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Lawsuit over San Francisco fee cap on food delivery advances

A judge rejected claims that platforms were unfairly targeted for their speech or political views, but he advanced a theory that a food delivery fee cap may violate the companies’ property rights.

SAN FRANCISCO (CN) — Food delivery companies can press forward with claims that a city ordinance capping how much they can charge restaurants is unconstitutional, a federal judge ruled Wednesday.

Third-party delivery platforms Grubhub and DoorDash sued the city of San Francisco last year after it made permanent a Covid-era law that limits the commission fees they can charge restaurants to no more than 15% per order.

Accustomed to charging fees as high as 30%, the food delivery platforms say the ordinance significantly impairs their businesses and that they cannot operate profitably with a 15% cap.

The delivery platforms lobbed a litany of legal claims against the price control ordinance. They said it impermissibly interferes with their contracts with restaurants, represents an unconstitutional taking of property, violates their due process and equal protection rights and was intended to retaliate against them for their speech.

In a 47-page ruling issued Wednesday, U.S. District Judge Edward Chen rejected most of those accusations, but he advanced one legal theory — that the ordinance violates the delivery companies’ constitutional right to private property.

The judge said that claim must move forward because more evidence is needed to determine if the ordinance has substantially harmed the delivery companies’ bottom lines.

DoorDash and Grubhub say the ordinance has lowered the value of their contracts with restaurants and prevented them from obtaining reasonable returns on their investments.

“We are pleased that today’s ruling allows us to move forward in our suit against San Francisco’s price controls, which are not only unconstitutional but also hurt the city’s restaurants, delivery workers, and diners,” a Grubhub spokesperson said in an emailed statement. “We look forward to swiftly resolving San Francisco’s illegal actions in court.”

Judge Chen dismissed other claims from the lawsuit, including an assertion that the ordinance unconstitutionally disrupts existing contracts. Chen found that claim could not survive because the price control served a legitimate legislative purpose — to protect the restaurant industry.

He also refused to accept arguments that the city lacked power to pass the ordinance because it did not “promote the welfare of the general public,” based on economists’ opinions that all price regulation is counterproductive.

“The city had grounds to believe that the platform industry was so concentrated that platforms could use their market leverage to extract high fees from restaurants,” Chen wrote. “As a result, the city found that the commission cap would reasonably protect the restaurant industry.”

Chen similarly dismissed an equal protection claim. He was not persuaded the platforms are a “politically unpopular group of businesses” who were unfairly targeted by city lawmakers.

Additionally, the judge threw out a claim that the ordinance was intended to retaliate against the platforms for supporting Proposition 22, a voter-approved ballot measure passed in 2020 that keeps app-based drivers classified as independent contractors instead of employees.

The judge found that claim unbelievable because DoorDash started supporting Proposition 22 long before the San Francisco ordinance was made permanent. Chen also noted that the ordinance doesn’t apply to other companies that supported Proposition 22 — like Uber and Lyft — but it does apply to Grubhub, which made no public donations to support the campaign.

Chen further found comments by one San Francisco lawmaker were not enough to show retaliatory intent. Supervisor Aaron Peskin had stated in a public meeting and Facebook post that the platforms funded the most expensive ballot measure in history to “gut employee protections” and that “correcting this imbalance is a long-term project."

“Statements by individual legislators … do not establish the motivation of the legislative body as a whole,” Chen wrote.

A spokesperson for San Francisco City Attorney David Chiu’s office issued a brief statement on the ruling Wednesday.

“We are pleased the court dismissed a majority of the plaintiffs’ claims,” spokeswoman Jen Kwart said. “We will review the order and determine the appropriate next steps.”

A DoorDash spokesperson said the court decision reaffirms its belief that permanent price controls are unconstitutional and bad for consumers, delivery drivers and local restaurants in San Francisco.

“We look forward to continuing to make our case in court,” DoorDash said in its statement. “We are proud of the work we’ve done to support San Francisco businesses and are committed to keeping our restaurant partners in the driver’s seat.”

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Categories / Business, Courts, Technology

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