The confluence of the COVID-19 pandemic and the national shortage of personal protective equipment (“PPE”) has resulted in many companies importing and selling PPE, especially facemasks and respirators. Indeed, companies not ordinarily in the health care market, but with foreign supply chain contacts, have entered that space to fill the urgent need for health care supplies. The federal and state governments have responded by stepping in to control the flow of material and prevent price gouging. This extraordinary health crisis, and the government’s rapid response to private-sector involvement, has left companies in uncharted and uncertain waters. O’Toole Scrivo, LLC has been at the forefront of this rapidly evolving landscape, providing guidance to companies engaged in the sale of PPE and representing companies before various government agencies.
On March 18, 2020, pursuant to the Defense Production Act of 1950 (“DPA”), President Trump signed Executive Order 13909, which authorizes the federal government to prioritize and allocate health care materials, services, and facilities. The government primarily relies on two types of orders to achieve that objective: (1) priority rated orders; and (2) allocations orders.
A rated order for supplies or services requires prioritizing and fulfilling the rated order over all other orders placed by the federal government, a state or local government, or a commercial entity. An allocation order controls distribution of supplies or services to promote national defense and comes in three forms:
- Set-aside: an official action that requires a person to reserve materials, services, of facilities capacity in anticipation of the receipt of rated orders.
- Directive: an official action that requires a person to take or refrain from taking certain actions in accordance with its provisions.
- Allotment: an official action that specifies the maximum quantity of a material, service, or facility authorized for a specific use.
Compliance with both types of orders is mandatory, but an entity that complies with an order may be insulated from civil liability resulting from compliance (e.g., breach of contract).
On March 23, 2020, President Trump signed Executive Order 13910 (“EO 13910”) to address hoarding and price gouging for the duration of the health crisis, and the U.S. Department of Justice (“DOJ”) created a task force to investigate and prosecute DPA violations. EO 13910 also authorized the Secretary of Health and Human Services (“HHS”) to protect scarce healthcare resources by designating items as protected under the statute. Those items include, among other things, facemasks and respirators, ventilators, disinfection and sterilization equipment, coveralls and gowns, and certain pharmaceuticals.
Once an item has been designated, it becomes a crime under federal law for any person to accumulate that item either: (i) in excess of his or her reasonable needs; or (ii) for the purpose of selling it in excess of prevailing market prices.
Willful noncompliance with any of the foregoing DPA provisions may result in criminal charges punishable by a fine up to $10,000, up to one year in prison, or both.
In New Jersey, Governor Murphy declared a state of emergency on March 9, 2020, and State law bans excessive price increases during a declared state of emergency and for thirty days after it ends. Unlike federal law, however, State law provides more specific guidance on what constitutes price gouging.
Under New Jersey law, an “excessive price increase” means a price that is excessive as compared to the price at which the 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. A price shall be deemed excessive if:
- The price exceeds by more than 10 percent the price at which the 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, unless the price charged by the seller is attributable to additional costs imposed by the seller’s supplier or other costs of providing the good or service during the state of emergency;
- In those situations where the increase in price is attributable to additional costs imposed by the seller’s supplier or additional costs of providing the good or service during the state of emergency, the price represents an increase of more than 10 percent in the amount of markup from cost, compared to the markup customarily applied by the seller in the usual course of business immediately prior to the state of emergency.
Price gouging violations are punishable by fines of up to $10,000 for the first violation and $20,000 for each subsequent violation.
JOINT TASK FORCE
On March 30, 2020, a task force (“Task Force”) was announced among the United States Attorney for the District of New Jersey, the State Attorney General, and the State Comptroller’s office to address a variety of pandemic-related misconduct, including hoarding, price gouging, charity scams, procurement fraud, insurance fraud, phishing schemes, and false and misleading investment opportunities. The Task Force is supported by numerous federal and State agencies, including the FBI, the Secret Service, Homeland Security, HHS Office of Inspector General, Immigration and Customs Enforcement, the State Police, the Department of Community Affairs, the Division of Criminal Justice, and the Insurance Fraud Prosecutor.
Companies providing health care supplies and services during the ongoing COVID-19 health crisis should be prepared for governmental scrutiny and inquiries. Although companies are not barred from importing products, the current legal and regulatory framework places significant restrictions on the sale and pricing of goods and services. Further, neither federal law nor the government agencies tasked with enforcing the law provide any guidance on what amount of profit equates to price gouging.
Companies therefore should be aware of the risk of investigation and prosecution in light of those uncertainties—even when making honest efforts to procure and distribute necessary materials. Comprehensive record keeping, transparency, and responsiveness to inquiries will be necessary for the foreseeable future.
For additional information on this topic or if you require compliance assistance, please contact Dennis Carletta at firstname.lastname@example.org or Andrew Gimigliano at email@example.com or at (973) 239-5700.
This article is for informational purposes only and not for the purpose of providing legal advice.
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