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Published in Economic Development

Coronavirus price gouging spurs efforts to rein in ‘bad actor’ resellers

BY Sunday, March 29, 2020 06:10pm

Panicked consumers stocking up on essential items during the early phases of the coronavirus outbreak have exacerbated what attorneys say are already weak agreements between manufacturers and distributors that spur unscrupulous resellers.

Across the U.S., these resellers have taken advantage of the conditions brought on by the pandemic and widespread quarantines. Public officials have ramped up efforts to combat price-gouging in various forms, including in Michigan.

Last month, Amazon.com Inc. said the company is working with state attorneys general to identify third-party sellers on the platform who are cashing in on buyers’ fears. By early March, the company said it had removed more than 530,000 products over price-gouging concerns and had suspended thousands of resellers’ accounts. eBay Inc. has banned the sale of face masks and hand sanitizers on its site altogether. 

On March 25, Michigan Attorney General Dana Nessel joined a bipartisan group of more than 30 other state attorneys general, penning letters to online sellers saying they have an “ethical obligation” to root out price gouging during the pandemic and beyond. 

The letters to Amazon, eBay, Walmart, Facebook and Craigslist said the companies’ efforts to crack down on overpriced items on their platforms have so far “failed to remove unconscionably priced critical supplies.”

More than half of the hand sanitizers and face masks available on Amazon had recent price spikes 50 percent higher than the 90-day average, according to a report from the U.S. Public Interest Research Group. Nearly one in six of the products sold directly by Amazon showed similar spikes.

Heightened monitoring and bans on certain advertisements and selling certain items haven’t worked, the attorneys general told the companies.

‘Bad actors’

Online selling platforms like Amazon and eBay have helped manufacturers reach a wider audience, but they have also made it easier for unscrupulous third-party sellers to deceive customers and generate price volatility, said Steven Cernak, a Detroit-based partner at the antitrust and competition law firm Bona Law PC. Cernak was formerly the in-house antitrust counsel at General Motors

A combination of legal and business factors are “preventing manufacturers from just telling the bad actors to stop their bad actions,” Cernak said. For example, the vast number of potential resellers across numerous online platforms can make it hard to corral all of those players. 

“If you’re a manufacturer and you’re not careful about your distribution channel, you can end up with too many resellers,” Cernak said, adding that online platforms take “a problem that is dated and make it even worse.”

He compared some third-party sellers to distant relatives of retailers generations ago who perhaps resold items out of a car or on the street.

“Some, a minority, of these third-party sellers on Amazon … might not have inventory. They might not be displaying the product properly or describing it accurately,” Cernak said, adding that consumers in some cases aren’t receiving what they expected from the retailer. “The ultimate consumer might not just blame that third party seller on Amazon. They might blame everyone, including that manufacturer.”

Legally, the manufacturer might not have strong enough protections in its agreements with its distributors to stop sales by unauthorized resellers, Cernak said. While some restrictions on resale practices are relatively benign under antitrust laws, he added, some are still viewed skeptically and may even be illegal. 

The coronavirus has amplified the issue.

“Six weeks ago, I had most manufacturers come to me saying unauthorized resellers were selling at too low of a price,” Cernak said. “Now, people are trying to sell at too high a price. A manufacturer can’t stop a retailer from selling at too high a price unless they put into place something like a brand management policy in the first place.” 

Clamping down

Under normal circumstances, Michigan’s price-gouging statute is fairly broad compared to other states and applies beyond a state of emergency and necessities, Cernak said. The price of an item is also judged by any price available from any other seller, which is “really big, really open-ended,” he said. 

However, as restaurants, schools and non-essential businesses across the state were shuttered for at least the next several weeks to slow the spread of the coronavirus and consumers flocked to stores to stock up on supplies, Nessel and Gov. Gretchen Whitmer tightened the state’s laws on price gouging. 

Whitmer signed an executive order targeting excessive markups on supplies and food items through mid-April. Nessel pushed for legislation that would provide more investigative tools, criminal penalties and enforcement authority to her office. 

As of March 24, Nessel’s office had received more than 1,500 complaints of price-gouging related to COVID-19. During the week of March 16, the state’s consumer protection tip line received more than three times the number of typical daily calls.

Ultimately, stricter enforcement and criminal penalties from the state surrounding price gouging are meant to protect the end user from paying too much — not to protect the brand reputation of the manufacturer, Cernak said. Manufacturers are responsible for ensuring their own protection against unauthorized third parties. 

“The options right now, in order to stop something that is already happening, are slim because it’s difficult to track down where these products are coming from,” Cernak said.

Still, manufacturers can take steps now to combat future abuse by third-party sellers, including stringent resale agreements and tracking. Serial numbers or other forms of tracing are also helpful for tracking the origin of products that do end up online or in the inventory of unauthorized sellers. 

“The manufacturer can go back to the (authorized) retailer and say, ‘Look, we told you you’re not supposed to do this, you’ve got to do better,’” he said. “Or otherwise (they could) penalize those retailers.”

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