Third-party restaurant aggregators and delivery services DoorDash, Uber Eats and Grubhub sued New York City late Thursday (Sept. 9) over a law the city passed that makes fee caps — which began as a short-term measure during lockdown — permanent.
The companies allege that the law “interferes with freely negotiated contracts” and call the measure “irrational,” arguing that it is “driven by naked animosity toward third-party platforms.” Through this suit, the companies are looking to block the enforcement of the law, according to AP reports, and are seeking unspecified monetary damages and a jury trial.
Upon the approval of the law in late April, Council Member Mark Gjonaj commented, “This landmark legislative package will protect our small businesses from unfair practices that threaten their existence when they are the most vulnerable.”
He added, “As we enter into the post-COVID recovery phase, we send a message to the city and the rest of the country that Silicon Valley must engage fairly with our small businesses or face consequences.”
The news comes as all parties — restaurants, delivery services, legislatures and consumers — are looking to assert their will in shaping the long-term economics of third-party delivery. In the early months of the pandemic, as consumers sought ways to meet their food needs without putting their health in danger, digital ordering soared, and third-party orders went from being a small fraction of restaurants’ total sales to a significant portion of their business. Consequently, the often steep fees that third-party services charge went from being an inconvenience to an unworkable situation for many restaurants.
In fact, PYMNTS data from the study “The Bring-It-To-Me Economy,” created in collaboration with Carat from Fiserv, which surveyed more than 5,000 U.S. consumers, find that around six in 10 are ordering food online more than before the initial outbreak of the virus. Plus, almost half of respondents (46%) report that they are ordering through aggregators “somewhat” or “much” more than before March 2020.
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Noting this trend, some cities imposed temporary fee caps to help restaurants make it through the difficult period. However, even as restaurants have reopened, digital ordering has remained elevated, and a return to pre-cap fees could take a significant toll on many cities’ restaurants.
On the other hand, aggregators continue to struggle to make a profit, even as an increasing number of consumers incorporate digital ordering into their lives. Major delivery services are operating at a loss, and fee caps further compromise their ability to make a profit.
In July, after San Francisco became the first city to make its fee cap permanent, DoorDash and Grubhub filed a similar lawsuit, and DoorDash’s Impact site, which argues for the company’s positive effect on local economies, has an entire “Why price controls don’t work” section dedicated to generating support for the aggregators’ position on this issue.
Included in the section is a “Projected lost tax revenue for state and local governments for 2021 in select U.S. markets,” which contends that price controls cost New York City $4.4 million.
With the popularity of aggregators, many restaurants see it as a necessity to make their food available through these marketplaces. However, some are seeking alternatives that would not levy the same hefty fees and would not stand between the restaurant and the consumer in the same way.
As Nabeel Alamgir, co-founder and CEO of digital ordering marketplace Lunchbox, told PYMNTS in an interview, “The ridiculous commission fees are what everyone hears, but the silent killer is the lack of guest data that these restaurants are getting.”
Related news: Restaurants Seek In-House Alternatives to Third-Party Aggregators
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