Can a Manufacturer Stop Price Gouging by Its Dealers During a Crisis?

Like many crisis situations, the Coronavirus Pandemic has created concerns and even outcry about price gouging for certain products.

If your company manufactures one of these products and your dealers and retailers have suddenly jacked up prices for them, what can you do?

Manufacturers are often concerned about their dealers charging “too low” a price for the manufacturer’s product.  After all, such pricing can destroy the product’s brand reputation and disincentivize other retailers from properly marketing the products and serving customers.  As other posts on this blog have covered, manufacturers have some tools to deal with those issues in ways that comply with federal and state laws.

But what if a dealer charges a price that the manufacturer considers “too high?” Again, these actions might harm the reputation of the brand and the manufacturer if consumers upset by the high prices do not distinguish between the dealer and the manufacturer. As the recent health crisis shows, retailers of all stripes sometimes will jack up prices if demand for a product suddenly skyrockets.

Certainly, there are some state laws aimed at so-called price gouging.  California’s, for instance, applies to the prices of necessities during states of emergency. Michigan’s, for example, is broader and applies to prices of any goods at any time if they are “grossly in excess of the price” that similar goods are sold. All these state laws can be enforced by the local enforcers and, often, consumers. It is unclear at best if the manufacturer of the product can bring a claim.

One thing that is clear is that it is not a violation of the U.S. federal antitrust laws for a dealer, or anyone else, to charge a “high” price. The Supreme Court has clarified that even the “charging of monopoly prices, is not only not unlawful; it is an important element of the free market system” because the possibility of gaining the ability to charge such prices “induces risk taking that produces innovation and economic growth.”

The Court did, however, recognize that a manufacturer’s desire to set a maximum resale price its dealers could charge might be good for competition and consumers. In State Oil Co. v. Khan, the Court made such manufacturer-imposed limits subject to the more favorable “rule of reason” standard that allows a manufacturer to explain why the limits are good for consumers. Unlike minimum price restraints, no state enforcer or court has found that state laws would reach a different conclusion, although at least one California enforcer downplayed but left open the possibility.

So, what can a manufacturer do?  As we have explained elsewhere, manufacturers should consider instituting a brand management policy with its retailers that explains a few key points about the marketing of the manufacturer’s products. For instance, the policy might require manufacturer approval of the use of the manufacturer’s brand elements in retailer ads and the locations from which the retailer will sell the products. If done properly, such a policy might also include some limits on the advertisements of resale prices that are “too low.”

Some manufacturers might also want to consider including maximum price limits as well. For instance, manufacturers of products that will be in short supply at introduction or in high demand during an emergency might want to include temporary resale pricing caps. These restrictions can help protect consumers from excessive pricing while also protecting the manufacturer’s brand from being tarnished forever because of the actions of a few dealers. But in order to implement such a cap, manufacturers need to put the provisions in place now.