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Kentucky Can Enforce Price-Gouging Law Against Online Retailers, Panel Rules

The Sixth Circuit found that despite third-party sellers having little control over prices on sites like Amazon, Kentucky can enforce its new price-gouging law against in-state companies.

CINCINNATI (CN) --- Kentucky Attorney General Daniel Cameron is allowed to enforce a price-gouging law activated during the Covid-19 pandemic against online retailers, a federal appeals panel ruled Thursday.

The Online Merchants Guild sued Cameron after one of its members was investigated and subpoenaed by the commonwealth following accusations of price-gouging related to respirator masks and hand sanitizer.

A federal judge granted the guild's motion for a preliminary injunction last June, ruling the Kentucky law -- which can only be used during states of emergency -- would have "impermissible extraterritorial effects" and violate the dormant commerce clause.

Cameron appealed the decision, and the case was argued before a Sixth Circuit panel last month.

In its decision Thursday, the three-judge panel conceded the merchant group had established standing to bring its claims, given it had "diverted resources that could have been expended elsewhere to address the attorney general's price-gouging investigations."

Although Cameron argued otherwise, the panel concluded an imminent threat of prosecution constituted an injury in fact to one of the guild's member companies, which allowed the group to bring legal action on its behalf.

But as the panel shifted to the merits of the guild's commerce clause claims, it sided firmly with Cameron.

The extraterritoriality doctrine of the dormant commerce clause is used to prevent a state from attempting to control or regulate conduct outside its borders. While the guild argued Kentucky's price-gouging laws do exactly that, the appeals court disagreed.

Even though Kentucky-based companies sell goods via Amazon to out-of-state buyers, the panel rejected the idea that Cameron could use the regulations to "set a ceiling on the price of goods."

Through the use of a hypothetical mom-and-pop retailer selling "widgets" whose demand increases exponentially during the Covid-19 pandemic, U.S. Circuit Judge Karen Moore explained that Kentucky's law would only allow a $0.50 per widget price increase from $5.00 to $5.50.

Moore, a Bill Clinton appointee, admitted this would "set a national ceiling" on the price of the widgets but disputed the lower court's reasoning that this would render the laws unconstitutional.

"A state law's effect on out-of-state commerce must be direct or inevitable to be invalid under the extraterritoriality doctrine," she said. "This is not the case here because the effect of Kentucky's price-gouging laws depends entirely upon Amazon's independent decisions in how it structures its online marketplace."

Because Amazon does not allow its third-party retailers to set state-specific prices or limit the states to which its products are shipped, Moore opined the law's effect on out-of-state commerce "is at best indirect, because it depends entirely upon decisions made by Amazon." (Emphasis in original.)

Moore cited the 2010 Sixth Circuit case International Dairy Foods Association v. Boggs, which involved an Ohio labeling law that was also determined to have a wholly indirect impact on out-of-state commerce.

"In International Dairy," Moore explained, "it was 'the complex national distribution channels through which milk products are delivered and the costs association with changing their labels' that compelled out-of-state labeling conduct."

She added, "Here, it is Amazon's decision to structure its online marketplace to allow only a single, national price while preventing third-party sellers from limiting the states in which their goods are sold that allows Kentucky's price-gouging laws to set, in effect, a national ceiling for certain goods sold on Amazon."

Moore pointed out the guild conceded at oral argument that Kentucky's price-gouging laws could be applied to a "brick-and-mortar" shop in the state without any constitutional concerns, and rejected the idea that circumstances change when a business chooses to move online.

"The guild has given us no reason to hold that the choice to sell in the virtual economy should afford a business added protection in these circumstances," she said. (Emphasis in original.)

Moore was joined on the unanimous panel by Senior U.S. Circuit Judge Alice Batchelder, an appointee of George H.W. Bush, and U.S. Circuit Judge John Bush, appointed by Donald Trump.

Cameron commended the court on its decision in a statement.

“The commonwealth’s price-gouging laws exist to protect Kentuckians from bad actors, especially during times of emergency, and we’re proud that we successfully defended these laws in court,” Cameron said. “During the height of the pandemic, we saw markups of up to nearly 2,000% from online third-party sellers for products such as masks and hand sanitizer, and it’s important to have the legal tools necessary to ensure Kentucky’s price-gouging laws are followed.”

Aaron Block, attorney for the Online Merchants Guild, did not immediately respond to a request for comment.

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