The State of Texas claims that Cal-Maine Foods illegally charged excessive prices for eggs during the Covid-19 pandemic. This is the first case to interpret the Texas Deceptive Trade Practices Act disaster price gouging provision. The trial court dismissed the case, but the First Court of Appeals in Houston reversed that decision. [Read Opinion here.] A Petition for Review is currently pending at the Texas Supreme Court with the State of Texas’ response due February 6, 2023.
Cal-Maine Foods is the largest producer of shell eggs in the United States. Cal-Maine maintains chicken flocks and produces most of the eggs it sells on its own farms. Cal-Maine processes shell eggs for sale to wholesale purchasers like grocery stores, club stores, and food-service distributors. Cal-Maine produces both specialty eggs and generic eggs, but this case involves only their generic egg business.
In March and April 2020, Texas Governor, Greg Abbott, issued a statewide disaster proclamation and shelter in place order due to the Covid-19 pandemic. Similar orders were issued across the country. This caused the demand for groceries to dramatically increase. This spike in demand was coupled with the Easter holiday, when egg prices are typically at the highest level of the year. Egg producers, who had shrunk chicken flocks in the months preceding March 2020, could not immediately respond to the increased demand given the time it takes to raise a hen to egg-laying age.
The State claimed that the price increase was “squeezing consumers” and small and large businesses because the price of eggs sold in stores rose from $.94/dozen earlier in March 2020 to $3.01/dozen during the disaster proclamation. The State claimed that Cal-Maine’s prices exceeded the national trend. In April 2020, Cal-Maine sold generic eggs for $3.32/dozen for generic white eggs and $3.44/dozen for generic brown eggs. The FDA responded to increased demand for eggs by instituting a temporary policy in April 2020 that permitted shell eggs originally destined to be used in food service to be sold to retail customers instead. That policy helped meet increased demand for home consumption, which resulted in prices decreasing to and below the pre-Covid-19 levels.
In April 2020, the State of Texas filed suit against Cal-Maine for violating the Texas Deceptive Trade Practices Act (DTPA) by allegedly impermissibly raising prices on generic shell eggs during a disaster and allegedly making misleading statements about its pricing.
The DTPA prohibits “selling or leasing…food…at an exorbitant or excessive price or demanding an exorbitant or excessive price in connection with the sale or lease of…food…during a disaster declared by the governor or the President of the United States.” See Tex. Bus. & Com. Code Section 17.46(b)(27).
The State alleged that because Cal-Maine is an integrated producer controlling the production process from raising chickens to selling eggs they could choose the price at which it sold eggs in the grocery store. Texas alleged that because there were no changes in production costs, supply chain issues, or contractual obligations that forced Cal-Maine to charge a specific price, “it should have and could have charged a lower price.”
Cal-Maine moved to dismiss under Texas Rule of Civil Procedure 91a on grounds that the State’s claims “have no basis in law or fact.” Cal-Maine noted that the State admitted Cal-Maine merely charged market prices, which could not be excessive or exorbitant as a matter of law. With regard to the misrepresentation claims, Cal-Maine claimed those were truthful statements. Finally, Cal-Maine argued several affirmative defenses centered around a claim that the DTPA’s ban on excessive or exorbitant pricing during a declared disaster is unconstitutional for three reasons: (1) unconstitutionally vague; (2) violates the Dormant Commerce Clause; and (3) constitutes a regulatory taking.
The trial court granted Cal-Maine’s Motion to Dismiss, but did not articulate its reasoning for doing so. The State of Texas appealed.
First Court of Appeals Opinion
The First Court of Appeals in Houston reversed. [Read Opinion here.]
Disaster Price Gouging Claim
The court noted that there are no prior cases interpreting the disaster price gouging statute, making this a case of first impression. Because the terms “excessive” and “exorbitant” are not defined by statute, and there is no case law interpreting them, it was up to the court to assign meaning to these words. The parties agreed that to determine whether a price is “excessive” or “exorbitant” a comparison must be made to what price is usual, proper, necessary or normal. The parties disagreed, however, on the timeframe for determining the necessary or normal price. The State argued the comparison should be made by looking at egg prices before the disaster and during the disaster. Cal-Maine argued the comparison should be made by looking at the normal or customary price during the disaster and compare that to the price charged by Cal-Maine.
The court found it unnecessary to determine which approach is proper at this stage of the litigation. In viewing the evidence in the light most favorable to the state (as the court must do in a motion to dismiss), the court held that it “cannot say there is no basis in law or in fact for the State’s DTPA price-gouging claim against Cal-Maine.” Importantly, the court did not make any ruling or comments on the merits or the claims or the likelihood of success, but held only that they were not absolutely without basis in law or fact. Because of this, the Motion to Dismiss should have been denied and the case should have proceeded to discovery.
Next, the court turned to the misrepresentation claims. The State claimed that Cal-Maine mislead consumers with statements on its website that “wholesale shell egg market prices…are out of our control” and in financial documents claiming their pricing was based on “independently quoted wholesale market prices” and “market quotations.” The State alleged these claims are misleading because, as a vertically integrated company, Cal-Maine controlled its own pricing. Additionally, the State claimed the reference to a “market” is misleading because Cal-Maine was really referring to the Urner Barry price report, rather than a regulated market.
Again, the court found that without further discovery, it cannot say that the allegations, taken as true, do not entitle the State to relief. The pleadings do not have full information on Cal-Maine’s business, costs, margins, or other information that could explain its pricing structure as a vertically integrated operation. Thus, again, the Motion to Dismiss should have been denied and discovery conducted.
For each of Cal-Maine’s affirmative defenses (vagueness, Dormant Commerce Clause, and regulatory takings), the court reached the same conclusion: A decision simply cannot be made yet. Because a Motion to Dismiss does not allow the consideration of evidence, affirmative defenses are not a proper basis for a motion to dismiss. Thus, while Cal-Maine may have colorable claims in these defenses, the court simply cannot reach that decision at this stage in the litigation. Thus, the affirmative defenses were not grounds to dismiss the case.
Because the court cannot hold there to be “absolutely no basis in law or fact for the State’s Claims or Cal-Maine’s affirmative defenses,” the trial court erred in dismissing the case under Rule 91a. The court reversed and remanded the case for further proceedings.
Supreme Court Petition
Cal-Maine filed a Petition for Review with the Texas Supreme Court on October 31, 2022. [Read Petition here.] The State waived a response, but the Court requested one, which will be due on February 6, 2023.