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Food delivery companies sue NYC over commission caps

Uber Eats, DoorDash and Grubhub jointly contesting 15% limit

Uber Eats, DoorDash and Grubhub are suing New York City over its commission caps for food delivery apps (Photo: DoorDash)

DoorDash, Grubhub and Uber Eats provider Uber Technologies are suing New York City over its recent measure that capped the commission that the apps could charge restaurants at 15%, a figure that was previously as high as 30%. It’s the latest legal action in a yearslong clash between America’s three largest food delivery companies and state and local legislators.

The companies are seeking an injunction that would stop New York City from enforcing the new law, as well as unspecified monetary damages and a jury trial. The companies say that together they’ve lost hundreds of millions of dollars through July as a result of the caps, which were temporarily set at 15% in May of 2020 before being made permanent last month.

“The laws simply seek to bring fairness to a system that all too often lacks it,” said New York City Small Business Committee Councilman Mark Gjonaj in a statement Thursday evening.

Not their first rodeo

The companies’ disputes with local regulators can be traced back to the implementation of the so-called ABC test, first implemented in California in May of 2018. The “test” was intended to limit gig employers’ ability to classify their workers as independent contractors, restricting the conditions that constitute independent contractor status.

Since then, gig companies have been waging war. In 2020, Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), DoorDash (NYSE: DASH) and others poured in a combined $200 million to support the passage of California’s Proposition 22, a ballot measure that exempted rideshare companies from the requirements of the ABC test, but that regulation was ruled unconstitutional last month in a huge blow to the companies.

Now the food delivery segment of the gig economy is feeling the pressure. Under the New York City provisions, Uber Eats, DoorDash, Grubhub (NASDAQ: GRUB) and others must now cap commissions for delivery services at 15% and for nondelivery services like advertising at 5%, as well as implement a 3% limit on transaction fees. Additionally, they must obtain a license with the city — which can be revoked under several different conditions — and renew it every other year.

“Throughout the COVID-19 pandemic, third-party platforms like Plaintiffs have been instrumental in keeping restaurants afloat and food industry workers employed, including by investing millions of dollars in COVID-relief efforts specifically for local restaurants,” the companies say in the joint lawsuit. “Yet, the City of New York has taken the extraordinary measure of imposing permanent price controls on a private and highly competitive industry — the facilitation of food ordering and delivery through third-party platforms. Those permanent price controls will harm not only Plaintiffs, but also the revitalization of the very local restaurants that the City claims to serve.”

Cities across the U.S. including San Francisco, Seattle and Washington have adopted temporary commission caps for third-party delivery companies to help local restaurants — many of which were forced to rely on their delivery segments due to lockdown restrictions — stay afloat. But now that restrictions are easing, Uber, DoorDash and Grubhub are alleging that the commission caps are limiting free enterprise between themselves and their partnering restaurants.

Read: Food delivery companies in NYC face permanent commission cap

Read: Uber, Lyft and others face a reckoning

“The ordinance is unconstitutional because, among other things, it interferes with freely negotiated contracts between platforms and restaurants by changing and dictating the economic terms on which a dynamic industry operates,” the text of the lawsuit states.

According to the companies, the New York City law “bears no relationship to any public health emergency,” and they complain that reduced revenue from commissions will result in costs being passed along to consumers. As a result, they warn, restaurants could struggle to maintain their demand for delivery because consumers may not be willing to pay heightened delivery fees on the apps.

“Those permanent price controls will harm not only Plaintiffs, but also the revitalization of the very local restaurants that the City claims to serve,” the lawsuit says.

The city disagrees. Councilman Francisco Moya, the architect of the permanent commission caps, emphasized that the ordinance serves to protect those businesses, not harm them.

“By limiting, without expiration, the fees charged to restaurants by third-party food delivery services,” he said in a statement Aug. 26, the day the measure was approved, “we are ensuring that mom-and-pop shops have a real opportunity to recover and thrive.”

A nationwide effort

Councilman Moya isn’t alone. On the other side of the country, San Francisco’s Board of Supervisors voted unanimously to approve its own permanent 15% commission cap on food delivery apps. Like New York, San Francisco also passed a temporary cap at the start of the pandemic, but the city sought to make it permanent in June.

“This legislation is well thought out, allowing the ability for restaurant operators to sign a completely separate marketing agreement for additional services, while ensuring that a clear 15% cap will remain on the delivery service,” said Laurie Thomas of the Golden Gate Restaurant Association. “This legislation will help ensure our San Francisco restaurants can continue to operate in a financially sustainable way as they recover from the past year plus with limited capacity and lost revenue.”

The companies are taking legal action in San Francisco as well, but elsewhere the situation is reversed. In August, the city of Chicago sued DoorDash and Grubhub, alleging that the companies were charging high fees and using consumer tips to pay themselves, among other deceptive practices. Both companies have denied the allegations.

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Jack Daleo

Jack is a staff writer for FreightWaves and Modern Shipper covering topics like last mile delivery and e-commerce fulfillment. He studied at Northwestern University, majoring in journalism with a certificate in integrated marketing communications. Previously, Jack has written for Backpacker Magazine and enjoys travel, the outdoors, and all things basketball.