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Getting Gouged

As the 2006 Atlantic hurricane season begins, climatologists are predicting another record-setting year of destructive weather. Historic hurricane data suggest the current 20- to 30-year hurricane cycle is less than half over, and some global-warming models show an increased atmospheric energy budget is adding strength to the storms that slam into American coastlines every year.

Consequently, as residents get ready to shutter their windows and take cover, companies that operate in coastal areas are bracing themselves for another season of business disruption and asset damage--as well as the price-gouging allegations that inevitably follow natural disasters.

"After every major emergency situation, you get concerns about price gouging," says Layne Kruse, partner at Fulbright & Jaworski in Houston. According to a March FTC report, state attorneys general brought at least 99 price-gouging cases after Hurricane Katrina. Similar trends occurred after September 11 and after Florida's deadly 2004 hurricane season.

But while enforcement efforts are on the rise, ensuring compliance with price-gouging laws isn't always easy--even for the best-intentioned companies. The statutory language is often vague, leaving broad enforcement discretion to appointed officials. And price-gouging statutes are proliferating at the state and federal levels as lawmakers respond to pressure to protect consumers. As a result, price-gouging policies represent a growing area of legal uncertainty.

"State AGs have a considerable amount of power in this area, especially given the way the laws are drafted," Kruse says. "Companies can't ignore the political dimension to this issue."

Retail Shakedown

As a legal term, "price gouging" is notoriously vague and subjective. Federal statutes, such as the Sherman Antitrust Act and the Clayton Act, don't address price gouging directly. Recent legislative proposals would change that. Unless and until such legislation becomes law, however, the federal code focuses on the primary crimes that underlie the idea of price gouging--namely, fraud and collusion to fix prices.

But at least 28 states have laws targeting price-gouging behavior. Under state laws, gouging means raising prices excessively to exploit customers' most urgent needs, typically during a state of emergency.

Approaches to defining and enforcing price-gouging prohibitions vary widely from state to state. Most statutes assign broad discretion to state authorities in enforcing the law. Many provide scarce guidance for discerning which prices are "unconscionable" (as laws in Florida, Virginia and Massachusetts define gouging) or represent a "gross disparity" from normal prices (as the laws prohibit in Louisiana, South Carolina and Michigan). Some states, including California, West Virginia and Oklahoma, define gouging with greater mathematical precision, setting specific limits (frequently 10 percent) on how much merchants can raise prices before it's considered gouging.

Another area of confusion is that the enforcement of gouging statutes is limited to products and services considered "essential" for health and safety. Here again, statutes rely on administrative discretion to distinguish essential items from mere conveniences.

"The statute applies to essential commodities, but there is no set definition," says J.R. Kelly, director of Florida's Division of Consumer Services, which investigates price-gouging claims for the state government. "We use a reasonable-person test, which is what the courts would do. Generally it means things such as food, water, ice, hotel rooms, gasoline, building materials ... anything people need to stay alive."

Plaintiff's Dream

Such vagaries invite exploitation by politicians and plaintiff's attorneys.

"It can rise to the level of a shakedown suit," says Michael Mallow, a partner with Loeb & Loeb in Los Angeles. "Defending price-gouging suits requires costly discovery, and most companies will determine that it's better to settle. Any time you have private rights of action, as many states do for price-gouging, someone will try to make money on these cases."

And as consumer-protection cases can serve state attorneys' political aspirations, many state AGs are taking an aggressive stance on enforcement.

"State AGs have taken a larger role in the trade-regulation field," says Chris Burris, a senior associate with King & Spalding. "We are seeing them acting more dynamically on their own, and in unison with other AGs."

Luckily, enforcement actions are still somewhat rare. For instance, Florida brought price-gouging actions against fewer than 10 businesses in 2005--several gas stations and one hotel. "That's out of probably 15,000 phone calls, and 3,000 to 4,000 investigations," Kelly says. The previous year--when the state was strafed by four major hurricanes, Florida prosecuted more than a dozen price-gouging cases.

In most cases that reach the prosecution stage, respondents resolve the charges by paying relatively small fines--generally in the $1,000 to $5,000 range. But some state laws provide for stiffer penalties, including jail time.

Texas law, for example, allows fines up to $20,000 per violation plus $250,000 if the act is committed against a senior citizen. Under Louisiana law, a violator convicted of price-gouging can be sentenced to 5 to 20 years in prison. And in November 2005, the state of New Jersey reached a $373,000 settlement with Amerada Hess Corp. to resolve allegations of gas-price fixing in the wake of Hurricane Katrina. The negative publicity associated with these allegations might have something to do with the rising settlement amounts.

"Many companies seek to resolve price-gouging matters because they want to avoid adverse publicity," says Gary Grindler, a partner with King & Spalding in Washington, D.C.

Avoiding Sanctions

The best way to protect the company's reputation, of course, is to avoid running afoul of price-gouging laws in the first place. Despite the inherent vagaries of price-gouging statutes, in-house counsel can help their companies be certain that any price changes are fully justified, particularly during states of emergency.

"You need to set up a mechanism for people to obtain approval for price changes to ensure they comply with laws," Grindler says.

Additionally, companies can prepare themselves by maintaining records and assembling information that justifies price-changes.

"We tell businesses that if they are going to raise prices, they need to have a reasonable basis for doing it," Kelly says. "So if your wholesale costs went up or your rent increased, get your documentation in place to explain why you had to raise prices."

Being prepared puts companies in a strong position to answer inquiries quickly with information that defuses gouging claims early, before they explode into prosecutions and lawsuits.

"GCs had better pay attention to this issue, especially with a plaintiff's bar that is constantly looking for the next cottage industry for lawsuits," Mallow says. "Think ahead, and think like a plaintiff's lawyer."

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