Price gouging – can you afford to pay the price?

11 May 2020

In response to pricing practices during the COVID-19 outbreak, the Competition and Markets Authority (CMA), who regulate anti-competitive behaviour, have set up a COVID-19 task force due to concerns that suppliers are taking advantage of the current circumstances to unfairly exploit consumers.

1. What is ‘price gouging’?

In the UK there is no set definition of ‘price gouging’. However, it is commonly understood to mean charging an artificially inflated price for high-demand goods or services during a period of emergency. Whilst overpricing by itself may not be a breach of competition law, the Competition Act 1998 (CA 1998) prohibits businesses from colluding or co-operating to fix prices, and dominant businesses from charging excessive prices. Thus if ‘price gouging’ involves such ‘price fixing’ or charging ‘excessive prices’ it will breach competition law.

The CA 1998 prohibits ‘agreements, decisions or practices’ which directly or indirectly ‘fix purchase or selling prices or any other trading conditions’ (s.2(2)(a)). Price fixing involves some form of agreement between at least two businesses, which could include informal conversations or a so-called ‘gentleman’s agreement’. Some examples of a direct price-fixing agreement would be fixing the price itself, fixing components of a price or setting minimum resale prices. Indirect price fixing could include prior consultation on respective prices, publication of price lists or granting discounts or allowances.

The CA 1998 also prohibits a business in a ‘dominant position in a market’ from directly or indirectly imposing ‘unfair purchase or selling prices or other unfair trading conditions’ (s.18(2)(a)). ‘Excessive pricing’ is a form of unfair pricing which arises where the price bears no reasonable relation to the economic value of the good or service. Although there are many factors which affect the dominance of a business, your business might have a ‘dominant position’ in the market if it has more than a 40% market share or if it is not affected by normal competitive restraints. The CMA guidance also clarifies that a business might be in a ‘dominant’ position by virtue of the particular circumstances of COVID-19.

Generally, a non-dominant company acting by itself is free to set its own prices. While it must not impose minimum resale prices, it can impose maximum resale prices. Therefore, as long as it sets its prices according to its own policies, and not in co-operation or concentration with its competitors, it should not currently be at risk of breaching competition law. However, in light of pricing practices during the COVID-19 outbreak, the CMA warned that it could advise the Government to consider taking direct action to regulate prices if necessary. Indeed, the French Government has recently imposed strict price controls on hand sanitiser to combat the soaring prices. Certain US states also have specific laws aimed at preventing, and penalising, ‘price gouging’.

The CMA guidance clarifies that certain high-demand goods and services are considered essential to protect the health of consumers in the current situation, for example, hand-sanitiser and face masks, and in light of this, it is important to try and ensure that prices are not excessively inflated for such goods and services. Further, the CMA has urged both businesses and individuals not to make misleading claims or charge vastly inflated prices, reminding members of the public that these obligations may apply to them too if they resell goods.

2.The COVID-19 exemption

On 25 March 2020, the CMA published guidance on its approach to competition law in light of COVID-19, acknowledging that there may be a need for companies to cooperate to ensure the supply and fair distribution of scarce products and/or services affected by the crisis to all consumers in the UK. The CMA will not take enforcement action if such co-ordination:

2.1 is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than is necessary
2.2 is appropriate and necessary to avoid a shortage of products, or ensure security of supply of such products
2.3 is clearly in the public interest
2.4 contributes to the benefit or wellbeing of consumers
2.5 deals with critical issues that arise as a result of the COVID-19 pandemic; and
2.6 is temporary, i.e. lasts no longer than is necessary to deal with these issues.

This will not apply if businesses are exploiting the crisis as a ‘cover’ for non-essential collusion. It is also important to recognise that this CMA guidance does not bind the European Commission in its application of EU competition law in the UK. Further, the CMA cannot offer protection against private litigation brought by third party litigants for perceived breaches of UK competition law. Therefore, even if you meet all of requirements in the CMA guidance this might not protect you from breaching EU competition law, or being subject to 3rd party claims under UK competition law.

3.What are the consequences of breaching competition law?

The CMA have a range of options at their disposal: they can investigate, issue warnings and take enforcement action. The CMA can also advise the Government about price controls. If you are found to be involved in anti-competitive activity your business can be fined up to 10% of its worldwide turnover and be sued for damages. Individuals can be fined or sent to prison for up to 5 years if found guilty of being involved in cartel activity. Additionally, company directors can be disqualified from being a director for up to 15 years.

4.Watch this space

At present the Government has not introduced any specific price gouging laws or regulations. The existing competition law legal framework remains in place, and will be utilised where possible, and necessary, to protect the public from the perils of price gouging. However in the event the CMA takes the view that the existing legislative framework is ineffective in protecting the public to the extent considered necessary, additional legislative measures may follow. The government has shown itself ready to act quickly in the current environment, and the court of public opinion may force the government’s hand if there is perceived to be a substantive problem with price gouging, or indeed any other types of anti-competitive behaviour.

For further advice, please contact Samantha Woodley or a member of Birketts Corporate Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2020.