Business Law Archives - Sharif | Faust

by Phillip Cavello || 7 July 2020 ||

* At the time of publication, Mr. Cavello, J.D. 2019, is a graduate law clerk under the supervision of attorney Khodadad D. Sharif.

**Special thanks to Afshin Pishevar, Esq. for coordinating with us to research the issues and help with the drafting of this post.

Khodadad “Ko” Sharif, Esq.

Phillip Cavello

In the midst of a pandemic, governments are left to their own devices to seek, obtain, and supply their population with the necessary medical equipment to deter further death. However, it is evident that without global cooperation, each country is hopelessly falling behind. In fact, Doctors, nurses, and patients alike are being forced to re-use medical equipment or utilize sub-par equipment. Further, every link in the chain of production are charging exuberant rates to produce and supply the medical equipment, which inevitably trickles down to the ultimate consumer. But why is essential medical equipment so expensive, and at what point are these price increases unlawful?

I. Why is Personal Protective Equipment so Expensive?

The supply chain of Personal Protective Equipment (“PPE”) was considerably disrupted because of the pandemic, the recent economic downturn, and the global powers

response to the pandemic.[i] With demand being far in excess of supply, the search for PPE has caused countries like China and the United States to create stringent policies inhibiting the export of PPE.[ii] Therefore, in this volatile market, it is undeniable that the global powers are acting in their self-interest.

A. China’s Regulations & Their Impact on the PPE Supply

By way of example, half the N95 masks in circulation are produced in China and at the inception of the pandemic China halted most of its’ exports of N95 masks.[iii] Recently, there was a Chinese Export regulation, issued on April 1, 2020, that harshened restrictions on exports of PPE from China.[iv] Under this regulation, before any export of PPE, it must be approved by the Chinese National Medical Products Administration.[v] But, approval for these exports are few and far in between. In fact, many promising deals have collapsed because various Chinese manufacturers failed to receive approval from National Medical Products Administration.[vi] Moreover, even if the deals stay intact, the supply chain has been severely disrupted by the mandatory customs inspections.[vii] These inspections were recently put in place by China.[viii] Though this is an effort to ensure the quality of the PPE, it is lengthening the approval process for shipments of PPE by days or even weeks.[ix] In these unprecedented times, those weeks are causing medical providers to reuse PPE, thereby putting those in the front lines in danger of contracting the disease.

B. United States Regulations & Their Impact on PPE Supply

Similar to China, the United States has largely barred the exports of PPE, under the Defense Production Act.[x] Under this act exports of PPE equipment are not permitted unless they are expressly authorized by the Federal Emergency Management Agency (“FEMA”).[xi] This is for good reason. In April of 2020, the American Medical Association contacted FEMA and stated that “[p]hysicians and other health-care workers in every state have expressed serious concerns regarding the availability of appropriate safety equipment.” the letter stated.[xii] Then on April 7, 2020, Secretary of State Michael Pompeo stated “[r]ight now, given the great need for PPE in our own country, our focus will be on keeping critical medical items in the United States until demand is met here.”[xiii]

The Department of Health and Human Services (“HHS”) estimates that the U.S. needs 300 million N95 masks per month to combat the COVID-19 pandemic[xiv]. But, the U.S. does not have that many in its reserves.[xv] Realizing the deficiency in importation of N95 masks, U.S. companies have begun manufacturing approximately 50 million N95 masks per month.[xvi] However, without looser restrictions, the U.S. will be unable to secure enough masks to meet the demand.

Now, the Federal and Drug Administration has gradually relaxed restrictions since the beginning of the pandemic, and even permitted imitations of approved PPE equipment, like the KN95 masks, to be used for medical purposes.[xvii] Despite these regulations, it appears that medical providers are still dealing with a mass shortage of PPE. In this case FEMA recommends medical providers first submit a request for assistance to the local, territorial or state emergency management agency before submitting a formal request with the FEMA Regional Response Coordination Center.[xviii]

C. Additional Factors to Consider

Another element to consider is payment for PPE.[xix] Due to the pandemic, the current environment is ripe for fraudulent actors to prey on the need for PPE. Chinese suppliers are now demanding upfront payments by distributors and customers to avoid being scammed.[xx] However, the suppliers are not the only ones being scammed. There are many reported cases of the buyers of PPE being scammed after providing the upfront fees.[xxi] In fact, the FBI has provided an official notice alerting the government and industry buyers of the emerging fraud trends relating to procurement of PPE.[xxii]

Further, even if distributors and customers are willing to pay the upfront fees, despite the possibility of being scammed, most must seek financing to pay for the upfront costs, thereby delaying the process in acquiring the much-needed supplies.[xxiii] Moreover, every party in this chain, among many others, are looking to profit from these deals. As a result the price is increased to the ultimate consumer.

Further, due to the economic downturn, logistics companies, like air freighters, are now charging premium freight rates for priority delivery to meet the demand for PPE.[xxiv] Although these logistics companies can be avoided altogether by having PPE privately chartered to the recipient, this creates another problem because those operating the private charters may not be as familiar with the ever-developing regulations of countries like the United States and China.[xxv] Therefore, it is prudent to use a logistics company. In addition, one should confirm that they are certified under Customs and Border Protections’ (“CBP”) Customs-Trade Partnership Against Terrorism (“C-TPAT”) program to avoid any issues with the customs agencies.[xxvi]

II. How Can We Stop Hoarding & Price Gouging?

What laws are on the books to combat hoarding and price gouging? It turns out that such laws exist, passed by both the federal government and the California government.

A. Federal Laws Prohibiting Hoarding & Price Gouging

On March 23, 2020, President Trump issued an Executive Order instructing HHS and the Department of Justice to enforce the anti-hoarding provisions of the Defense Production Act.[xxvii] Under this act, it would prevent people from hoarding supplies of necessary medical equipment like respirator masks, ventilators, and surgical gloves.[xxviii] Despite the executive order it is apparent that people are still hoarding PPE. This likely in the hope of selling these items for much higher prices. In a recent joint operation, the Department of Justice and HHS ordered a so-called hoarder to turnover 192,000 N95 respirator masks, 598,000 medical grade gloves and 130,000 surgical masks.[xxix] Although FBI agents and other law enforcement agencies are tracking hoarders of medical equipment, there still lingers a fear that retailers will gouge the prices of other necessities for life.

In response to this fear, the government could bring actions against retailers under the Section 5(a) of the Federal Trade Commission Act (FTC Act). (15 USC §45). [xxx] This act prohibits “unfair or deceptive acts or practices in or affecting commerce.”[xxxi] Under the FTC Policy Statement on Unfairness, an act or practice is unfair when it (1) causes or is likely to cause substantial injury (usually monetary) to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition.[xxxii] Substantial injury usually involves monetary harm but can also include reputational harm.[xxxiii]

An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury.[xxxiv] An injury may be substantial if it raises significant risk of concrete harm.[xxxv] An act or practice is not considered unfair if consumers may reasonably avoid injury. [xxxvi] Consumers cannot reasonably avoid injury from an act or practice if it interferes with their ability to effectively make decisions or to take action to avoid injury.[xxxvii] To be unfair, the act or practice must be injurious in its net effects — that is, the injury must not be outweighed by any offsetting consumer or competitive benefits that are also produced by the act or practice.

B. Pleas by the Senate

On March 17, 2020, Members of the House of Representatives sent a letter to the Chairman of the Federal Trade Commission (FTC), imploring the Commission “to take immediate action to protect consumers from price gouging during the COVID-19 public emergency.”[xxxviii] Specifically, the senators wrote:

“The FTC, as our nation’s top consumer protection enforcer, must do everything in its power to address price gouging for consumer health products during this national emergency … Although there is no federal law outlawing price gouging, as a general matter, the Federal Trade Commission Act (FTC Act) grants the FTC the power to prevent “unfair or deceptive acts or practices.” Charging outrageously inflated prices for everyday consumer health products in the middle of a global pandemic certainly fits that description. And make no mistake, the price gouging we are seeing has nothing to do with “supply-and-demand” or “price discovery”—it has everything to do with squeezing every last cent out of consumers in a time of desperate need.”[xxxix]

Despite any clear action by the Federal Trade Commission up to this point, consumers may rely on their own state laws to prevent, or seek remedies for, price gouging.

C. California’s Laws on Price Gouging

Like many other states, California has its own laws on price gouging, and though this blog is predominately focused on California you can find the information of other states laws at: https://consumer.findlaw.com/consumer-transactions/price-gouging-laws-by-state.html.

In California it is punishable by up to 1 year in jail and/or up to a $10,000 fine, civil penalties of up to $2,500 per violation, plus one may seek an injunction and restitution if a person sells commodities for more than 10 percent over the costs of these items immediately preceding the declaration of a state of emergency by the President, Governor, country, or city. Cal. Pen. Code § 396. [xl]

However, in certain circumstances, an increase in price by 10% is not unlawful. Specifically, when the seller can demonstrate the increase was: “directly attributable to additional costs imposed on it by the supplier of the goods, directly attributable to additional costs for labor or materials used to provide the services, during the state of emergency or local emergency, and the price is no more than 10 percent greater than the total of the cost to the seller plus the markup customarily applied by the seller for that good or service in the usual course of business immediately prior to the onset of the state of emergency or local emergency.” Cal. Pen. Code § 396(b).[xli]

Nevertheless, if the seller cannot meet their burden enumerated under Cal. Pen. Code § 396(b), not only can they be reprimanded under Cal. Pen. Code § 396, but they may also be held civilly liable under the California Business and Professions Code. In Particular California makes it unlawful for a person or business to engage unfair competition which includes any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising. Cal Bus & Prof Code § 17200.[xlii]

The “unlawful” prong effectively turns on a violation of the underlying law, like Cal. Pen. Code § 396, into a per se violation of the Business and Professions Code.[xliii] Further, a plaintiff must show that because of the Defendants conduct, while doing business, they have suffered a loss of money or property. In doing so, a Court may award a plaintiff restitution, injunctive relief, and other relief that the Court deems appropriate.

Conclusion

Ultimately, the global supply chain of PPE has been disturbed by the pandemic, and the search for PPE has caused countries like China and the United States to create stringent policies inhibiting the export of PPE, thereby impacting the supply chain and the costs attributed to importing these products. Further, the state and federal government may prevent hoarding of necessary medical equipment and price gouging, which is seemingly prevalent throughout this pandemic. Specifically, in California the state may provide relief when person or business sell commodities for more than 10 percent of the items price preceding the declaration of the state of emergency. Further, absent a showing by the person or business that the cost of the item increased because of the additional costs in acquiring the goods, a plaintiff may also bring a civil claim under the Business and Professions Code.

More Questions?

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[i] https://www.hklaw.com/en/insights/publications/2020/04/legal-insights-on-the-import-of-ppe-and-other-medical-supplies

[ii] Id.

[iii] Id.

[iv] Id.

[v] Id.

[vi] Id.

[vii] Id.

[viii] Id.

[ix] Id.

[x] Id.

[xi] Id.

[xii] https://www.ama-assn.org/press-center/press-releases/ama-urges-fema-act-single-national-source-acquisition-ppe