By: John Gillies
As the Covid-19 pandemic continues, a legal battle has begun between New York City and three of the most popular third-party food delivery apps. In a lawsuit filed in the Southern District of New York, Grubhub Inc., Doordash Inc., and Portier, LLC (collectively “the Apps”) are jointly suing for an injunction on an ordinance passed by the legislature, which caps commissions the Apps can charge restaurants for using their service at a combined 20% (for delivery and non-delivery charges). The legislature believes this will help the restaurant industry stay afloat as life slowly returns to what it was like before the pandemic. The Apps, however, see this cap as unconstitutional and detrimental to their business plans, which surprisingly have yet to turn a profit.
Third-party food delivery phone apps have revolutionized how customers and restaurants are able to complete transactions. With a credit card loaded into the app interface, in only a few clicks a person can order food from any restaurant in their area that has contracted to be on the app. While popular even before the pandemic, Covid-19 (and the lockdowns that came with it) grew the Apps’ popularity exponentially. With such large portions of the population confined to their homes, users praised the convenience of the Apps, while simultaneously lamenting the fees. This ordinance, however, does not directly seek to address the costs to the consumer, but rather the costs to the restaurants themselves.
In May 2020, in response to the pandemic, the New York City legislature enacted an ordinance that imposed temporary price controls capping the amount food delivery apps could charge restaurants for using their platforms. The cap was set at a combined 20% for delivery and non-delivery fees. The Apps did not file suit at that time, likely understanding the poor optics that fighting a measure to help small businesses during a national health emergency would bring to their companies. However, there was a lawsuit filed by Micheli & Shel LLC (a Manhattan bakery), which alleged that rather than complying with the temporary ordinance, the Apps were simply reorganizing their fees and feigning compliance with the ordinance.
The New York City legislature chose to make what were previously characterized as temporary commission caps permanent, mirroring the actions of the San Francisco legislature, who made its commission caps permanent in June of 2021. After each city made their commission caps permanent, they were met with lawsuits from the Apps that are still pending. In each lawsuit, the Apps attack the permanent ordinances as being unconstitutional because they go against the Contracts Clause and the Takings Clause.
Like every dispute, there are two sides, and each has compelling points. The cities that have imposed caps have done so intending to save small businesses. It is believed by the New York City legislature that the permanent imposition of commission caps will help restaurants survive the pandemic. The New York City legislature acknowledges how important the apps have been towards sustaining the restaurant industry through lockdowns, but sees the current arrangement as unsustainable, with one Councilman stating, “Without them, it’s an instant death. With them, it’s a slow death.” While the legislature’s intentions are noble, it is not entirely clear that the cap will have the desired effect. As the complaint alleges, “The Ordinance is also harmful. The cost of facilitating food delivery and marketing will likely shift to consumers, thereby reducing order amounts or volume, lowering restaurant revenues, decreasing earning opportunities for delivery couriers, and resulting in less tax revenue in the City’s coffers.” This has already been seen in other cities like Denver, which passed a similar ordinance limiting how much DoorDash could charge restaurants, leading DoorDash to attach a $2 “Denver fee” to customers for each order.
New York City’s legislature has taken steps that they believe will save its small businesses, but the route they have taken to achieve that goal does not stand up to constitutional scrutiny; the Apps allegations of unconstitutional government overreach are convincing. In the complaint’s First Cause of Action, the Apps invoke Article 1, Section 10, Clause 1 of the United States Constitution (“The Contracts Clause”). The Contracts Clause states that “No State shall . . . pass any . . . Law impairing the obligation of Contracts.” In application, this clause means that the state cannot interfere with contracts that were legally entered, so long as the contract itself also is not illegal. These contracts between the Apps and the restaurants were signed voluntarily by both parties. It is also worth mentioning again that the Apps have yet to turn a profit, mainly because their start-up business model requires time to become profitable. For example, when focused on DoorDash last quarter its revenue was up 83% (to $1.24 billion), but the company still lost $102 million. The Contract Clause, and the power to have contracts enforced, are a fundamental part of the Constitution. The contracts were voluntary, and even though the Apps are losing money, having their legally formed contracts enforced is their right. The legislature should find another avenue to provide support for the restaurants.
The Apps’ complaint also invoked the Takings Clause in the Fifth Amendment of the Constitution, which prohibits the government from depriving a person of private property “without just compensation.” The contracts between the Apps and the restaurants, and the payments originating from them, can be susceptible to “taking” under the Takings Clause. Here, there would be no just compensation from the government. The revenue that the Apps contracted for will simply disappear, as portions of many of the contracts they negotiated with restaurants have become suddenly unenforceable.
It is commendable that the New York City legislature wants to help its small businesses survive the pandemic, but the route of price controls and commission caps does not stand up to constitutional scrutiny and will likely be unenforceable. Restaurants have been hit as hard as any industry during the pandemic, and it is up to the legislature to find constitutionally valid measures to support them.
Student Bio: John Gillies is a second-year law student at Suffolk University Law School. He is a staffer on the Journal of High Technology Law. John received a Bachelor of Arts Degree in Sociology from the University of Connecticut.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
