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Force Majeure and Reference Pricing are Concepts Businesses Need to Think About During the COVID-19 Crisis

Apr.13.2020

Force Majeure

Many companies are wondering if they can invoke force majeure in light of the COVID-19 pandemic. Force majeure excuses a party to a contract from performance based on an event that makes performance impossible or impractical. Force majeure contract clauses often discuss events like terrorism, war, and natural disasters. In situations where a contract does not contain a force majeure provision, the party can rely on other similar defenses such as impossibility or frustration of purpose. These contractual defenses are likely appealing to companies suffering unforeseen cancellations because of the current pandemic. For example, businesses might want to invoke force majeure or a similar provision to decline issuing a refund for goods or services cancelled due to the mandate against large gatherings, or to unilaterally change services, such as a customer’s travel dates, to avoid losses stemming from those cancellations.

A force majeure or similar argument depends on the state law under which the claim is made as well as the specific contractual provisions. Many states construe force majeure clauses and similar legal concepts narrowly. Some states, including New York, even require the force majeure event to be explicitly enumerated in the contract for a viable defense. Several state laws, including New York and California, also require refunds to be issued for tickets after certain events are cancelled, regardless of the reasoning for cancellation (though there are exceptions in New York if the event was merely rescheduled).

These defenses will draw scrutiny from State Attorneys General as they continue to focus on protecting consumers. Moreover, it also does not permit companies to unilaterally alter services after cancellation and expect consumers to agree to those unilateral changes. Rather, these tactics are the type of conduct that Attorneys General will scrutinize during the COVID-19 crisis in order to protect consumers with extra vigilance. Many Attorneys General have issued press releases on the subject of refunds and stated that they expect businesses to bear COVID-19 related cancellation losses, as well as vowed to investigate any company that promises a refund to consumers but fails to deliver it. Attorneys General will certainly closely watch if companies are using force majeure concepts in an unfair or unconscionable way triggering alleged violations of state unfair and deceptive trade practices laws. This is why companies need to carefully think through these defenses to ensure cancellations or rescheduling services can be done in a lawful manner. 

Reference Pricing and Price Gouging

Another concept Attorneys General will scrutinize in the price gouging context is reference pricing. Reference pricing is the concept where a regular price is discounted for a limited period to a promotional price, which is later re-raised to the original “regular” price. However, companies are exposed to risk if they continue to place items endlessly on “sale.” In other words, if something is constantly on sale, it is not a legitimate “sale” price, but in fact is the regular price, so any increase will be viewed through a lens of potential gouging as opposed to a company reverting to its regular list price. Reference pricing stems from Federal Trade Commission (FTC) guides against deceptive pricing, which counsels against offering a “reduced” price for a good that is really based on a fictitiously inflated original price. According to the FTC guides, in order for a price to be considered a genuine price, it must be the price “at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith.” The price may not have been established for the purposes of a perceived bargain (or, in this context, a lower perceived increase). Many states have similar laws regulating reference pricing. This concept is important for price gouging laws since some states deem a certain percentage price increase over the “regular price,” such as 10-20%, to be textbook price gouging. Therefore, to avoid running afoul of these laws, companies must carefully consider whether they are increasing prices to this degree over the price at which the good was actually sold (as opposed to a fictitious regular price). Companies should develop important facts to assist with defending price increases in lieu of exposing themselves to gouging or reference pricing claims. 

In sum, companies have to be careful when deploying the benefits of force majeure and similar defenses given the heightened sensitivity that Attorneys General have under the current COVID-19 crisis. Companies should also carefully raise their promotional prices to regular list pricing in order to increase revenues during the current crisis. 

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Clayton S. Friedman
Partner – Orange County
Phone: +1 949.798.1316
Email: cfriedman@crowell.com
Natalie O. Ludaway
Partner – Washington, D.C.
Phone: +1 202.624.2613
Email: nludaway@crowell.com
Michael Yaghi
Partner – Orange County
Phone: +1 949.798.1396
Email: myaghi@crowell.com
Joselle Albracht
Senior Counsel
Phone: +1 949.798.1332
Email: jalbracht@crowell.com
Suzanne Trivette
Associate – New York
Phone: +1 212.895.4312
Email: strivette@crowell.com