Exploiting distress and excessive pricing: the law

Service page: Class actions and consumer claims lawyer.

What exactly is exploiting distress?

Imagine a pandemic: empty shelves, and a bottle of alcohol gel sold at several times its usual price, because buyers have no choice. This is exploiting the consumer’s distress: charging an excessive price when the consumer cannot choose, because there is no competition, there is a shortage, or the situation forces them to buy at any price.

The open market allows high pricing. But there is a red line. A price that reflects real costs is legitimate. A price that exploits the consumer’s distress, on terms unreasonably worse than usual, may be unconscionable exploitation (oshek), which allows the contract to be canceled (section 18 of the Contracts (General Part) Law). And if a supervision order applies to the product, selling above the set price is an offense.

Which laws prohibit exploiting distress in Israel?

Consumer Protection Law, 5741-1981: prohibits misleading (section 2) and exerting unfair influence on the consumer, for example exploiting their mental, intellectual or physical disability or their lack of knowledge of the language (section 3). A transaction made through material misleading or exploitation can be canceled within a reasonable time, and the business must return the payment within seven days of receiving the cancellation notice (section 32). The Consumer Protection and Fair Trade Authority may impose a monetary sanction for certain breaches (section 22C). The Law does not set a maximum price.

In a declared emergency (a special situation on the home front, a civil emergency event, or a state of emergency due to a contagious disease), the Minister may declare a ban on unfair influence in an emergency. During the declaration period, selling essential goods or services included in the notice at a price that is significantly and abnormally higher than the average price in the three months before the declaration is deemed unfair influence (section 3A of the Consumer Protection Law). The declaration applies only for the period and to the products set in it.

Supervision of Prices of Commodities and Services Law, 5756-1996: empowers the Ministers to apply supervision, by order, to the price of a commodity or service (among other cases, when it is in short supply because of exceptional circumstances: section 6(b)(2)) and to set a binding or maximum price for it. Selling at a price higher than the set price is an offense punishable by up to three years’ imprisonment or a fine (sections 11 and 34). A consumer who paid the price set in the order does not thereby breach the contract, even if a higher price was agreed, and the seller cannot claim the difference from them (section 11(b)).

Contracts (General Part) Law, 5733-1973, section 18: “exploitation” (oshek): a person who made a contract as a result of the other party exploiting distress, mental or physical weakness or inexperience on their part, and the terms of the contract are unreasonably worse than usual, may cancel the contract, by notice to the other party within a reasonable time after learning of the ground for cancellation (section 20).

Economic Competition Law, 5748-1988 (חוק התחרות הכלכלית, התשמ״ח-1988): relevant where monopolists are involved. Setting unfair purchase or sale prices for the asset or service in the monopoly is an abuse of position (section 29A(b)(1)). The Israel Competition Authority is empowered to investigate and enforce.

What happened in Israel in practice?

A supervision order because of a shortage is temporary: it is valid for up to a year and can be extended with the government’s approval (section 6(e)). So you need to check whether an order applied to the product on the date of purchase. A supervisor appointed under the Law may, with the approval of the Attorney General and with the consent of the person who broke the law, collect a monetary payment from them in lieu of criminal proceedings (kofer) (section 38). Information on actual enforcement is worth checking on the websites of the Ministry of Economy and Industry and the Consumer Protection Authority.

What can happen to a business that exploited someone’s distress?

The sanctions depend on how serious the breach is: a monetary sanction from the Consumer Protection Authority for breaches of the Consumer Protection Law, a court order to stop the practice, a class action for harm to many people, criminal proceedings (selling above a price set in a supervision order is an offense: section 34 of the Price Supervision Law), and cancellation of the transaction itself under the Contracts Law. Not every high price will end up in court, and documenting the prices is the basis for any proceeding. For a business that has received a certification motion: defense against a motion to certify a class action.

Were you charged an excessive price? This is how to file a complaint

Step one: document it. Photograph the price, keep the invoice, write down the date and time. Step two: contact the Consumer Protection and Fair Trade Authority through the digital complaint form on the government website. Step three: if you suspect the business harmed many consumers, consider contacting a lawyer to look into a class action. Many consumers harmed by the same business is exactly the basis for a class action.

A fine line: what is allowed?

Not every price rise in a time of distress is exploitation. A business whose import costs went up, whose supply chain broke down, or that has higher real expenses may pass the cost on to the consumer. The problem is when the net profit grows abnormally by exploiting the fact that the consumer has no choice. The difference between the two is the heart of the legal dispute, so documenting costs is also the strongest defense of a business under investigation.