over in Thursday's opinion, which repeatedly referred to a hypothetical "Mom & Pop's" retailer.

The opinion also referred to the stakes of Judge Van Tatenhove's conclusion that it wasn't enough that state Attorney General Daniel Cameron limited his probes to "Kentucky-based entities" selling to customers in the state. According to the June 2020 ruling, that doesn't change the fact that those investigations, and any enforcement action taken in their wake, will have "the practical effect" of dictating the prices "these Kentucky-based entities can charge outside of Kentucky." Because Amazon merchants can't restrict themselves to only selling to Kentucky residents, the judge said their sales will "inevitably" cross into other states.

The ruling could have had profound nationwide implications for price-gouging enforcement, thanks to the potential for limits on the ability to police price-gouging from sellers within a state whose goods are available nationwide through Amazon or a similar online portal. But the appellate panel on Thursday refused to enshrine "a sweeping expansion of what has been a jealously circumscribed, narrow doctrine" by treating virtual commerce differently than physical sales, and it refused to undermine "uncontroversial state consumer protection laws that might apply in the context of eCommerce."

Cameron welcomed the ruling in a statement Thursday.

"The Commonwealth's price-gouging laws exist to protect Kentuckians from bad actors, especially during times of emergency, and we're proud that we successfully defended these laws in court," said Cameron.  "During the height of the pandemic, we saw markups of up to nearly 2,000 percent from online third-party sellers for products such as masks and hand sanitizer, and it's important that we have the legal tools necessary to ensure Kentucky's price gouging laws are followed."

Guild chairman and in-house attorney Paul Rafelson, a partner at boutique e-commerce firm Rafelson Schick LLP, told Law360 on Monday that OMG is mulling its options, including seeking rehearing. 

Rafelson pushed back on the Sixth Circuit's analogies between online sellers and brick-and-mortar stores, arguing the former are "upstream" and have little or no ability to get Amazon to change its rules.

"The state is in a better position than we are," Rafelson said. 

The case's broader implications had drawn amicus support for the Kentucky enforcer from more than 30 fellow attorneys general, who argued that the dormant commerce clause, and its limitations on state rules being applied "extraterritorially," shouldn't apply to price-gouging measures that are "a valid, non-protectionist exercise of state police powers that is designed to aid vulnerable consumers during emergencies." Price-gouging enforcement, left largely up to individual states, is typically activated by declarations of emergency.

Kentucky's rules, the enforcers said in September, don't have an impermissible impact on commerce beyond the state's borders because they don't control other states' commerce or establish "conflicting regulatory burdens."

The guild had pointed to the amicus brief as a demonstration of the diversity of approaches with which sellers must contend. The Sixth Circuit panel acknowledged that diversity Thursday — for instance, Kentucky goes after price hikes in excess of 10% while the number jumps to 25% in Alabama — even as it held that the conflict is not one targeted by a dormant commerce clause prohibition on "impermissible extraterritorial effects."

The prospect of compliance with one state's laws putting an entity out of compliance with the laws of another isn't an issue in this case, according to the panel, "because sellers can sell in non-Amazon marketplaces where they are allowed to establish state-specific prices."

"Thus, the fact that numerous states have enacted or might enact price-gouging laws that differ somewhat from Kentucky's is of little consequence here," Judge Moore said. "Entities doing business in multiple states must comply with those states' valid consumer protection laws — this is nothing new, and nothing that the extraterritoriality doctrine frowns upon."

Despite the toss of the preliminary injunction, the guild did score one important win Thursday in the panel's rejection of the Kentucky enforcer's arguments that it lacked standing to sue at all on behalf of one of its members, Jones & Panda LLC.

Trade groups can establish standing by showing that challenged conduct is forcing them to expend extra resources and energy, according to the panel, which rejected enforcer arguments that helping members with price-gouging issues falls "within its mission to advocate for the interests of online merchants."

The panel also rejected enforcer arguments that Jones & Panda itself lacks standing to sue because it didn't have a "credible" fear that it faced prosecution.

"The attorney general has not disavowed enforcement with respect to Jones & Panda. To the contrary, he has vigorously litigated enforcement of the Jones & Panda subpoena and [civil investigative demand] in state court," Judge Moore said. "Moreover, the attorney general has engaged in significant posturing regarding his price-gouging investigations in public comments."

Judges Alice M. Batchelder, Karen Nelson Moore and John K. Bush sat on the panel for the Sixth Circuit.

Kentucky is represented by Solicitor General S. Chad Meredith, along with Matthew F. Kuhn, Brett R. Nolan, Victor B. Maddox, J. Christian Lewis, Justin D. Clark and Philip R. Heleringer with the Attorney General's Office.

The Online Merchants Guild is represented by Paul Rafelson of Rafelson Schick PLLC, Aaron Block of the Block Firm LLC and Mark Gilbert of Deatherage Myers & Lackey PLLC.

The case is Online Merchants Guild v. Daniel Cameron, case number 20-5723, in the U.S. Court of Appeals for the Sixth Circuit.

--Editing by Michael Watanabe.

Update: This story has been updated to include comment from the Guild. 

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