DoorDash, Grubhub spar with San Francisco over 'dangerous' delivery fee cap

DoorDash and Grubhub are locking horns with San Francisco over a limit on fees that the delivery giants insist would set “a dangerous precedent for government overreach.”

Originally designed to help restaurants battered by COVID-19, the city imposed a 15% cap on order fees as a temporary measure back in April 2020. It was set to expire on Aug. 15, 60 days after restaurants were allowed to fully reopen in California — but now San Francisco wants to make it permanent.

That proposal has drawn the ire of DoorDash and Grubhub, who filed suit on Friday to block the move, blasting it as unconstitutional. In the complaint, the companies are seeking an unspecified amount of monetary damages, and warn that caps will ultimately hurt restaurants.

The suit states that caps will lead to fewer choices for restaurants, higher consumer prices, and could affect the services the companies offer in San Francisco.

"Costs to facilitate food delivery that are not covered by restaurants will likely shift to consumers — irrespective of whether those restaurants would prefer to bear those costs to increase their own sales — thereby reducing order volume, lowering restaurant revenues, and decreasing earning opportunities for couriers," the filing stated.

In response, John Cote, communications director for the city attorney’s office, told Yahoo Finance in a statement that San Francisco would “review the lawsuit once we’ve been served with it, and we will address it in court.” He declined to comment further.

'Arbitrary price controls'

Cities across the U.S., including the Bay Area, adopted temporary delivery limits during the COVID shutdown, but San Francisco is the first in the nation to make it a permanent change. New York City is also considering a permanent cap, according to the Wall Street Journal.

San Francisco’s cap prohibits all fees charged to restaurants by delivery companies from exceeding 15% of an order total, and the Board of Supervisors voted unanimously to make it permanent last month.

However, Mayor London Breed, recognized the potential negative effects, and declined to sign the bill.

"Though I appreciate an intent to continue to protect our small businesses, this ordinance is unnecessarily prescriptive in limiting the business models of the third-party organizations, and oversteps what is necessary for the public good," she said in the letter.

Both companies warned that a cap would restrict options for independent eateries.

“Imposing permanent price controls is an unprecedented and dangerous overreach by the government and will limit the options small businesses rely on to compete in an increasingly competitive market,” a DoorDash spokeswoman said in a statement.

Separately, a Grubhub representative criticized “arbitrary price controls [that] hurt independent restaurants by limiting their access to critical tools that help them find new diners and generate more orders.”

However, the cap has the backing of some in the restaurant industry. The Golden Gate Restaurant Association (GGRA), which said it was “disappointed” by the DoorDash/Grubhub lawsuit, said it was working with legislators to find common ground.

In a statement given to Yahoo Finance, Laurie Thomas, executive director of GGRA said the organization wanted a cap that would allow “additional flexibility for restaurants to sign additional contracts for marketing services, SEO and consumer discounts, and pass throughs for credit card fees.”

Meanwhile, some local restaurateurs have shunned the use of the delivery services, citing the costs. Kim Alter, chef-owner of Nightbird in San Francisco, no longer uses either one of those companies.

"If this pandemic brought anything to light it was that restaurants were running unsustainably before COVID,” Alter told Yahoo Finance.

“And these large companies coming in and taking such a high percentage off the top of a small restaurant that has razor-thin margins was not beneficial in the end for both parties,” she added.

“Restaurants are not out of the woods yet, we are dealing with higher costs in product, labor, and major obstacles we as an industry have never seen before,” Alter said.

“These companies are only out for themselves and they have received breaks for years, the percentage cut should have been regulated years ago.”

This legal action is heightening the third-party delivery wars. Both DoorDash and Grubhub have been criticized in the past for charging commission fees as high as 30% to restaurants trying to stay afloat.

Earlier this year, DoorDash rolled out a new pricing plan that gives restaurants more control over the fees they pay. Restaurants can choose from a three-tiered commission structure—15%, 25% or 30% per order—with a higher level of service at each tier.

Grubhub, on the other hand, has a negotiable fee structure based on the level of marketing and visibility a restaurant wants.

DoorDash said the “vast majority” of San Francisco restaurants have opted into a commission rate higher than 15%.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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