Defense Production Act

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Almost a year into the business disruptions caused by the pandemic, businesses continue to find ways to adapt and to comply with new pricing restrictions. Some of these changes relate to additional costs that businesses may need to pass along to consumers — at least in part. Given what we have seen in recent months, it is worth revisiting how businesses can implement these surcharges with an eye towards compliance with local price gouging laws.

In the wake of the deep freeze that recently swept the nation, natural gas has taken the forefront among a slew of price gouging allegations. Last week’s winter storms caused natural gas spot market prices to spike, with some reporting up to a 100% percent increase. Reports also surfaced of spot prices for wholesale electricity in Texas’ power grid increasing more than 10,000%. In response, Minnesota Senator Tina Smith (D-MN) has not only encouraged federal regulators to investigate the price spikes, but has also requested regulators to “[i]nvoke, as appropriate, any emergency authorities available, including under the Natural Gas Policy Act, to allocate natural gas supplies at fair prices.” Whether natural gas prices exceeded allowable limits under applicable price gouging statutes currently in effect depends, among other things, on whether natural gas is within the scope of these laws in the first place.

As part of the federal government’s efforts to combat the COVID-19 pandemic, President Biden plans to “fully use” the Defense Production Act (the “DPA”) to compel production of medical and protective equipment, and ensure adequate supplies and distribution of vaccines. On January 21, 2021, the White House released its National Strategy for the COVID-19 Response and Pandemic Preparedness, in which it stated that “the federal government will use its full powers to prevent hoarding and price gouging, including by reviewing and expanding the designated scarce materials under the DPA.” In doing so, the new administration re-committed the federal government to using the DPA to combat price gouging, a practice started by President Trump in March 2020.

With the federal government’s increasing focus on enforcing price gouging compliance, attention has turned to the Defense Production Act (the “DPA”). Passed in 1950 in response to the Korean War, the DPA is modelled on the War Powers Acts of 1941 and 1942 and gives the President, among other things, sweeping power to control the domestic economy during times of crisis. Despite these origins, the DPA is routinely invoked in a variety of circumstances, including in response to natural disasters like Hurricane Katrina and now COVID-19 (the DPA as later amended in 1988 is also the basis for the president’s authority to block certain foreign investment into the U.S. on national security grounds through the Committee of Foreign Investment in the U.S. – or CFIUS).

While the majority of price gouging enforcement has occurred at the state level (see Proskauer on Price Gouging — A Coast-to-Coast Reference Guide), the federal government has also been active, and several federal price gouging bills have been introduced, though none have been signed into law. See, e.g., S. 3574 (empowers the FTC and Attorney General to enforce civil and criminal penalties for price gouging); H.R. 6472 (prohibits “unconscionably excessive” pricing “indicating the seller is using the circumstances related to” the emergency to increase prices); H.R. 6264 (creates a new criminal offense for price gouging during a state of emergency); H.R. 6450 (based on California law, limits raising price of consumer goods to no more than 10% after an emergency declaration).