Department of Health and Human Services Triggers Price Gouging and Hoarding Provisions of Defense Production Act

On March 30, 2020, the Department of Health and Human Services (HHS) published a Notice (first announced on March 25) designating specific categories of medical and health resources as “scarce” or “threatened” within the meaning of 50 U.S.C. § 4512 of the Defense Production Act (DPA).  The equipment listed in the notice are:

• Respirators, including those designated as N-95 and others;
• Ventilators, both portable and stationary;
• Any drug products containing chloroquine phosphate or hydroxychloroquine HCl, an anti-malarial drug;
• Sterilization services for medical devices and sterilization devices;
• Disinfecting devices;
• Medical gowns or apparel;
• Personal Protective Equipment (PPE) coveralls;
• PPE face masks, surgical masks, and face shields; and
• PPE gloves or surgical gloves.

Under § 4512 of the DPA, it is now unlawful to accumulate these materials at levels “in excess of the reasonable demands of business, personal, or home consumption” or “for the purpose of resale at prices in excess of prevailing market prices.”  Although HHS did not provide written guidance on what constitutes “reasonable demands,” US Attorney General William Barr explained during an earlier press conference that:

“We’re not talking about consumers or businesses stockpiling supplies for their own operations; we’re talking about people hoarding these goods and materials on an industrial scale for the purpose of manipulating the market and ultimately driving windfall profits.  If you have a big supply of toilet paper in your house, this is not something you have to worry about, but if you are sitting on a warehouse with masks, surgical masks, you will be hearing a knock on your door.”

AG Barr has also announced the creation of a COVID-19 Hoarding and Price Gouging Task Force to investigate and prosecute violations of the anti-hoarding and anti-price gouging provisions of the DPA. The task force will be led by Craig Carpenito, the United States Attorney in the District of New Jersey, but will have at least one attorney from each United States Attorney’s Office.

Willful violations of the DPA are subject to a maximum $10,000 fine and/or up to one year imprisonment under § 4513.  Furthermore, implementing regulations of the DPA also prohibit a person from delivering any item specified if that person knows or should have known that the item will be held in violation of the DPA upon delivery. 

This notice follows two Executive Orders issued by President Trump delegating certain powers under the DPA to the Secretary of HHS, Alex Azar, and the Federal Emergency Management Agency (FEMA).  President Trump published his first Executive Order invoking the DPA on March 18.  This Order made a definitive finding that “health and medical resources needed to respond to the spread of COVID-19, including personal protective equipment and ventilators, meet the criteria specified in section 101(b) of the Act (50 U.S.C. § 4511(b)).”  The Order also delegated to Secretary Azar (in consultation with FEMA) the President’s prioritization and allocation powers under 50 U.S.C. § 4511(a) with respect to health and medical resources needed to respond to the spread of COVID-19.  

On March 23, President Trump published another Executive Order, invoking the DPA to delegate additional authority to Secretary Azar (in consultation with FEMA) to combat the hoarding of health and medical resources needed to respond to the spread of COVID-19.  Specifically, the Order granted Secretary Azar the authority to designate these kinds of health and medical resources as “scarce” or “threatened” materials under 50 U.S.C. § 4512.  HHS’s March 30 Notice expressly relies on the authority granted by President Trump’s March 23 Executive Order.

President Trump’s Executive Orders and HHS’s March 30 Notice come at a time when state attorneys general across the country are reporting a surge in consumer complaints related to price gouging, resulting in investigations, cease-and-desist letters, fines, and lawsuits.  Thirty-six states (including the District of Columbia) have specific price gouging statutes, the majority of which also grant private causes of action to purchasers harmed by price gouging behavior.  And attorneys general have announced an intent to investigate complaints of price gouging even in states without specific price gouging statutes, such as Washington and Montana. 

Nevertheless, the DPA grants the President a broad range of powers related to the national defense that are simply unavailable to the states.  For weeks, the President has faced increasing calls to exercise his powers under the DPA from state and federal officials across the country, including the US Conference of Mayors, Speaker Nancy Pelosi, numerous state Governors, and others.  For the most part, President Trump has appeared reluctant to use the DPA to require businesses to take specific action.  However, in addition to HHS’s March 30 Notice, President Trump published a Memorandum on March 27 invoking the DPA to direct Secretary Azar to “use any and all authority available under the Act to require General Motors Company to accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate.”  On the same day, GM issued a press release announcing a partnership with Ventec Life Systems to increase the production of ventilators and other medical equipment.  This may indicate a shift in the President’s views on the DPA, and many businesses are now seeking guidance on the substance of the DPA and the President’s authority thereunder.

If you have any questions regarding the DPA or federal and state actions on price gouging, please contact the individuals listed in this bulletin.  O’Melveny & Myers LLP has also developed a 50-state survey of price gouging statutes and enforcement activity.  Please let us know if you are interested in receiving a copy.