Enact Emergency Legislation Now and Save Maryland Restaurants Before it is Too Late

*Jared Stape

I. Introduction

A harmful paradox has rapidly emerged in the restaurant industry—U.S. restaurants are losing revenue—while third-party delivery apps are seeing an exponential increase in revenue.[1] The COVID-19 public health emergency has razed local restaurants with ordinances preventing on-site dining, causing an uptick in delivery.[2] This has created a temporary paradigm shift, forcing restaurants to change their business models to rely more on delivery until vaccination rates are high enough for the U.S. population to gain herd immunity, allowing restaurants to open without restrictions.[3] Many hungry customers think they are supporting local restaurants by placing orders with third-party apps, including Grubhub, DoorDash, Uber Eats, and Postmates.[4] However, these self-proclaimed restaurant lifelines are actually more cancerous, as they impose exorbitant commission fees on local restaurants, crippling an already struggling industry.[5]

II. An Examination of Hidden Fees From Third-Party Apps

On October 20, 2020, Maryland’s Montgomery County Office of Consumer Protection issued a consumer protection warning, alerting restaurants to the predatory tactics imposed by third-party delivery companies.[6] Although large third-party delivery companies advertise free or small delivery fees to customers, these companies charge restaurants exorbitant commission fees, “totaling 20 to 40 percent or more for each order.”[7] As such, companies that provide large-scale delivery services are causing restaurants to miss out on substantial revenue.[8]

While third-party delivery companies claim that the base commission imposed on restaurants ranges only from fifteen to thirty percent, most companies find additional ways to charge restaurants.[9] For example, Grubhub employs search engine optimization (SEO) tactics.[10] If a restaurant agrees to pay more money to Grubhub, they will have a better chance of being placed at the top of customers’ search results.[11] This practice creates winners and losers because if a restaurant refuses to pay additional compensation for SEO, their business will be pushed down the list, making it more difficult for customers to find them.[12] Additionally, when customers call in orders using phone numbers provided by Grubhub, restaurants are required to pay extra compensation for marketing fees.[13] DoorDash, another major delivery service, imposes “subscription and delivery fees” on restaurants.[14] Meanwhile, an Uber Eats company representative admitted to charging restaurants a “standard commission rate [of] 30%” on most orders.[15] Unfortunately, owners agree that these apps have become a necessary evil if restaurants expect to stay in business.[16] One owner stated that he uses third-party apps because “[a]t the end of the day, you may not be making money, but you have your staff working.”[17] The owner of Casa Vega, a Los Angeles restaurant, analogizes food delivery apps to piranhas, eating away at small business owners’ already razor thin margins, which are often a mere six percent.[18]

In Chicago, Giuseppe Badalamenti—a restaurant consultant and owner of Chicago Pizza Boss—used social media to provide a striking example of just how exploitative these unregulated fees can be for restaurants[19] Badalamenti’s post tracked the cost of forty-six takeout orders placed on Grubhub in March.[20] The orders generated a total revenue of $1,043, but Grubhub charged $666 in aggregated commission fees, gobbling up sixty-four percent of the restaurant’s total revenue. [21]

III. Unregulated Commission Fees May Be Illegal

In 1890, Congress passed the first antitrust law—the Sherman Act.[22] Although businesses have evolved from the era of when the “horse and buggy” was the main means of transportation, the general principles of the Sherman Act remain intact.[23] The Sherman Act proscribes business practices, including contracts, conspiracies, and trade restraints that if successful, would amount to monopolization.[24] However, The Supreme Court held that the Sherman Act does not preclude all restraints on trade, only practices that are unreasonable.[25] Common examples of practices that are almost always unlawful include price fixing, market division, and bid rigging.[26] With this in mind, have third-party delivery apps violated the Sherman Act?

On April 13, 2020, a class action lawsuit was filed in the United States District Court for the Southern District of New York against Grubhub, Uber Eats, Postmates, and DoorDash (the Defendants).[27] The Plaintiffs aver that third-party delivery apps hold monopolistic power over customers and restaurants, leaving consumers and restaurants with little choice other than to do business with the Defendants.[28] Due to the lack of competition, the Defendants are able to charge restaurants exorbitant fees, “rang[ing] from 13.5%-40% of revenues . . . .”[29] Additionally, the Defendants require restaurants to sign contracts, containing uniform price clauses.[30] These clauses eliminate a restaurant’s ability to charge lower prices, preventing restaurants from procuring untapped market share.[31] Aggregated, the Plaintiffs contend that these practices directly violate Section Two of the Sherman Act.[32] As Section Two proscribes any person from engaging in behavior to monopolize a trade among the States, an attempt to monopolize, or conspire with others, they aver that the Defendants have directly violated this Section.[33] Moreover, they assert that the Defendants will continue to maintain their monopolistic power by using exclusionary, unreasonable, and anti-competitive conduct.[34]

On October 20, 2020, the Defendants issued a response, asking the Court to dismiss the lawsuit.[35] The response denies price fixing and asserts that the Defendants operate their businesses in a reasonable manner within a competitive market.[36] The Defendants have also baldly claimed that arbitrary caps imposed by the government will actually harm local restaurants.[37] The Defendants reason that government mandated caps would interfere with their ability to conduct background checks on drivers—a purportedly expensive procedure—making less drivers available to pick-up deliveries for restaurants.[38] As delivery demand has surged in recent months, background checks are needed for all the new drivers employed by these companies.[39] In addition, the Defendants contend that government orders are illegally interfering with private contracts between businesses.[40]

IV. Maryland Needs to Implement Price Caps Against Third-Party Delivery Apps

Regardless of the outcome in Davitashvili, right now, the most effective way to protect Maryland restaurants is through emergency legislation.[41] Local governments within Maryland should follow the lead of cities that have enacted emergency orders, which have limited the commission fees that third-party delivery companies can charge restaurants.[42] Of note, these commission caps would be temporary and persist only until the pandemic has subsided for a reasonable amount of time.[43] So far, in Maryland, only Baltimore County and Anne Arundel County have enacted price caps of fifteen percent on fees charged by third-party delivery companies.[44] Outside of Maryland, Washington D.C., Philadelphia, New York City, Seattle, San Francisco, and Los Angeles, are among the growing numbers of cities that have adopted emergency orders temporarily limiting third-party commission fees to fifteen percent.[45] Other cities have contemplated adjusting commission caps to as little as five percent.[46]

While local restaurants in Maryland wait and hope for emergency legislative action, consumers can take immediate steps to support their favorite local restaurants.[47] Hungry customers should order directly from the restaurant’s website or app.[48] If consumers take this approach, all revenue generated from the transaction will go directly to the restaurant.[49] In addition, consumers can use social social media to spread awareness about the predatory tactics employed by major, third-party apps.[50] So, for your next delivery, drop third-party apps, order directly from the restaurant, and help save your favorite, local eatery.

*Jared Stape is a second-year day student at the University of Baltimore School of Law and is a Staff Editor for Law Review. Jared was recently inducted as a distinguished scholar to the Royal Graham Shannonhouse III Honor Society. Last summer, he drafted a judicial opinion for the Honorable Joan E. Ryon of the Circuit Court for Montgomery County, Maryland. Jared currently works part-time as a judicial extern to the Honorable Jonathan Biran at the Court of Appeals of Maryland. This summer, Jared will join JDKatz as a law clerk.

[1] Alison DeNisco Rayome, Food Delivery Apps Say They’re Saving Restaurants. Instead They’re Charging Big Fees, Cnet (May 15, 2020, 4:00 AM), https://www.cnet.com/how-to/food-delivery-apps-say-theyre-saving-restaurants-instead-theyre-charging-big-fees/#:~:text=The%20top%20delivery%20 apps%20like,services%20they%2 0decide%20to%20use; Joe Macdonald, Restaurants Are Saying Goodbye to Third-Party Delivery Apps, FsR (June 2020), https://www.fsrmagazine.com/expert-takes/restaurants-are-saying-goodbye-third-party-delivery-apps.

[2] See Leah Nylen & Alexander Nieves, As Restaurants Struggle, Cities Look to Cap Delivery Fees, Politico (May 8, 2020), https://www.politico.com/states/new-york/albany/story/2020/05/05/as-restaurants-struggle-cities-look-to-cap-delivery-fees-1282401.

[3] Tara Smith, Covid and Food Delivery: Paradigm Shifts in Foodservice in the Midst of the Pandemic, Mht Partners: Shop Talk (Apr. 1, 2020), https://www.mhtpartners.com/covid-and-food-delivery-paradigm-shifts-in-foodservice-in-the-midst-of-the-pandemic/.

[4] Rayome, supra note 1.

[5] Id.

[6] Press Release, Montgomery Cnty., MD, Washington Consumers’ Checkbook, a Nonprofit Organization, Releases Report Detailing Impact on Restaurants and Patrons (Oct. 20, 2020), https://www2.montgomerycountymd.gov/mcgportalapps/Press_Detail.aspx?Item_ID=27976.

[7] Id.

[8] Id.

[9] Jeff Blyskal, Food Fight! Online Ordering Services Charge Restaurants Huge Fees, Consumers’ Checkbook, https://www.checkbook.org/san-francisco-bay-area/restaurants-pay-steep-fees-to-order-and-delivery-services/ (Oct. 8, 2020).

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Gina Pollack, For Restaurants Trying to Ditch Delivery Apps, The Struggle Is Real, LAist (Aug. 10, 2020, 7:00 AM), https://laist.com/2020/08/10/why_so_many_restaurants_hate_food_delivery_apps.php.

[15] Id.

[16] Id.

[17] Rayome, supra note 1.

[18] Pollack, supra note 14.

[19] Rayome, supra note 1.

[20] Blyskal, supra note 9.

[21] Id.

[22] Sherman Act of 1890, ch. 647, 26 Stat. 209 (codified at 15 U.S.C. §§ 1–7) (amended 1955, 1974, 1975, 1976, 1982, 1990, 2004).

[23] The Antitrust Laws, Fed. Trade Comm’n, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws (last visited Mar. 25, 2021).

[24] 15 U.S.C. § 1.

[25] Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58 (1911); see The Antitrust Laws, supra note 23.

[26] See The Antitrust Laws, supra note 23.

[27] Complaint at 1, Davitashvili et al. v. Grubhub Inc. et al., No. 1:20-cv-03000 (S.D.N.Y. 2020).

[28] Id. at 2–4.

[29] Id. at 2.

[30] Id. at 3.

[31] Id.

[32] Id. at 36.

[33] Id.

[34] Id.

[35] Julia Arciga, Grubhub, Postmates Try to Sink Suit Over Alleged Price Pacts, Law 360 (Oct. 20, 2020, 2:51 PM), https://www.law360.com/articles/1321118.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

[40] Id.

[41] See Lauren Feiner, New York City Council Votes to Cap Food-Delivery App Fees at 15% During States of Emergency, CNBC (May 13, 2020, 5:23 PM), https://www.cnbc.com/2020/05/13/nyc-city-council-votes-to-cap-app-delivery-fees-at-15percent.html.

[42] Id.

[43] Id.

[44] Emily Opilo, Baltimore City Council Approves Fee Cap on Grubhub, Door Dash, Other Restaurant Delivery Apps, Balt. Sun (Jan. 26, 2021, 10:45 AM), https://www.baltimoresun.com/politics/bs-md-pol-baltimore-delivery-app-fee-cap-20210125-njub3zdssve6pjobxpmhhaxvdy-story.html.

[45] Blyskal, supra note 9.

[46] Id.

[47] Id.