New York Dismisses Price Gouging Lawsuit Against Wholesaler
As previously discussed here by an FTC defense attorney, the Federal Trade Commission and state Attorneys General have enhanced the use of resources at their disposal to protect consumers in the midst of the COVID-19 crisis. Issues such as price gouging and unsubstantiated product efficacy claims sit atop the regulatory action list.
The New York Attorney General Enforcement Action
In May 2020, the New York Attorney General initiated legal action against Quality King Distributors, alleging that the company gouged prices of more than 46,000 cans of Lysol disinfectant spray. The lawsuit seeks a permanent injunction barring the company and its CEO from continuing their illegal conduct, restitution for injured consumers, a civil penalty, and disgorgement of Quality King’s profits from their alleged illegal practices.
The lawsuit charges the wholesaler, Quality King Distributors, Inc., and its CEO, with illegally increasing the company’s wholesale prices to sell Lysol disinfectant products to neighborhood grocery and discount stores in New York.
Between January 2020 and April 2020, according to the New York AG, the company increased the price of Lysol Disinfectant Spray from about $4.25 per 19-ounce can to as high as $9.15 per can, even though the company purportedly did not incur increased costs for the product. According to the NY AG, the stores purchasing Lysol products from Quality King then passed on those increased prices to their customers, forcing them to pay far higher prices for Lysol products than they did before the pandemic.
The New York AG alleges that consumers were charged as much as $16.99 for one can of Lysol that was previously sold at a retail price range of $5 to $8. The lawsuit seeks restitution from Quality King for those consumers who were forced to pay unlawfully high prices for these essential products.
According to the NY AG, prior to the pandemic, Quality King sold Lysol Spray at the median wholesale price of about $4.25 for one 19-ounce can of the product or about $51 for a pack of 12 cans. The lawsuit alleges that the company then steadily increased its prices as New York and the nation became gripped by the coronavirus pandemic – first to a wholesale price of about $5 per can ($60 per 12-pack) during February 2020, then about $7.95 per can ($95.45 per pack) by early March. By the end of March, alleges the NY AG, Quality King charged as much as $9.15 per can of Lysol Spray (about $110 per pack), or more than double its typical price for the product just two months earlier.
As alleged by the NY AG, during this time, Quality King’s own median costs to purchase Lysol Spray from its suppliers remained flat at around $3.54 per can or $42.50 per 12-pack. As a result, the company has purportedly been able to boost its gross profit margin on the product from about 21 percent before the pandemic crisis to more than 95 percent during the crisis, or almost a five-time increase.
The lawsuit alleges that Quality King’s price increases injured New York consumers, who sought to buy Lysol’s disinfectant products to kill the coronavirus on surfaces in their homes to reduce the risk of infection. The NY AG alleges that retail stores in New York paid Quality King’s high wholesale prices and then passed the price increases on to their customers.
As a result, consumers paid prices of $12, $13, and even $16.99 for cans of Lysol that were previously sold at a retail price range of $5 to $8, the complaint alleges. Between February 1, 2020 and April 7, 2020, Quality King sold Lysol Spray with gouged prices in at least 432 separate transactions, the complaint also alleges. According to the NY AG, these sales accounted for at least 3,835 12-packs of Lysol Spray or 46,020 19-ounce cans.
The lawsuit alleges that Quality King has also increased prices on Lysol Disinfectant Wipes.
New York’s Expanded Price Gouging Law
The case was prosecuted by the NY AG under New York’s price gouging law, which, at the time, prohibited the sale of consumer products that are necessary for the health, safety, and welfare of consumers for an “unconscionably excessive price.” The law has subsequently been expanded beyond consumer goods, so that it now protects any products or services that are vital or necessary to the health, safety, and welfare of consumers or the general public. The new law extends protection to businesses, hospitals, health care providers, and the State of New York.
New York Supreme Court Dismisses the Case
On September 23, 2020, the Supreme Court, New York County dismissed the case, holding that the increased prices charged by Quality King were not, as a matter of law, “unconscionable or overall extreme.” The court noted that Quality King did not uniformly raise their prices on Lysol products, and that the company proved that its costs to purchase Lysol products increased as well.
“When considered among the panoply of Lysol products offered at that time (which includes Lysol wipes and other size Lysol cans, among other Lysol products, and which Petitioner urges should all be included should the court fashion injunctive relief), all of which were shown to be vital and necessary for health and safety, the pricing overall did not indicate any use of unfair leverage, an abuse of bargaining power or unconscionable means; nor did the pricing represent a gross disparity between the price of the goods and their value measured by the price at which they were sold immediately prior to March 7, 2020,” the court stated.
Importantly, the court considered the prices that the company was charging on all of its Lysol products, rather than just those that the NY AG alleged had unlawfully inflated prices. This suggests that the existence of consumer choice may potentially be a possible mitigating factor. It is also important to note here that the court went beyond considering merely the amount of the price increase. Rather, the court found that Quality King demonstrated that its prices were not only competitive, but that they were lower than marketplace competitor prices.
The case is People of the State of New York v. Quality King Distributors, Index No. 451296/2020 (N.Y. Sup. Ct. 2020).
Richard B. Newman is one of the leading State Attorney General (AG) defense lawyers in the marketing and advertising niche. He is a partner at Hinch Newman LLP.
Informational purposes only. Not legal advice. May be considered attorney advertising.