March 23, 2020
The COVID-19 crisis has resulted in huge demand for a range of consumer and other products, including face masks, hand sanitizer, paracetamol, bottled oxygen and ventilators. For companies manufacturing or reselling these products, this has provided an opportunity to raise prices. Sometimes increases have been dramatic and put in place overnight.
Sudden and unexplained price increases — giving rise to excessive prices or “price gouging” — potentially raise significant issues under EU and UK antitrust/competition and fair trading laws. Fines and third-party damages claims against companies can result. Governments also have made it clear that they will not hesitate to put in place statutory price regulation as necessary.
Leaving aside the moral and reputational elements, manufacturers and resellers need to be careful when putting in place significant price rises in the current situation. It is clear that regulators are watching. Companies should also appreciate that individual self-restraint at this stage will reduce the likelihood of statutory price regulation being introduced by governments.
Early on in the UK outbreak, the UK Competition and Markets Authority (CMA) sent a warning on excessive price increases and the possible introduction of statutory rules, saying:
“[The CMA] will consider any evidence that companies may have broken competition … law, for example by charging excessive prices. … And it will take direct enforcement action in appropriate cases. In addition, the CMA will assess whether it should advise Government to consider taking direct action to regulate prices.”
This was backed up by a 20 March 2020 open letter to the pharmaceutical and food and drink industries. The CMA said this time:
“… [W]e have received reports that a minority of firms in your sector are seeking to capitalise on the current situation by charging unjustifiably high prices for essential goods. … If appropriate, the CMA has recourse to a range of competition … powers to tackle bad behaviour. …”
The CMA also recognised that issues may arise along the supply chain:
“We understand that some price rises may result from constraints further up the supply chain. For example, if an individual firm raises its prices as a result of passing on increased prices from wholesalers or suppliers, then this may be unavoidable. However, where this is happening, we would like to hear from you about any information relating to such price increases by wholesalers or suppliers, so that we can investigate these issues further up the supply chain.”
The CMA has taken further steps to respond, in particular by setting up a dedicated COVID-19 taskforce. In part, the taskforce will scrutinise market developments to identify harmful pricing practices as they emerge and warn firms suspected of exploiting these exceptional circumstances. The CMA already has contacted traders and platforms regarding excessive pricing of hand sanitizer.
End-users and purchasers along the supply chain are able to contact the taskforce to make a complaint. The greater the level of detail provided to the taskforce, the higher the likelihood that a complaint will be taken up and investigated.
In the UK at least, absent any future statutory regulation, the CMA (and private third parties) will need to rely on antitrust/competition law to tackle excessive pricing. EU and UK antitrust law generally prohibits a dominant company — but not companies generally — from engaging in excessive pricing. A company is typically at risk of a dominance finding only if in an appropriately defined market it has a market share of >=40 percent or so. Markets can, however, be narrowly defined and include for example spare parts or servicing markets, so a company should be wary even if instinctively it feels that it is not dominant in any market.
On 23 March 2020, the European Competition Network of national regulators in the EU issued a joint statement on the application of competition law in the EU during the crisis. This expressly stated that the regulators “will … not hesitate” to take action against companies taking advantage of the current situation by abusing their dominant position.
Outside the UK, in various countries in the EU, generally applicable fair trading or unfair commercial practices laws may be used to challenge excessive prices (these will operate in parallel to and separately from standard antitrust/competition laws). A company does not need to be dominant for these rules to apply, although in some cases there will need to be a relationship of “economic dependence” or similar between the supplier and its customers. These rules can also give rise to regulatory fines.
As an example, the Italian Competition Authority has started investigations into alleged “unjustified and significant” price increases of face masks and hand sanitizer sold on certain platforms. These have reportedly been started under the regulator’s unfair commercial practices rules.
Legally binding price restrictions also are starting to be put in place. For example, in France the wholesale and retail prices of hand sanitizers have been capped by law. These types of restrictions will be well-publicised, but clearly need to be monitored, for example through the trade press. The European Commission has recognised that price regulation may be “helpful to avoid soaring and abusive prices” provided that these are applied without discrimination.
The immediate message is clear: Price hikes, particularly if sudden and dramatic, will give rise to the risk of an investigation, either during the pandemic period or afterward. Potentially dominant suppliers are most at risk and should take antitrust law advice before increasing prices in the current situation. Dominance can exist in narrow markets, so careful consideration should be given to this.
Even nondominant companies should consider the application of general fair trading rules and self-restraint in relation to price increases (implemented unilaterally) on the part of suppliers and retailers will help reduce the likelihood of government price regulation.
At the same time, end-users and other customers faced with material price hikes have defences available. They may be able to complain to a regulator or take direct court action based on antitrust or fair trading rules.
For more information, please see McGuireWoods’ related alerts:
We will provide more detail on these topics in future alerts.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.