Analysis

Price-Gouging Rules, E-Commerce To Collide At 6th Circ.

By Bryan Koenig
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Law360 (March 8, 2021, 10:12 PM EST) -- Kentucky's attorney general wants to investigate pandemic-related price-gouging on Amazon, but his probe has been stopped in its tracks by a court order up for oral arguments Wednesday at the Sixth Circuit that dozens of state enforcers say poses a serious threat to their ability to protect consumers.

Kentucky Attorney General Daniel Cameron's appeal of a June 2020 preliminary injunction blocking him from pursuing investigations or cases against Amazon retailers could serve as an important bellwether for would-be enforcement actions springing from the pandemic. The Kentucky case is expected to address not only state enforcers' ability to rein in those who exploit the pandemic but also the limits state attorneys general face going after online sellers whose wares cross state lines, a subject that raises constitutional questions.

Merchants worry that the Kentucky probe and others have made them "scapegoats" for ills better attributed to Amazon rather than the small businesses that make up many of its sellers.

In Kentucky, however, authorities say they can't even try to investigate whether Amazon sellers are charging excess prices for certain goods covered by the state's emergency declaration.

"That has been entirely shut down in our office because of this case," Deputy Solicitor General Matt Kuhn said in an interview.

The lower court decision, especially if upheld on appeal, poses major implications for the ability of state enforcers to go after price-gouging in this crisis and in future ones, especially when merchants are based outside an attorney general's jurisdiction.

"This would be a pretty significant blow to price-gouging statutes," said Orrick Herrington & Sutcliffe LLP of counsel Andrew Cook, a former Wisconsin deputy attorney general.

Attorneys general have been at the forefront of price-gouging enforcement, which is generally untouched by federal law, although federal prosecutors have been able to go after the sale of certain "essential" products, such as disinfectants and protective gear, priced above market under former President Donald Trump's March 2020 invocation of the Defense Production Act.

Not all states have price-gouging statutes but most do, generally triggered by emergency declarations. Those laws have been pushed to their limits by a crisis that has now lasted a full year instead of the days or weeks that normal price-gouging emergency orders anticipate.

"This is normally an area of law that's one state at a time, for one week or two at a time. And now it's something different," said Christopher E. Ondeck, Proskauer Rose LLP antitrust group co-chair and an attorney for United Egg Producers Inc., which weighed in on the case as an amicus filer arguing price-gouging prohibitions shouldn't be automatically treated as a valid exercise of state policing powers.

Proskauer, which has tried to position itself as the go-to defense firm for price-gouging since early in the pandemic, is watching the post-virus horizon just as intently as any current case. Beyond current enforcement actions, Ondeck said, "there are far more nonpublic state attorney general investigations." Ondeck estimates there are thousands of these probes, the fruits of which will be emerging for years to come.

In Kentucky, halting Cameron's probe was the point for the Online Merchants Guild, a major critic of Amazon that focuses much of its energy on state taxes on national internet sellers. The group sued Cameron to block probes announced with fanfare, and with Amazon's help, weeks into the pandemic's economic shutdown. The guild argued that in going after Amazon sellers, whose prices are set nationwide, the Kentucky enforcer ran afoul of the Constitution's dormant Commerce Clause, which prohibits state regulation from crossing borders.

Kentucky's Kuhn argued, however, that the state enforcer was focused entirely on Kentucky consumers and sellers based in the state. If the guild is right and Amazon merchants can sell to someone in the state, and the enforcer has no ability to scrutinize that conduct even though it could take a look at brick-and-mortar sales or businesses operating outside of Amazon, it "would undercut Kentucky's police powers significantly," Kuhn said.

The Kentucky enforcer's price-gouging concerns are not limited to Amazon, according to Chris Lewis, executive director of the Office of Consumer Protection within the attorney general's office. Lewis said the attorney general's office is also looking at complaints related to other platforms and he anticipated the probes would continue long after the pandemic ends.

The invocation of the dormant Commerce Clause is what makes this case the one to watch for price-gouging enforcement, according to Ondeck. The constitutional aspect, Ondeck said, means that the instant case could impact most price-gouging probes nationwide.

U.S. District Judge Gregory F. Van Tatenhove of the Eastern District of Kentucky cited the clause in his June 23 order, a decision that drew a harsh amicus brief on appeal from over 30 attorneys general. The enforcers argued that the 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."

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."

It's highly unusual for a federal judge to block a state attorney general from pursuing an investigation, according to Robert M. McKenna, a former Washington state attorney general who now leads Orrick's state attorney general team. And that's probably why the amicus coalition weighed in, he said in an interview.

"They don't like having courts tell them when they can investigate and when they can't," McKenna told Law360. "They're very protective of their enforcement prerogatives."

While the enforcers are united in defending those prerogatives, their actual implementation and the parameters of the laws behind them are unique to each attorney general's office, creating what Proskauer attorneys call a "patchwork concern."

"They have less of a nationwide concern," said Ondeck, which can create a problem for retailers who sell across state lines. As of early March 2021, Proskauer counted 42 states with price-gouging statutes or emergency declarations, creating "a logistical and legal and business nightmare," Ondeck said.

Those concerns have spurred Proskauer to take up the cause of clients like United Egg to push for fair, uniform application of price-gouging statutes that don't force companies to navigate the kind of cross-jurisdictional tightrope threatened by the attorneys general.

The even bigger concern, according to Ondeck, is the inevitable wave of proposed class actions that will target alleged price-gouging. When emergency declarations end, Ondeck predicts plaintiffs firms will hunt for big changes in prices customers paid.

"We think that the plaintiffs firms are going to mine the period of the activation of the price-gouging laws," Ondeck said. "And they have up to five years to do it, depending on the state they are suing in."

For now, price-gouging enforcement has gone after pricing for an array of goods, resulting in cease-and-desist letters as well as settlements and lawsuits, some of which have been rejected by courts. While protective equipment, especially masks, as well cleaning supplies, have incurred enforcer scrutiny and actions, so too have gas stations and egg producers. Many probes never make it past the investigation stage.

"If they can document that their price increases were justified, usually that'll be the end of the inquiry and you'll never hear about it," McKenna said.

United Egg Producers used much of its amicus brief in the instant case to argue that egg producers have been unfairly targeted by state attorneys general, using rules that vary wildly between states and have forced some producers to rack up "hundreds of thousands of dollars in legal bills."

Judge Van Tatenhove's disputed order specifically blocked the Kentucky attorney general 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's a very aggressive move," said McKenna.

Judge Van Tatenhove's reasoning was that it wasn't enough that Cameron limited his probes to "Kentucky-based entities." According to the 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.

One option, Judge Van Tatenhove said in citing the Online Merchants Guild, would be to regulate Amazon itself. The guild argues that the platform itself is ultimately responsible for setting prices.

"Amazon takes a very different stance on that," Kentucky's Lewis said, asserting that those facts will play out in court and that the ability platforms have to control their sellers will impact the office's ultimate enforcement decisions. "At this [point] we're very much in early, early discovery," Lewis said.

Guild chairman and in-house attorney Paul Rafelson, a partner at boutique e-commerce firm Rafelson Schick LLP, says the group isn't trying to undermine state price-gouging enforcement.

"Our case really is about something more deep-rooted," Rafelson said. "How incestuous the relationship is between Amazon and all of these state politicians."

Those politicians, Rafelson said, don't want to go after the e-commerce giant for fear of losing local Amazon facilities.

Kentucky's Kuhn argued that states have wide latitude on where they direct investigations.

"We've taken an all-of-the above approach," said Kuhn, who asserted that Kentucky price-gouging law focuses on sellers.

Kentucky officials did not, however, rule out an investigation into Amazon itself.

"We're going to go where the investigation leads us," Lewis said.

Lewis said that the enforcer needs discovery so it can look into exactly how sellers and Amazon interact and who is ultimately responsible for setting prices in a way that could trigger price-gouging law. "Frankly that's part of our investigation that we were prevented from doing," he said.

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 Jill Coffey.

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

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Case Information

Case Title

Online Merchants Guild v. Daniel Cameron


Case Number

20-5723

Court

Appellate - 6th Circuit

Nature of Suit

3950 Constitutional - State Statute

Date Filed

June 29, 2020

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