COVID 19 and America’s Newest Oldest Crime – Hoarding
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Shortly after the President signed Presidential Proclamation 9994 invoking the Defense Production Act to fight the Coronavirus Pandemic, the Attorney General, acting under the same body of law, issued his own memorandum addressing the legal aspects of the consequences of the Proclamation. The Memorandum, dated March 24, 2020 and sent to all U.S. Attorneys, promised to “pursue bad actors who amass critical supplies either far beyond what they could use or for purposes of profiteering. Scarce medical supplies” the Memorandum said, “need to be going to hospitals for immediate use in care, not to warehouses for later profit.”
The Memorandum gave few specifics on what acts would, and would not, be criminally pursued, but those which were given were helpful. The memo states that the U.S. will pursue “those who acquire vital medical supplies in excess of what they would reasonably use or for the purpose of charging exorbitant prices to the healthcare workers and hospitals who need them.” It said it would not pursue “[r]egular Americans who are stocking up on the necessities of daily life or businesses who are acquiring material reasonably needed for their own use. Nor will we take action against manufacturers or suppliers who are working with the government and healthcare providers in an effort to combat this crisis.” In effect, those who “stockpile” will not be pursued. Those who “hoard” will. So, last week, when Melinda Gates told a BBC interviewer that she and her husband began, as far back as 2015, acquiring foods and other necessities in anticipation of a pandemic, she was admitting to “stockpiling,” not hoarding. (Interview of Melinda Gates with Emma Barnett, April 16, 2020, (bbc.co.uk/sounds/play/089n5rj)). She broke no law. The distinction seems a bit ephemeral but is important since, in the end, the remedies for a violation of the Defense Production Act call for fines and a period of imprisonment not to exceed one year per violation. (50 USC §4513).
What is actionable under the Defense Production Act?
The Attorney General’s Memorandum, brief though it is, generally summarizes the prohibitions under the Defense Production Act. Unlike the 1917 National Defense Act, which, at the time, prohibited “hoarding”, but not price gouging, the Defense Production Act, effectively combines the two “either/or” forms of conduct into a single prohibition. The Act states: “No person shall accumulate (1) in excess of the reasonable demands of business, personal or home consumption or (2) for the purposes of resale at prices in excess of prevailing market prices” those materials designated by the President [or his delegee under the statute] as scarce or which would be threatened by such accumulation.” (50 USC §4512) So the first point of emphasis is that not all articles can be the subject of a federal criminal charge of price gouging under the DPA, only those designated as “threatened by accumulation.” On March 30, 2020, acting pursuant to authority delegated to him by Pres. Proc. 9994, the Secretary of Health and Human Services identified 15 classes of goods that were that were designated as “scarce” and were covered by the Act.[1]
The Attorney General’s language explaining who would and would not be subject to prosecution is helpful, but of greater consequence is the safe harbor language related to business conduct. “Nor will we take action against the manufacturers or suppliers who are working with the government and with healthcare providers in an effort to combat this crisis.” The sentence contains within it certain built in defenses against charges of profiteering. Government agencies are sophisticated buyers, the memo implies, so prices to them, negotiated by sellers in good faith, should be presumptively “prevailing”, or at a minimum defensible. Arguably a price paid by the government creates a prevailing price. Similarly, sales directly to sophisticated healthcare providers should fall within the same defense. But the language in the memorandum discussing merchandise going to “warehouses for later profit” is unclear, but it implies some distinctions that can be important. If a distributor has already consummated a sale to a hospital, but the buyer has requested a delay in delivery, the seller is probably relatively safe, provided that the price itself meets the “prevailing market price” test. This is not a holding for “later profit.” It is a holding for “later delivery.” The memo is clearly directing itself to those who both buy and hold for the purpose of increasing the price as scarcities grow, not simply those who hold because a customer cannot be found, even if the “prevailing market price” later changes. So ultimately the “prevailing market price” standard and the price point above which such a price will be actionable, will present the most difficult question for distributors and their attorneys. There is no easy answer. State price gouging laws fall into two, predictable, categories. In states like New Jersey and California, a fixed percentage increase above a provable market price is per se a “gouging” price. In both states the price uplift cap is 10%. But other states, as well as the Defense Production Act, use the variable standard of a price “above” the “prevailing market” price, which both puts on the prosecutor the burden of establishing the “prevailing market price” and creates the subset question of “how far above prevailing market must one go to risk a violation”? This is clearly the greatest question that the seller/distributor faces.
The one especially helpful factor of the Attorney General’s Memorandum is that the Memorandum establishes a task force, requiring each U.S. Attorney’s Office to appoint one Assistant as a member of the task force, giving uncertain distributors some point of inquiry to where they should look for more specific guidance. A distributor or his attorney who in good faith seeks some guidance from the federal government, may be able to get some direction from his local U.S. Attorney’s Office by simply calling and soliciting the guidance from the Task Force that the memo implies will be available. To the extent that an inquirer gets comfort from a Task Force member, never would a memo to the file be more valuable.
If you would like assistance with these issues, please contact a Neville Peterson professional.
[1] The 15 articles designated a “scarce” were: M95bFiltring Facepiece respirators (FFR); other FFRs; air purifying respirators; powered purifying respirators; portable ventilators; drug products with the active ingredient chloroquine; sterilization services for certain medical devices; disinfecting devices intended to kill pathogens; medical gowns and apparel; personal protective equipment; PPE facemasks; PPE surgical masks; PPE face shields; PPE gloves; ventilators and devices modified to act as ventilators. 85 Fed. Reg. 17592-593, March 30, 2020.