“Price Gouging” Not Permitted

Governor Edmund G. Brown Jr. declared the drought in California a state of emergency on January 1, 2014 and directed state officials to take all necessary actions to prepare for these drought conditions. In response, the California Contractors State License Board (CSLB), is doing its part, began expediting applications for C-57 Well Drilling Contractors and encouraging Class “A” General Engineering Contractors that are authorized to perform water supply projects (but not well drilling unless they possess a C-57 Well Drilling classification) to add the C-57 classification to their license. More recently, the CSLB voiced its concern that there may be “price gouging” “occurring in some California counties where the drought has taken a serious toll on individual residential water wells,” identifying by name Tulare and Kern counties. It reminds all contractors and, in particular, C-57 Well Drilling and C-61/D-21 Machinery and Pumps contractors to make sure the prices they are charging are within legal guidelines following the declaration of a state of emergency.

The CSLB cautions that “[t]he marketplace demand for drilling services is not justification for raising prices for the same services that would have been charged prior to the declared state of emergency.” It cites to Subdivision (a) of California Penal Code § 396, which states, in part: “While the pricing of consumer goods and services is generally best left to the marketplace under ordinary conditions, when a declared state of emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified increases in the prices of essential consumer goods and services be prohibited.”

With specific respect to contractors, Subdivision (c) of Penal Code § 396 states:

“Upon the proclamation of a state of emergency resulting from an earthquake, flood, fire, riot, or storm declared by the President of the United States or the Governor, or upon the declaration of a local emergency resulting from an earthquake, flood, fire, riot, or storm by the executive officer of any county, city, or city and county, and for a period of 180 days following that declaration, it is unlawful for a contractor to sell or offer to sell any repair or reconstruction services or any services used in emergency cleanup for a price of more than 10 percent above the price charged by that person for those services immediately prior to the proclamation of emergency. However, a greater price increase is not unlawful if that person can prove that the increase in price was directly attributable to additional costs imposed on it by the supplier of the goods, or directly attributable to additional costs for labor or materials used to provide the services, provided that in those situations where the increase in price is attributable to the additional costs imposed by the contractor’s supplier or additional costs of providing the service during the state of emergency, the price represents no more than 10 percent above the total of the cost to the contractor plus the markup customarily applied by the contractor for that good or service in the usual course of business immediately prior to the onset of the state of emergency” (emphasis added).

A violation of Penal Code § 396 is a misdemeanor and could result in county jail imprisonment for up to one year or by a $10,000 fine, or both. Such a violation would also constitute an unlawful business practice and unfair competition under California Business & Professions Code §§ 17200 et seq. and could result in additional civil penalties.

Additional Resource: California Expediting Well Drilling Licenses During Drought