Antitrust Concerns in the Food Delivery Industry during the Pandemic
Posted on Apr 11, 2021Lily Zhou
Since the onset of the COVID-19 pandemic, increasing attention has been paid by industry experts, the legal and regulatory community, and the general public to the anti-competitive and potentially collusive conduct of food delivery companies.[1] Industry representatives and lawmakers have spoken against the looming dominance of certain food delivery apps (such as Grubhub, DoorDash and Uber Eats) and their potential to further consolidate.[2] Despite these efforts, food delivery companies have so far escaped liability and have continued prospering as the pandemic enters a second spike across the country.[3] The difficulty largely lies in the fact that the delivery companies do not appear to be engaging in behaviors traditionally targeted by antitrust laws, such as explicit price fixing and monopolizing.[4]
Section 1 of the Sherman Act, the main federal antitrust law in the United States, provides that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”[5] There are several key requirements in this section, including a mutual relationship in the form of a contract or conspiracy and a restraint of trade or commerce. Notably, the Supreme Court decided that the Sherman Act only prohibits unreasonable restraints of trade, not all restraints.[6] Thus, while an agreement between two parties might restrain trade, if the restriction imposed is reasonable in character, the parties may not be in violation of the Sherman Act.[7] Typically, reasonableness is judged under the “rule of reason” test, which consists of a fact-specific assessment of “market power and market structure . . . to assess the [restraint]’s actual effect” on competition.[8] The goal is to “distinguis[h] between restraints with anticompetitive effects that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.”[9] On the other hand, activities like “plain arrangements among competing individuals or businesses to fix prices, divide markets, or rig bids” are per se violations of the Sherman Act, for which no defense or justification exists.[10]
In the food delivery market, no clear and concrete evidence currently exists of unreasonable restraints of trade, particularly price-fixing or monopolization. Thus, it is difficult for antitrust law to catch the problematic behaviors of delivery companies. However, there is circumstantial evidence of potentially collusive or anticompetitive conduct.
Class Action Suit in the Southern District of New York
In April 2020, private plaintiffs filed a class action lawsuit against the four major food delivery companies (Grubhub, DoorDash, UberEats and Postmates) in the Southern District of New York, accusing them of occupying monopoly power in the delivery market.[11] In the Complaint, the plaintiffs alleged that the defendant companies charge restaurants high commission fees, ranging anywhere from 10% to 40%, depending on the company.[12] Through this practice, the food delivery companies reap a huge portion of profits from the businesses whose food they deliver to customers, sometimes grabbing as much as 30 to 35% of restaurant revenues, while restaurants and customers pay an extraordinary amount of fees.[13] Most notably, the plaintiffs argued that the food delivery companies required the restaurants they service to keep their dine-in prices equivalent to their prices on the delivery apps.[14] In this way, food delivery companies gain the ability to charge high fees to restaurants who no longer have any competitive advantage from dine-in service, and have to resort to these companies to deliver take-out food. Food delivery companies can thus be seen as engaging in a form of price fixing. Because the major food delivery companies participate in this practice simultaneously without evidence of an explicit collusive agreement, this may constitute a kind of problematic parallel pricing conduct.[15] Moreover, the Complaint alleges that food delivery companies have dominated the delivery personnel market, such that restaurants will not be able to conduct delivery services themselves because they have no access to the delivery personnel, and therefore have to deliver through third-party delivery companies.[16]
Potential Solution: Regulatory Cap on Fees
Despite these troublesome phenomena, without explicit evidence of price fixing or unreasonable restraints of trade, there is no basis for antitrust law, specifically Section 1 of the Sherman Act, to intervene.[17] However, a very simple yet effective solution exists: a regulatory cap on the fees that delivery apps can charge. Several characteristics in the food delivery market justify the use of regulatory solutions to protect restaurants and consumers from the domination of food delivery companies. First, the food service industry is already mature enough that government intervention would not strongly hurt the market’s ability to self-regulate. Moreover, this market’s free function over recent years has resulted in an undesirable status quo devoid of healthy competition, as the various food delivery companies all charge high fees and engage in parallel pricing activity. Second, the fees charged to restaurants are not transparent in the market. Because the restaurant partners pay these fees out of view of their consumers, the market price (i.e., the cost of these fees) will not naturally adjust up or down based on consumer choice and competition. Consumers simply choose which delivery app they want to use based on factors relating to their own personal convenience and independent of the fees charged to the restaurants from which they order. Thus, consumer decisions and market competition will not alleviate the burden imposed on restaurants through these fees. Third, the restaurants themselves lack the ability to bargain for lower fees on their own, at least based on the Davitashvili class action complaint and its alleged accusations.[18] Finally, unlike in other industries, even a reduction in the fees charged to restaurants will not manifestly reduce the supply of food delivery companies.
In fact, the New York City Council already issued such fee caps back in May 2020 and extended it in August.[19]This price control has helped restaurants during the pandemic by protecting them from the hefty fees.[20] New York City’s cap extends to both delivery fees (imposing a 15% maximum) and marketing fees (imposing a 5% maximum).[21]Since the cap was issued, most delivery apps in most locations have been abiding by the rules,[22] which shows that a regulatory solution can indeed be effective in protecting the restaurants from the extraordinary fees. Thus, New York and other states can consider adopting or extending the cap, at least for as long as the pandemic lasts, to protect restaurants from exorbitant fees and provide a temporary solution to the antitrust concerns in the market.
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[1] See, e.g., Lauren Hirsch, Klobuchar and Democrats Push Antitrust Regulators to Scrutinize Uber’s Potential Deal for Grubhub, CNBC (May 20, 2020), https://www.cnbc.com/2020/05/20/klobuchar-pushes-antitrust-regulators-to-scrutinize-potential-uber-deal-for-grubhub.html (discussing lawmakers’ effort to urge the DOJ and FTC to examine potential mergers in the market); Sam Sabin, Tech Antitrust Groups Have a New Target: Food Delivery Apps, Morning Consult (Aug. 11, 2020), https://morningconsult.com/2020/08/11/food-delivery-apps-tech-antitrust-campaign-ftc/#:~:text=Some%20of%20the%20most%20prominent,and%20Doordash%20Inc.
[2] Id.
[3] Jennifer Millman, NJ Gov Says 2nd Wave ‘Is Coming Now’ as NYC Mayor Calls City’s Latest COVID Rate ‘Worrisome’, NBC N.Y. (Oct. 29, 2020), https://www.nbcnewyork.com/news/coronavirus/another-new-jersey-city-imposes-virus-curfew-as-u-s-breaks-daily-case-record-for-3rd-time-in-week/2693359/.
[4] See Jerrold G. Van Cise, The Federal Antitrust Laws (Am. Enter. Inst. for Pub. Policy Research, 4th revised ed. 1982).
[5] 15 U.S.C. § 1 (2018).
[6] See, e.g., State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). In this case, a gasoline supplier terminated the contract with the operator of gas station, who then sued supplier for price fixing, challenging supplier’s vertical maximum price fixing arrangement. The Supreme Court held that vertical maximum price fixing is not per se violation of the Sherman Act.
[7] The Antitrust Laws, Fed. Trade Comm’n (Dec. 14, 2017, 7:15 PM), https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.
[8] Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984). In this case, a tubing company sued another tubing company and its parent corporation for conspiracy under the Sherman Act. The Supreme Court held that a parent corporation and its wholly owned subsidiary were not legally capable of conspiring with each other under section 1 of the Sherman Act.
[9] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007) (holding that application of per se rule is unwarranted as to vertical agreements to fix minimum resale prices).
[10] Fed. Trade Comm’n, supra note 7; Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988). In this case, a dealer which sold calculators sued the supplier for antitrust violation, after the supplier terminated the dealership at the request of a competing dealer. The Supreme Court held that vertical restraint of trade is not per se illegal under § 1 of the Sherman Act unless it includes some agreement of price.
[11] Class Action Complaint, Davitashvili et al. v. Grubhub, Doordash, Postmates, Uber (S.D.N.Y. filed April 13, 2020) (No. 1:20-cv-03000).
[12] Id. at 6–9.
[13] Class Action Complaint, supra note 11, at 7–9; Dean DeChiaro, Antitrust Hawks, Restaurants Want to Rein in Food Delivery Apps, Roll Call(Aug. 11, 2020), https://www.rollcall.com/2020/08/11/antitrust-hawks-restaurants-want-to-rein-in-food-delivery-apps/ (suggesting that the delivery apps can eat up 30% of the bill).
[14] Class Action Complaint, supra note 11, at 3 (accusing delivery companies of imposing unlawful price restraints through the pricing restrictions on delivery apps); Kieren McCarthy, GrubHub, DoorDash, Postmates and Uber Eats Sued by Hungry, Overcharged Coronavirus Customers, The Register (Apr. 15, 2020), https://www.theregister.com/2020/04/15/grubhub_doordash_postmates_sued/ (explaining the class action lawsuit and the claims asserted).
[15] Even when there is no accompanying, detectable collusive actions, there can still be problematic monopoly pricing by oligopolists that “constitutes an economically and legally distinct problem requiring new doctrines and new remedies for its solution.” Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562, 1562 (1969).
[16] Class Action Complaint, supra note 11, at 18–19; DeChiaro, supra note 13.
[17] State Oil Co. v. Khan, supra note 6, at 10.
[18] Class Action Complaint, supra note 11.
[19] Amelia Lucas, Local Lawmakers Provide Struggling Restaurants with Temporary Relief from Food Delivery Fees, CNBC (May 15, 2020), https://www.cnbc.com/2020/05/15/city-lawmakers-provide-restaurants-with-relief-from-delivery-fees.html (discussing how the government fee cap provided relief to restaurants); Erika Adams, City Council Extends Emergency Food Delivery Fee Cap Until Full Indoor Dining Returns, New YorkEater (Aug. 27, 2020), https://ny.eater.com/2020/8/27/21404680/nyc-food-delivery-fee-cap-extension (discussing the extension of fee caps); Lisa Fickenscher & Reuven Fenton, NYC Council Agrees to Cap Grubhub, UberEats Fees during Pandemic, New York Post (May 13, 2020), https://nypost.com/2020/05/13/nyc-council-agrees-to-cap-grubhub-ubereats-fees-during-pandemic/ (“The New York City Council compared food ordering apps like Grubhub and UberEats to blood-sucking parasites before passing emergency legislation aimed at helping struggling restaurants lower their delivery costs during the pandemic.”).
[20] Adams, supra note 19.
[21] Lisa Fickenscher, City Council Moves to Extend Food Delivery Caps on Grubhub, UberEats, New York Post (Aug. 6, 2020), https://nypost.com/2020/08/06/city-council-moves-to-extend-food-delivery-caps-on-grubhub-ubereats/.
[22] Adams, supra note 19.