18 Mar Unconscionable Formula
Still of major concern to many retailers is the lopsided definition being used to qualify price gouging. After searching for the source of this definition we come up with an interesting theory and it probably won’t surprise you that it isn’t so much about protecting the consumer.
Price Gouging Protections?
In early March of 2020, with California facing an inevitable outbreak of Covid-19, Governor Newsom declared a state of emergency. About a month later he issued an Executive Order (N-44-20) specific to price gouging. Unlike similar past orders protecting consumers from unfair pricing during a disaster, the ambiguous “unconscionable” descriptor was missing and in its place a specific standard form of measurement.
“The order also gives additional tools to the California Department of Justice and Attorney General’s Office, among others, to take action against price gougers.” In other words, with a price gouging formula your local district attorney no longer needed to do guesswork to build a case. Now, it was a simple equation.
It wasn’t long before local DA’s put their new tools and “favorable” definition to work. Here in the Bay Area, Safeway settled a price gouging case with Alameda and Contra Costa County DA’s for selling hand sanitizer for $5.99 (cost $4.15) and $9.99 (cost $5.99). These District Attorneys were not shy about showing off their “catch” either. Both agencies issued press releases highlighting their work and the settlement reached. The news was picked up by many local outlets.
The Problem – Not a Solution
“Unconscionably excessive” pricing was now being recognized in mathematical terms, as anything over a 33.3% profit margin on covered items, new to your store. This margin which is below the typical average margin of most hardware stores was in no way “unconscionable”. However, it became the bar to which pricing would be judged.
We could not comprehend how a definition of excessive high pricing could be set so low. It seemed obvious that the definition, as it appeared on the Executive Order, was some sort of an error. All of our attempts to clarify this came up empty. We called the Governor’s office, they said to talk to a lawyer. We spoke to our local State Representatives, we spoke to local District Attorney’s offices and no one could give us an answer.
Some light was shed on the issue when we researched an early reference to this definition. It appeared in the introduction of Senate Bill 1196 in late February 2020, almost two months before the EO. Senator Umberg (Orange County) introduced the legislation in response to what was believed to be a loophole in existing law that defined price gouging. Penal Code 396, had most recently been implemented to protect victims of wildfires across the State in 2019 and was felt to be out of date. This bill tightened the wording and more clearly defined price gouging.
In creating SB-1196 Senator Umberg worked closely with the District Attorneys from both Orange and San Diego Counties. Their intent becomes more clear in a press release from Todd Spitzer, Orange County District Attorney. It mentioned that Senator Umberg is working “in concert” with himself and San Diego County District Attorney Summer Stephan in debuting new legislation that “will tighten California law to assist law enforcement officials in prosecuting instances of price gouging”.
While there is no argument that the bill itself adds protections for consumers. We would argue the language also makes it very convenient to find, prosecute and gain publicity for the local District Attorney’s office. The language and formula in the bill indicate a complete unawareness of retail operations. The retailer’s perspective was probably never even considered.
We along with several other retail groups raised objections and worked with Senator Unbergs office to have the language changed as the bill made its way into becoming law. We wanted to ensure the bar for gouging would be set to a fair and reasonable level. The Senator was unwilling to change the core formula, so we settled for a concise definition of “cost” which would include operating expenses. The final bill sailed through both houses without a single no vote and was signed into law in September of 2020.
The way we saw things, this clearly allowed a safety valve for businesses which could now use an effective cost into the calculation when determining whether or not an item is priced too high. As mentioned in our last post, we don’t have law degrees and you really shouldn’t be taking this as legal advice but in our minds this made sense.
Why it Still Matters
The extended Executive Order signed before SB1196 became law expired at the beginning of the month and to our surprise was renewed again. The renewal carried a less restrictive list of products, emergency and medical items but still contained the bad formula. To verify that in fact retailers did have a safety value in regards to “cost” we spoke with an assistant district attorney. Seeking confirmation we asked if we were reading things correctly. He could not answer our questions stating it would be providing legal advice. After much back and forth the following question was asked.
“As a hardware retailer (vendor), who is selling “emergency supplies”, am I allowed to include overhead expenses as part of my cost when determining if I am compliant with the current executive order in regards to price gouging?”
The answer was we can’t answer that question. The implication being the newest EO could be interpreted in different ways, possibly independent of the newly changed law which contained the revised definitions of costs. Therefore an answer again would be providing legal advice.
Where Does that Leave Us
Once again, just as with the vaccine distribution the situation appears to be more political than logical. In our opinion, the insufficient definition of price gouging used on Executive Orders probably benefits the prosecutorial departments tasked with enforcement as much as they help protect the general public.
In our experience hardware store owners are good people. They understand the long term value of customer relationships and would not risk that to make a quick buck, especially during a global pandemic.
While some suppliers are continuing to be extremely conservative in response to the restrictive laws and orders others are ignoring it. In our opinion, which again isn’t legal advice, you should offer these products at a price that you see as fair and are comfortable charging. If you can justify it in your mind chances are you will also be able to make a good argument in your defense should you be questioned.
Despite the protections regarding the inclusion of expenses as part of cost there is still a risk you could be seen as breaking the law and if you aren’t comfortable taking that chance you probably shouldn’t.