Archived copy: The Federal Response to Hoarding and Price Gouging During the COVID-19 Pandemic

Summary

• Due to the lack of comprehensive federal legislation addressing price gouging, the government turned to the Defense Production Act of 1950 (DPA) to protect the public during the COVID-19 pandemic.
• While Congress originally enacted the DPA to address wartime situations, the Act’s authority extends to permit the executive branch to respond to national emergencies, such as the pandemic.
• The DPA’s anti-price-gouging provision prohibits the accumulation of designated materials for the purpose of resale at prices “in excess of prevailing market prices.”
• The COVID-19 Hoarding and Price Gouging Task Force of the Department of Justice (DOJ) investigated and prosecuted a number of cases related to hoarding and price gauging during the pandemic.

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The COVID-19 pandemic presented a number of extraordinary challenges for the United States. One of those challenges was the widespread shortage of nearly all essential items, including the vital personal protective equipment and sanitizing products needed to protect our medical professionals, first responders, and the general public from the virus. Unfortunately, as the severity of the pandemic became apparent, some individuals sought to take advantage of the national crisis, and they accumulated these much-needed products in excess of their personal needs for the purpose of selling them at inflated prices—an action known as “price gouging.” As a result, federal law enforcement agencies were tasked with investigating and prosecuting hoarding and price gouging so that these critical supplies could be best utilized to safeguard public health rather than enrich those who attempted to exploit the dire situation.

An obstacle to federal enforcement was the lack of comprehensive federal legislation addressing price gouging. Several bills were introduced in both chambers of Congress, but to this day, none have been signed into law. Section 5 of the Federal Trade Commission Act (FTCA) prohibits “unfair methods of competition” and “unfair or deceptive practices,” but the Act has never been applied to combat price gouging.

Due to this gap in federal law, price gouging had traditionally been enforced mainly through state laws. And many states, counties, and municipalities invoked emergency powers and issued numerous executive orders to protect public health during various declared disasters or public health crises, including the pandemic. Private-sector companies also undertook an unprecedented effort to combat price gouging, often cooperating with federal and state law enforcement authorities.

The Defense Production Act

To combat price gouging in the wake of the COVID-19 pandemic despite the lack of comprehensive federal legislation addressing the issue, federal law enforcement agencies turned to the Defense Production Act of 1950 (DPA). At the start of the Korean War in 1950, Congress enacted the DPA, modeled on the War Powers Act of 1941 and 1942, which had conferred President Franklin D. Roosevelt with sweeping authority to control the domestic economy during the Second World War. Since 1950, Congress has continually reauthorized the DPA, most recently in the John S. McCain National Defense Authorization Act of 2019, which will expire in 2025. While Congress originally enacted the DPA to address wartime situations, the Act’s authority extends to permit the executive branch to respond to national emergencies, such as the COVID-19 pandemic.

Section 101(b) of the DPA provides the mechanism for how the president triggers his authority under section 101(a) of the DPA. First, the president must find that (1) the material at issue “is scarce or critical material essential to the national defense,” and (2) “the requirements of the national defense for such material cannot otherwise be met without creating a significant dislocation of the normal distribution of such material in the civilian market to such a degree as to create appreciable hardship.”

The DPA contains two sections relevant to enforcement actions during the COVID-19 pandemic: the anti-hoarding provision and the anti-price-gouging provision. The anti-hoarding provision of section 102 authorizes the president to “designate” materials necessary to promote the national defense and prohibits the accumulation of such materials “in excess of the reasonable demands of business, personal, or home consumption.” Furthermore, the anti-price-gouging provision of section 102 prohibits the accumulation of designated materials for the “purpose of resale at prices in excess of prevailing market prices.” The willful violation of this statute is punishable by a fine of up to $10,000 and imprisonment for no more than a year.

Pursuant to the authority conferred by the DPA, President Donald Trump signed three executive orders to combat price gouging. On March 23, 2020, President Trump issued Executive Order 13910, which became the primary federal anti-price-gouging initiative, and delegated authority to designate materials under the DPA to the Secretary of Health and Human Services. Accordingly, on March 25, 2020, then-Secretary of Health and Human Services (HHS) Alex Azar designated scarce or threatened materials that would be subject to the hoarding prevention measures authorized under Executive Order 13910. Designated materials included N95 face masks, portable ventilators, disinfecting devices, medical gowns or apparel, personal protective equipment (PPE) coveralls, PPE surgical masks, PPE face shields, and PPE gloves. As the pandemic progressed and supply levels changed, HHS continued to extend and update the materials on the list. The latest update, on July 7, 2021, was in effect until November 15, 2021. The designation of the listed materials as scarce granted federal enforcement agencies—namely the Department of Justice (DOJ)—the authority and mandate to enforce the DPA against anyone who hoarded such materials or engaged in price gouging.

Although the DPA granted federal law enforcement agencies the authority to pursue cases involving price gouging and hoarding, it also presented two key questions: what qualifies as price gouging, and what notice is required for a violation?

What qualifies as price gouging under the DPA? The DPA’s anti-price-gouging provision prohibits the accumulation of designated materials for the purpose of resale at prices “in excess of prevailing market prices.” Few federal courts have addressed the meaning of “prevailing market prices” in the context of the DPA, but one court defined it as “those prices charged by established vendors in the relevant market, not new market entrants seeking to inflate prices above those routinely charged in the relevant market.” Whether other courts will follow this interpretation is an open question. And an ambiguity remains as to whether law enforcement agencies should interpret the statute to mean established vendors’ prevailing market prices for designated goods before the onset of the pandemic or the prices that resulted afterward.

In addition, the statute does not define “excess,” and courts have provided little guidance on how much above an average price an item must be to subject the seller to prosecution. In the context of the DPA’s hoarding provision, one court held that “excess” simply means “more than.” But just because a good is sold at one cent over the prevailing market price does not mean that the DOJ would choose to prosecute the merchant.

On June 9, 2020, as then-head of the DOJ’s COVID-19 Hoarding and Price Gouging Task Force, I testified and submitted a joint statement before the Senate Judiciary Committee with then-Associate Deputy Attorney General William Hughes regarding the DOJ’s focus on profiteering. I explained that when the DOJ saw a reseller charge substantially higher prices, it inquired whether the legitimate costs of the reseller were high, and if the reseller must have sold at a high resale price to turn any profit or simply break even. If so, even a price much higher than other transactions would not subject the reseller to prosecution. Whether the reseller is profiteering was the dominant inquiry. Despite such insight, however, neither the DOJ nor the Task Force provided any bright-line rules, largely leaving such questions to prosecutorial discretion.

What notice is required for a DPA violation? A criminal violation of section 103 of the DPA requires proof of two general requirements: first, that the defendant actually did something expressly prohibited or failed to do something expressly required by the DPA itself; and second, that the defendant did so willfully and with knowledge that his conduct was generally unlawful. Therefore, another question is whether individuals and market participants that accumulated materials shortly after the DPA’s invocation possessed the requisite knowledge that their actions were unlawful as required for federal authorities to prosecute them under the DPA.

The DOJ’s Efforts to Combat Price Gouging and Hoarding During the Pandemic

Upon the president’s invocation of the DPA, the DOJ implemented a number of measures to investigate, disrupt, and prosecute potentially unlawful conduct related to COVID-19.

COVID-19 Hoarding and Price Gouging Task Force. On March 24, 2020, then-Attorney General William P. Barr announced a nationwide task force and asked me to take the lead in investigating and prosecuting hoarding, price gouging, and market manipulation during the COVID-19 pandemic. Attorney General Barr directed each U.S. Attorney’s Office, as well as relevant DOJ components, to designate an experienced attorney to serve as a member of the task force. He also directed the Task Force to develop effective enforcement measures, to work closely with HHS as it designates particular items and equipment as scarce, and to coordinate nationwide investigations and prosecution of hoarding and price gouging. During the height of the pandemic, the Task Force worked closely with the administrator of the Federal Emergency Management Agency (FEMA) in exercising his authority pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 to seize necessary health-care and medical items and to redeploy them to essential personnel. Thus, comprised of federal prosecutors located throughout the United States, the Task Force opened hundreds of hoarding and price gouging investigations into companies and individuals selling designated materials.

Confiscation and distribution of hoarded material. On April 2, 2020, the DOJ and HHS announced the distribution of hoarded personal protective equipment, including approximately 192,000 N95 face masks, to frontline health-care workers in New York and New Jersey. The Task Force, working alongside the Federal Bureau of Investigation, discovered the supplies during a March 30 enforcement operation and alerted HHS, which used its authority under the DPA to order that the supplies immediately be furnished to the United States. In addition to the N95 face masks, the Task Force also retrieved 598,000 medical-grade gloves, 130,000 surgical masks, procedure masks, N100 masks, surgical gowns, disinfectant towels, particle filters, as well as bottles of hand sanitizers and spray disinfectant. HHS paid the owners of the hoarded equipment pre-COVID-19 fair market value for the confiscated supplies.

National Center for Disaster Fraud Hotline. On March 19, 2020, then-Deputy Attorney General Jeffrey Rosen issued a letter to the nation’s U.S. Attorneys and directed that the public make all coronavirus-related complaints to the National Center for Disaster Fraud (NCDF) Hotline. The NCDF is a national coordinating agency within the DOJ’s Criminal Division, and its mission is to improve the detection, prevention, investigation, and prosecution of criminal conduct related to natural and man-made disasters.

Coronavirus Coordinator. In the same March 19, 2020, letter, Deputy Attorney General Rosen directed every U.S. Attorney to designate a Coronavirus Coordinator for his or her respective office. These coordinators (1) served as the legal counsel for the federal judicial districts on matters related to the coronavirus, (2) prosecuted or assisted in the prosecution of coronavirus-related cases, and (3) conducted public outreach and awareness activities relating to the coronavirus.

Specific Price Gouging Enforcement Actions

While in operation, the DOJ’s COVID-19 Hoarding and Price Gouging Task Force investigated and prosecuted a number of cases, demonstrating its commitment to combat hoarding and price gauging during the pandemic. The following cases illustrate the diverse methods and varied tools that were in the Task Force’s arsenal to aggressively challenge criminal misconduct pertaining to designated materials.

Defense Production Act. On April 24, 2020, the DOJ charged Amardeep Singh with violating the DPA by hoarding PPE and price gouging customers of his retail store in Long Island, New York. According to his deferred prosecution agreement, between March 15 and April 14, 2020, Singh received massive quantities of PPE items (face masks, surgical gowns, hand sanitizers, and digital thermometers)—some of which had been officially designated as scarce—and then advertised and sold these items at his retail store at prices far exceeding prevailing market prices. For example, Singh purchased three-ply disposable face masks for $0.07 per unit and resold them for $1.00 per unit, which constituted a markup of approximately 1,328 percent.

On February 25, 2021, the DOJ charged Imran Selcuk with violating the DPA by selling masks in excess of prevailing market prices between March and May 2020. According to his plea agreement, Selcuk purchased approximately 100,000 KN95 masks for $1 per mask and 25,000 surgical-style masks for 50 cents per mask and resold them at over 500 percent of that price at his pizza restaurant and online. He also represented to customers that the US. Food and Drug Administration (FDA) certified the KN95 masks, despite the fact that the FDA does not “certify” masks.

Federal Food, Drug, and Cosmetic Act. On June 5, 2020, the DOJ charged King Year Packaging and Printing Co. Ltd (King Year) with three counts of violating the Federal Food, Drug, and Cosmetic Act (FDCA) for importing misbranded and substandard respirators that falsely purported to meet the N95 standard. According to the complaint, from April 6 to April 21, 2020, King Year manufactured 495,200 defective and misbranded masks that claimed to be N95 respirators and imported such defective products into the United States. King Year also stamped the National Institute for Occupational Safety and Health (NIOSH) and FDA logos on the packaging for its respirators, when in fact they were not NIOSH-approved nor FDA-authorized.

On June 17, 2020, the DOJ charged Crawford Technology Group Co. Ltd. for violating the FDCA by manufacturing and selling 140,400 misbranded KN95 filtering face masks for import into the United States. According to the complaint, the packaging for the respirators and the respirators themselves falsely indicated that they were 95 percent efficient at filtering harmful airborne particles. They also falsely claimed to be compliant with European Union and Chinese standards that require at least 94 or 95 percent filtering efficiency, respectively. In truth, the average filtering efficiency for Crawford’s respirators was 22.33 percent.

Fraud. On September 29, 2020, the DOJ charged a Thai national, known only by the alias “Dang Chanchai,” with nine counts of wire fraud for defrauding a New Jersey company in its purchase of COVID-19 personal protective equipment. According to the indictment, Chanchai falsely represented himself as a distributor of 3M N95 respirators and sent the victim company a contract that falsely represented that he would supply 10 million of such products. From April 20 through April 30, 2020, Chanchai sent the victim company fake documents purporting to be from 3M, including false representations about the status of the production of the respirators and requests for payments to satisfy the order. Based on Chanchai’s misrepresentations, the victim company wired payments totaling $1,494,306 to Chanchai, who did not provide a single 3M N95 respirator to the company and ceased communications after receiving the final payment.

On November 24, 2020, the DOJ charged Paschal Ngozi Eleanya and Arael Doolittle for attempting to fraudulently sell 50 million non-existent N95 face masks to a foreign government. According to the indictment and Doolittle’s plea agreement, Eleanya and Doolittle negotiated a sales price for the masks that was five times the publicly listed price that 3M had set, and they expected to gain around $275 million as a result of their fraudulent scheme.

Theft of personal protective equipment. On October 21, 2020, the DOJ charged Frank Smail and Mike Pellegrini with conspiracy to steal PPE from the Federal Law Enforcement Training Center (FLETC); Smail was also charged with PPE theft, obstruction of justice, and lying to federal agents. According to the indictment, the two defendants conspired, and then Smail stole a large amount of the FLETC’S PPE supply, requiring a transport vehicle and numerous trips to load and carry away a significant number of boxes.

The Future of Enforcement

While the DOJ’s COVID-19 Hoarding and Price Gouging Task Force has been disbanded, time will tell whether the government will rely on the DPA to combat price gouging in future emergencies. During the pandemic, the Task Force proved that the statute can be utilized as an effective tool for protecting the public when supplies become scarce. The Task Force’s interpretation of the statute and corresponding executive orders has survived challenges to its constitutionality, but there are still open questions. As other cases make their way through federal courts and new challenges arise, we will gain additional insight into the effectiveness of that 70-year-old statute in protecting the public from those who would use the current pandemic as a tool to profit off those in need.

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