Price Gouging: What Compliance Teams Need to Know

The COVID-19 pandemic is having a lasting effect on the U.S., European and global economies. Supply chain challenges, commodities crises and labor disruptions—further exacerbated by geopolitical tensions—have forced companies to re-think strategies, adjust their operations and, in turn, their pricing.  The dramatic rise in inflationary pressure has accelerated: the U.S. Consumer Price Index rose by 7.9% while prices rose by 9.0% in the UK, the fastest increase in 40 years in both countries.^1,2

Such economic environments tend to foster upward price pressures and increased risk of exploitation for customers, such as price gouging. Various legal and economic regimes have attempted to make price gouging illegal to better protect consumers.

The pandemic brought price gouging back to the center stage as prices of necessities, such as paper towels and protective masks, climbed exponentially.  Yet, it is difficult for consumers and policymakers to know if price increases are driven by a true cost increase or exploitation by a company. While some of these practices are here to stay and reflect changes in consumer preferences and market behavior, other corporate actions are driven by the interest in improving financial performance, especially in sectors that might previously have suffered from a softening of demand. Regulators should consider intervening whenever market forces do not create the expected downward pressure on prices through the transformational period as demand declines and there is a path towards economic normality.

In April 2022, the New York Attorney General launched an investigation into gas price gouging by the oil industry (prompting an examination of the state’s entire supply chain³), while and the city’s mayor issued a state of emergency to prevent baby formula price gouging⁴. Both of these actions show governments’ commitments to exercise their investigative and enforcement capabilities. Governments and regulators around the world are acutely aware that competitive forces may not always function properly and intervening to protect consumers is important. Lack of action also carries significant political consequences. Added to this is the risk of private enforcement action. For example, class action lawsuits may be brought to bear on companies with large groups of claimants mobilizing to challenge and seek compensation for excessive prices. In the UK, a class action has been brought against a giant telecommunications company for excessive pricing⁵. Some previous cases, and potentially new and upcoming cases, focus on extra charges that do not accurately reflect the true underlying cost structures of supplying the products and services.

While all companies need to understand the legal environment, including, for example, jurisdictions, competition (anti-trust) and regulatory frameworks (and covered products and services), it is the data management and economic analysis that requires additional critical thinking and various practical actions (both immediate and with a medium to longer-term lens in mind).

Companies should be able to document set or list pricing, pricing analyses undertaken (for example, through benchmarking or market assessments) and actual costs and prices for all products and services in case of an investigation, enforcement procedure or private action. As the numbers and variety of products and services sold grow, supply-chains become more complex and global, generating an enormous volume of data enormous. Fortunately, there are data solutions being developed that help companies to improve their knowledge management.

In addition, every inquiry or legal challenge will require proof of pricing policies and supporting economic and relevant market analysis in order to reject any market abuse allegations. This is a critical component of the compliance structure and implementation. As compliance functions become broader and interdisciplinary within corporations, there will be a need to expand the knowledge of ‘price gouging’ rules within compliance departments—as well as the underlying information to track and  analyze to remain safely above the law. Chief compliance officers and their teams should understand the role of pricing policies in compliance programs and their implementation. Training programs among marketing and sales teams across global supply chains could also be useful.

Such a compliance program and its implementation cannot be executed without proper technological and analytical support. The competition (anti-trust) regime could serve as a case in point. Similar approaches have been proven successful in helping companies avoid investigations, illegalities and enforcement consequences.

Finally, while caselaw is still limited, several cases will also lead to formal legal procedures. The expertise needed for those cases involve big data analytics and extensive economics analysis. This hybrid approach already seeds a new generation of experts, who bring to the boardroom and the courtroom a fresh take on familiar challenges.

_Sources
^1.https://edition.cnn.com/2022/03/10/economy/us-consumer-price-inflation-february/index.html
^2.https://www.bbc.co.uk/news/business-12196322
^3.https://www.reuters.com/world/us/new-york-ag-launches-investigation-oil-industry-over-gas-price-gouging-cnn-2022-04-14/
^4.https://nypost.com/2022/05/22/nyc-mayor-adams-issues-state-of-emergency-to-prevent-baby-formula-price-gouging/
^5.https://www.totaltele.com/513273/BTs-appeal-against-600m-class-action-lawsuit-rejected