Every company will be impacted by the new import tariffs, as they increase manufacturing costs. However, companies selling on an autorenewal basis could disproportionately feel the impact and should proceed with caution before increasing prices.
Why? Because many state laws require “material change” notices. Specifically, if there is a “material change” to a negative option, subscription, or other continuity offer, the seller must provide the consumer with a clear and conspicuous notice of the material change and provide information regarding how to cancel. Regulators and private plaintiffs might allege that a price increase constitutes a material change, and that if sellers wish to charge existing customers the higher price, they must send a notice and give customers the opportunity to cancel. Private plaintiffs also allege that the Electronic Funds Transfer Act (EFTA) and general consumer protection laws impose the same requirements.
The new Trump tariffs amount to import taxes on (essentially) anything and everything sourced overseas and imported to the United States. We expect the taxes will cause supply chain disruption and create logistical challenges for many companies. The new taxes will be implemented, enforced, and collected by Customs and Border Protection (CBP). If the taxes result in increased costs, companies will need to increase their prices, eat the costs, or reduce the value of the products they are selling.
Thus subscription sellers must decide whether, how, and when to increase their prices. If a company increases the autorenewal price for existing customers, a challenger could take the position that it must send a material change notice, such as an email, informing customers of the increased price. Private plaintiffs also argue that the notification must include a hyperlink that can be used to cancel. (Reminder: California’s amended automatic renewal law and the Federal Trade Commission’s updated Negative Option Rule will require online cancellation mechanisms to be provided to customers who have enrolled in the subscription online.)
Plaintiffs could also argue that companies must receive customers’ affirmative consent to the change, that mere notice is not enough. For example, at least one plaintiff has argued that, unless a company has clearly, conspicuously, and explicitly disclosed that prices might change at the time of enrollment, the company must receive existing customers’ consent before charging increased prices.
And plaintiffs are increasingly alleging that notice is required for any degradation of the products or services. In other words, even if the price does not increase, if the product’s overall value is reduced, private plaintiffs have alleged that this constitutes a “material change” to the subscription that triggers the requirement for a notice.
We are seeing an uptick in class action challenges targeting material changes in consumer contracts. And even if the Federal Trade Commission (FTC) does not investigate these changes, we expect the California Autorenewal Task Force (CART) and state attorneys general, as in New York, to take action against companies that violate this requirement—which would likely trigger a broader investigation.
If you have questions or are considering a price increase in response to the tariffs, you may contact the authors.