April 28, 2020
By Mohamed H. Nabulsi
On April 24, 2020, a criminal complaint (“Complaint”) was filed in federal court against Amardeep Singh (“Defendant”), a New York-based businessman, for allegedly accumulating personal protective equipment (“PPE”) and other materials “in quantities that far exceed the reasonable demands of [his] retail business” and for reselling said PPE “at prices in excess of prevailing market prices.”
The DPA’s Criminal Prohibitions During the COVID-19 Crisis
The Defense Production Act of 1950 (the “DPA”), criminalizes the accumulation of materials that have been designated by the President as scarce or materials the supply of which would be threatened by such accumulation. Specifically, the DPA forbids the accumulation of designated materials (1) “in excess of the reasonable demands of business, personal, or home consumption” or (2) “for the purpose of resale at prices in excess of prevailing market prices.”
On March 23, 2020, the President delegated to the Secretary of the Department of Health and Human Services the power to designate materials as scarce, and the Secretary thereafter designated certain health and medical resources as scarce, including ventilators, N-95 and other respirators, surgical masks, face shields and gloves (the “Designated Materials”). Consistent with these developments, U.S. Attorney General William Barr has advised all U.S. Attorneys that the Justice Department “will aggressively pursue bad actors who amass critical supplies either far beyond what they could use or for the purpose of profiteering.”
Defendant’s Alleged DPA Violations
According to the Complaint, before March 2020, Defendant exclusively engaged in the business of selling sneakers, clothing and other apparel. In mid-March 2020, however, he began to designate a portion of his retail space to “COVID-19 Essentials,” where he allegedly sold N-95 respirators, surgical masks, face shields, medical gowns and clinical-grade sanitizing and disinfecting products to the public, and he allegedly advertised the same through social media websites such as Instagram.
On April 14, 2020, a search conducted of Defendant’s retail premises revealed quantities of Designated Materials that the Complaint alleges “far exceed[] the reasonable demands of [Defendant’s] sneaker and apparel business,” including, among several others, more than 21,000 KN-95 respirator face masks, 75,500 surgical masks, more than 5,000 face shields, more than 2,400 full body isolation suits, and more than 700,000 disposable vinyl gloves.
In so charging Defendant, the Government dubiously presumed that his business model (the sale of shoes and clothes) was either unable to change, or legally incapable of changing, to meet the demands of an evolving marketplace. While the alleged quantities of Designated Materials likely are excessive for the demands of a shoe and clothing business, such quantities may not be excessive for the demands of a new or existing business whose model is, or has become, centered on the re-sale of PPE acquired in bulk at wholesale prices.
The Complaint further alleges that Defendant re-sold the materials “in excess of prevailing market prices.” For example, Defendant allegedly resold N-95 respirator masks at an alleged 59% to 99% markup, and disposable face masks at an alleged markup of 1,328%. However, the Complaint does not specifically allege what the “prevailing market prices” are for the Designated Materials, and instead calculates the alleged “markups” at which Defendant was re-selling the materials using the (presumably wholesale) price at which he originally obtained them as a baseline.
The Government’s charges rely on two questionable assumptions that may not withstand judicial scrutiny: (1) the “prevailing market prices” are determined by the prices at which Designated Materials may be acquired in the wholesale market; and (2) businesses that change their business models to accommodate the demands of the market during a crisis are suspect. Indeed, it could certainly be the case, for example, that the quantities of Designated Materials that Defendant had acquired were appropriate for the reasonable demands of his business’s newfound purpose of re-selling PPE, and that the prices at which he was reselling the same were, in fact, the prevailing prices at which the materials may be acquired in the consumer marketplace in the U.S. Notably, the Complaint does not allege where or how Defendant purchased the materials, nor does it allege any facts pertaining to Defendant’s customer base.
Be that as it may, the Government’s Complaint underscores that it intends to vigorously prosecute individuals believed to be hoarding or price gouging the Designated Materials. Business owners whose businesses are presently engaged in the re-sale of PPE should, therefore, seek legal counsel to ensure compliance not only with the strictures of the DPA, but also with local consumer protection and anti-price gouging laws and rules, so as to minimize the possibility of becoming the subject of a state and/or federal investigation.