Sticker Shock at the Pump: An Evaluation of the Massachusetts Petroleum Price-Gouging Regulation

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"[D]uring any abnormal disruption of the market for consumer goods and services vital and necessary for the health, safety, and welfare of consumers resulting from stress of weather, convulsion of nature, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, or other cause of an abnormal disruption of the market which results in the declaration of a state of emergency by the governor, no party within the chain of distribution of such consumer goods or services or both may sell or offer to sell any such goods or services or both for an amount which represents an unconscionably excessive price." (1)

"Apparently, bicycles are the way to go on Martha's Vineyard." (2)

I. INTRODUCTION

On August 29, 2005, Hurricane Katrina struck the Gulf Coast of the United States. (3) The storm became the costliest as well as one of the deadliest natural disasters in American history. (4) By damaging oil drilling platforms, petroleum pipelines, and refineries, Hurricane Katrina disabled roughly 95% of the Gulf Coast's offshore crude oil processing mechanisms, which at the time represented 27% of the total crude oil production in the United States. (5) Following Hurricane Katrina, gasoline prices rapidly increased by more than $.45 per gallon above the average pre-storm retail price, and extreme price fluctuations continued for weeks after. (6) Due to the swift and seemingly excessive rise in gasoline prices, many consumers speculated that the price hikes were a result of price gouging on the part of sellers seeking a windfall in profits, as opposed to a reflection of actual petroleum shortages. (7)

Economists define "price gouging" as the practice of pricing goods above a reasonable market rate resulting in a surplus of revenue for the seller. (8) The federal government has not passed legislation regulating price gouging, leaving the matter for determination by the individual states. (9) Price gouging of petroleum products has emerged as an especially contentious issue. (10) While many argue that gouging is a form of "profiteering" at the expense of vulnerable consumers, and therefore should be prohibited, opponents of anti-price-gouging laws contend that these statutes actually serve to hinder petroleum markets by artificially constraining the price of gasoline, resulting in long-term price escalations. (11)

The Massachusetts anti-price-gouging regulation prohibits unconscionable pricing of petroleum products during a market emergency. (12) In White v. R.M. Packer Co., (13) the United States Court of Appeals for the First Circuit (First Circuit) provided guidance for applying and interpreting the regulation by devising a scheme for analyzing gross disparities in petroleum pricing. (14) In construing the statute, the First Circuit analyzed the plain language of the anti-gouging regulation as well as applicable contract jurisprudence. (15) Going forward, it will also be important for Massachusetts courts to address the views of economists who have evaluated restrictions on price gouging and their economic impact, while refining the existing framework for evaluating violations of the anti-gouging regulation. (16)

This Note will first discuss the origin and meaning of "price gouging" and the impetus for states to enact anti-gouging legislation. (17) This Note will then discuss the existing types of anti-gouging laws implemented by the states as well as review the positions of opponents and proponents of price restrictions. (18) This Note will proceed to consider the history and judicial interpretation of the Massachusetts anti-price-gouging regulation. (19) This Note will go on to analyze the First Circuit's use of contract law and the statute's plain meaning in the White decision, as well as the possible economic effects of statutory price constraints in light of the court's decision. (20) The Note will conclude by proposing recommendations for Massachusetts courts to consider when analyzing a gouging claim in the future. (21)

II. HISTORY

A. A Price Gouging Primer

1. Origins and Characteristics of Price Gouging as Applied to Petroleum Markets

Medieval philosophers and theologians maintained that the exchange of goods for money, services, or other effects should be determined by a "just price" derived from the customary value of the goods or by the item's natural worth. (22) Modern economists have rejected the "just price" hypothesis, and instead delineate the widely accepted theory of supply and demand, whereby prices are set by the interaction of the two factors in the marketplace. (23) Even so, when prices markedly exceed what an average consumer would consider typical, particularly after a market emergency caused by a natural disaster, consumers, politicians, and the media frequently condemn these price increases as gouging. (24)

Price gouging is defined as a process by which a seller prices a product above its market value when no alternative is easily available to consumers. (25) The term also refers to a merchant charging an unreasonably high rate for his merchandise to create a windfall of profits. (26) Because price gouging typically follows an emergency or disaster and usually involves a necessary and inelastic good that is limited due to natural constraints or production restrictions, consumers become particularly susceptible to its effects as they are most exposed. (27) Therefore, unlike justifiable price increases due to heightened costs or attempts to stimulate profit, gouging carries the stigma of wrongdoing as it is frequently associated with greed on the part of sellers in tandem with consumer vulnerability. (28)

Price gouging in the petroleum market occurs when gasoline retailers charge consumers unconscionable or excessively high prices during, or shortly after, a market emergency. (29) A "market emergency" is defined as a period of economic unrest following a disaster when supply levels of gasoline are unstable. (30) Although the precise meaning of "excessively high prices" varies by jurisdiction, it generally involves pricing at a level that is unreasonable when compared to prior rates, as determined through an examination of the seller's retail price and gross margin of profit before and after the emergency. (31)

In discussing the difference between price gouging and acceptable price hikes, the Federal Trade Commission (FTC) found it permissible for stations to raise prices due to heightened wholesale expenses and transportation charges. (32) Nevertheless, while retailers' expenses, such as rent, labor, and electricity, may ultimately affect the ultimate price of gasoline, the FTC determined that the impact of those costs do not radically drive up prices, and therefore increases in those expenditures would probably not constitute a viable defense to gouging. (33)

2. Price Gouging Codified

Currently, there is no federal statute prohibiting price gouging of petroleum or otherwise. (34) Congress has considered several proposed bills, although none so far have been passed into law. (35) In the absence of federal legislation, many states have created and implemented their own price-gouging laws. (36) At present, thirty-four states have enacted some form of an anti-gouging regulation, some encompassing all commodities and others specifically targeting petroleum. (37) Three types of anti-gouging statutes have emerged: the price percentage cap model, which bars price increases over a set percentage after the declaration of a state of emergency; unconscionability laws, which prohibit the sale of goods at grossly excessive prices during a market emergency; and no-increase laws, which forbid any price increase beyond the amount required by the higher costs of the operation in the post-emergency market. (38)

a. The Three Major Models of Anti-Price-Gouging Statutes

Price percentage cap statutes prohibit price increases during a declared state of emergency over a certain percentage of the good's pre-emergency price. (39) Percentage caps range from 10% to 25% above pre-emergency prices. (40) For example, California's price cap law bars merchants from selling goods, food, or services at a rate of more than 10% the item's price prior to the declared emergency. (41) Under the California law, sellers able to demonstrate a rise in production or acquisition costs may receive an exemption from the price restrictions. (42)

Anti-price-gouging laws under the unconscionability model bar the sale of goods at unconscionable or grossly excessive prices following a proclaimed emergency. (43) The statutes may define the products or services affected broadly, such as the New York and Virginia laws that pertain to "essential consumer goods," or narrowly, such as the Massachusetts and Indiana regulations that exclusively concern petroleum products. (44) The evaluation of unconscionable pricing also varies by jurisdiction. (45) The New York statute requires a broad examination of the gross disparity in pricing by comparing the price differences during an unspecified period of time before and after the emergency, whereas Indiana is more precise in that it identifies a price as unconscionable when it grossly exceeds the average price of the product seven days prior to the emergency. (46) Nevertheless, many state anti-gouging laws permit sellers to charge higher prices after an emergency if the increases are due to heightened seller costs. (47)

The no-increase method is the most restrictive of the price-gouging laws because it prohibits raising the price of goods or services beyond any amount associated with the higher costs of doing business due to the market emergency. (48) The states that have chosen to adopt this type of anti-gouging law tend to sustain a significant amount of natural disasters. (49) The goods covered under the no-increase laws vary: the Georgia no-increase law applies only to essential consumer goods, whereas the Louisiana statute includes all goods and services sold during an acknowledged emergency or named tropical storm or hurricane. (50) The Connecticut no-increase statute is unique in that the price-gouging provision is only triggered by certain emergencies, namely those stemming from energy and supply crises. (51)

b. The Political Impetus Behind Anti-Gouging Laws

Although natural disasters often provide motivation for instituting anti-gouging legislation, politicians frequently argue such laws are necessary to protect societal welfare in general. (52) Proponents of anti-gouging regulations assert that the government has an obligation to protect against unfair or deceptive practices that adversely affect the consumer. (53) Those who cannot afford a price increase of an essential good may be excluded from purchasing and suffer hardship as a result, while a wealthier individual may be merely inconvenienced by the increased price. (54) Lawmakers argue this discrepancy only deepens the schism between the rich and the poor, resulting in an ongoing lack of access to necessities for the poorest members of society. (55)

Furthermore, legislators support anti-gouging legislation by rejecting the assumption that the free market always functions as intended. (56) Some lawmakers contend that in certain circumstances, especially when supplies are dwindling due to a market emergency, buyers are unable pursue optimal transactions with merchants. (57) As a result, buyers are forced to obtain a product--frequently a necessity--at an inflated price because there is no alternative. (58) Gougers, therefore, pervert the marketplace by raising the price of goods not in response to changing market equilibriums, but rather based on a desire to accumulate profit, which some politicians find reaches a level of offensiveness that warrants regulation. (59)

Lawmakers are also influenced by consumer anger toward purported price gougers. (60) These consumers, outraged by sellers who allegedly profit from the vulnerability of buyers in times of emergency, regularly demand the prohibition of gouging. (61) Although these individuals may misunderstand the actual economics of price shifts, consumer anti-gouging protests have been so pervasive as to spur politicians to actively promote statutory price regulation. (62) Politicians also tend to support anti-gouging legislation as a means to garner support for their campaigns, as these laws serve to appease the anti-gouging cries of their constituents, while allowing the politician to appear actively concerned with society's economic welfare. (63)

3. Gasoline Price Gouging Through an Economic Lens

While consumers and politicians generally support anti-gouging statutes, economists view price gouging as a natural feature of a functioning market. (64) Economists theorize that price controls create issues within the market such as inefficient allocation of resources, underinvestment in the supply chain, and price confusion. (65) If markets are not permitted to self-correct free from restrictive regulations, economists fear consumers will be more heavily burdened in the long run. (66)

The basic supply and demand model illustrates the inefficiencies caused by price-gouging laws aimed at petroleum products. (67) In an efficient market, supply and demand equilibriums exclude some individuals from the market, which lessens demand, causing the item to become less valuable and accordingly more plentiful, which thereby grants access to those who were once excluded. (68) Legislators often institute price-gouging laws to ameliorate this problem in the aftermath of market emergencies--a solution economists find impractical as the laws create artificially low gasoline prices. (69) The low prices drive demand to levels production cannot meet, causing widespread fuel shortages. (70) Economists prefer to permit the price of gasoline to rise naturally when a market emergency is pending so that gasoline is better rationed and allocated, allowing consumers to purchase the amount of fuel they need or are financially able to obtain. (71)

Economists assert that lawmakers are enacting anti-gouging laws to combat pricing behavior that is not actually gouging, but rather represents a normal functioning market. (72) An increase in the price of crude oil triggers an immediate rise in the cost of retail fuel products; however, decreases in crude oil prices do not elicit a corresponding and instantaneous drop in gasoline prices. (73) This phenomenon motivates consumer accusations of gouging, but is actually a nonmanipulative and predictable feature of the petroleum market. (74) As there is no definitive indicator of gouging, economists instead urge lawmakers to avoid instituting gasoline price …