The Capitol Forum Has Reported
Vol. 8 No. 289 August 18, 2020
Just Eat Takeaway/Grubhub: Court Challenges to Local Fee Caps Would Face Uphill Climb, Constitutional Law Experts Say
Court challenges to city legislation capping the fees food delivery platforms like Grubhub (GRUB), Uber (UBER), DoorDash, and Postmates can charge to restaurants would face long odds of success, constitutional law experts said.
Since the pandemic curtailed indoor dining nationwide, more than a dozen U.S. cities have enacted laws temporarily capping platform fees. And as momentum grows in some jurisdictions to extend the caps or make them permanent, the platforms appear set to initiate litigation against the regulations on a host of overlapping constitutional grounds.
But each of these claims would face a common challenge—modern courts are, as a general matter, highly deferential to legislative actions involving price regulation. In mounting a court challenge to the caps, then, the platforms would find relatively limited precedent in their favor, the experts said.
In any event, the fee caps—and resulting legal challenges—could have significant short and long- term effects on the platform market.
In the near-term, fee caps, especially in New York City, could affect Just Eat Takeaway’s (AMS: TKWY) commitment to its $7.3 billion agreement to acquire Grubhub given the acquisition target’s outsize exposure to that market, The Capitol Forum has reported.
And deal impact aside, extended temporary or permanent fee caps would affect every food delivery platform player, and would—if they withstand court challenges—make it much more difficult for loss-making operators like Uber or DoorDash to generate significant profits in the U.S. food delivery market.
Against this backdrop, platforms blasted the fee caps. “We maintain a fundamental opposition to government-imposed pricing on private companies and believe that fee caps are counterproductive,” a Grubhub spokesperson told The Capitol Forum, adding that caps “lower pay for drivers; reduce restaurant orders; increase costsum. for diners; disruptcom an essential supply chain of meals; and cost jobs, tax revenues and important economic activity.”
“Commission caps are a form of price fixing, which would ultimately undermine restaurants’ access to reliable delivery services,” a DoorDash representative said. Just Eat Takeaway, Uber, and Postmates spokespeople didn’t respond to requests for comment.
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Constitutional challenge? Given the threat fee caps pose to its business model, Grubhub has been outspoken about its willingness to initiate legal challenges to any new regulation.
“[W]e believe the current law in New York City is the most legally fraught fee cap in the country. If it is extended in its current form, Grubhub will have no choice but to honor our obligations to our shareholders and seek a remedy in court,” Amy Healy, Grubhub’s head of public affairs, told a New York City Council joint committee in August 13 testimony.
DoorDash has made similar threats—after a Chicago alderman in April introduced a fee cap ordinance, the company blasted the proposal as “extreme and unconstitutional,” adding that “the expense for the defense of the unconstitutional ordinance will fall on Chicagoans.” The Chicago City Council didn’t ultimately pass the cap.
But although U.S. legislatures don’t often impose overt price caps, it’s not particularly controversial that such regulations can pass constitutional muster, said John Drobak, a law professor at Washington University in St. Louis.
“Businesses and investors always say price regulation is unconstitutional notwithstanding what the Supreme Court has said in the past. So under the current law, it really is constitutional,” said Drobak.
In fact, courts have upheld New York City price controls on an array of services, said Robert Bookman, a partner at Pesetsky & Bookman who represents the New York City Hospitality Alliance, a key proponent of the fee caps.
“There's plenty of examples over the years of government regulating fees in such a way that it's been upheld by the courts,” he said, noting that in addition to residential rent control, New York City has regulated rates for tow trucks, carters, and other services.
“They threatened to sue before so this is no surprise. I stand by this legislation and the restaurants it protects from exorbitant fees,” New York City Council Member Francisco Moya, the prime sponsor of the bill to extend the city’s temporary fee cap, told The Capitol Forum. um. com Takings clause. The Supreme Court explicitly endorsed price controls’ constitutionality in Florida Power Corp., a unanimous 1987 decision authored by Justice Thurgood Marshall.
“It is of course settled beyond dispute that regulation of rates chargeable from the employment of private property devoted to public uses is constitutionally permissible,” Marshall wrote. “So long as the rates set are not confiscatory, the Fifth Amendment does not bar their imposition.”
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But this isn’t to say that courts haven’t on occasion invalidated price controls. In fact, current city fee caps aren’t a monolith, and a first step to assessing their legality involves examining relevant state constitutions and statutes, an attorney familiar with the arguments against the caps said.
City power to regulate commerce, for example, depends to some extent on whether their states provide for home rule, which gives city lawmakers relatively broad authority, or instead follow the more restrictive Dillon’s Rule. In other situations, state legislatures have explicitly limited municipal powers—Florida law, for example, specifically prohibits cities from imposing price controls on lawful business activities.
Nonetheless, the crux of the argument against the fee caps involves the U.S. Constitution, under which the platforms could harness a variety of overlapping doctrines, a second attorney familiar with the arguments against the caps said.
Perhaps the most straightforward argument on this front, constitutional law experts said, is the takings clause, which stems from the Fifth Amendment’s prohibition on the government appropriating “private property…for public use, without just compensation.”
The clause has historically involved real property, and actual takings—classically, when the government seizes land through eminent domain. However, the Court’s 1922 Mahon decision also recognized that government regulation, if it “goes to far,” will be recognized as a taking.
Food delivery platforms’ existing contracts with independent restaurants often provide that they’re entitled to 30% or more of a delivery order. And the platforms could argue that New York City bills limiting these fees to 20% represents a taking of, in effect, a third of their expected revenue— and more than their expected profits—from these contracts.
But such an argument would face a host of complications—at the outset, it’s not clear that the platforms have a valid regulatory takings claim here in the first place.
A number of cases, stemming from the Court’s 1944 decision in Bowles v. Willingham, hold that the takings clause doesn’t apply when an owner isum. free to withdraw com their property from the market. In addition to rent controls, courts have used this reasoning to uphold commodity price controls, as well as price caps on Medicare and Medicaid reimbursement.
In its 2014 Baker County Medical Services decision, an Eleventh Circuit panel described “a long line of cases instruct[ing] that no taking occurs where a person or entity voluntarily participates in a regulated program or activity,” citing cases from the First, Fifth, Seventh, and Eighth Circuits.
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This is also the law in the Second Circuit, which includes federal courts in New York City. In its 1993 Garelick v. Sullivan decision, that court held that “a property owner must be legally compelled to engage in price-regulated activity for regulations to give rise to a taking.”
Ad hoc. Other courts, however, have allowed property owners to assert takings claims even in the absence of a government mandate to participate in the price-controlled market.
For example, although a landlord isn’t legally obligated to rent apartments, the Supreme Court of New Jersey in a 1975 case described landlords’ freedom to exit the market as “largely illusory,” because tearing down the units and constructing something else in their place would be “economically prohibitive.”
It’s not clear, however, that this situation a close analogue to the food delivery platforms, which lack significant sunk costs or trapped capital. This is to say nothing of the fact that fee caps are in all cases local, meaning that the platforms—all of which operate nationally—can easily exit, enter, and shift resources between these markets.
If a plaintiff could overcome this threshold issue, the Supreme Court’s 1978 Penn Central decision establishes the modern analysis for evaluating regulatory takings. In considering the constitutionality of a purported taking, courts must examine the economic impact of the regulation, the “investment-backed expectations” of the affected parties, and the character of the government action, the Court said.
This three-factor test is, as the Court noted, an “ad hoc, factual” inquiry into whether a regulation “goes too far.” In practice, however, a 2016 analysis of more than 2,000 state and federal court decisions concluded that “takings claims based on government regulation almost invariably fail.”
“The bottom line is, when you get to this sort of balancing test, usually the government will prevail, particularly if there isn't any kind of physical restriction on property or physical seizure,” said Ilya Somin, a law professor at George Mason University.
And although some courts have interpreted stateum. constitutional com takings clauses as providing enhanced protections, this distinction will do little to shift the odds on the New York City cap, said Somin, who described the state’s constitutional jurisprudence as one of the most pro-government in the country.
Ultimately, then, plaintiffs seeking to invalidate commercial price controls on takings clause grounds will in almost all cases face an uphill climb, experts said.
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“There’s not a lot of precedents to hang your hat on,” said Thomas Merrill, a law professor at Columbia University and a former U.S. deputy solicitor general during the Reagan and Bush administrations.
“The big picture here is that the Supreme Court has never invalidated a rent control statute,” said Merrill. “The answer has been entirely negative at the Supreme Court level, which does not provide a lot of encouragement to lower courts.”
Fair return standard? Plaintiffs challenging government price controls could also argue that the Court’s decisions on public utility rate regulation, rather than the Penn Central analysis, is the appropriate framework for evaluating fee caps.
These cases flow from the Court’s 1944 decision in Hope Natural Gas, which held that utility price controls must give investors a fair rate of return. By this standard, fee caps below the platforms’ costs would represent a confiscatory, regulatory taking.
Some lower courts have used this “fair return” standard outside of the public utility context, for example in evaluating auto insurance rates or residential rent control. In fact, 1970s decisions from New Jersey and California state courts invalidating rent control statutes during an era of high inflation might be the strongest precedent the platforms could use in attacking the fee caps, Merrill said.
Still, it’s not clear that the cases harnessing utility concepts are analogous to food delivery. Utility owners are legally required to furnish services to the public and are therefore barred from market exit. Online restaurant platforms, of course, aren’t, and don’t operate immovable assets or have substantial sunk costs.
Not only that, but unlike utilities (which generate revenue from ratepayers) or landlords (rentals), the platforms generate revenue through two separate means: restaurant commissions and diner fees. And although the fee caps affect the former part of this equation, a platform could in response pursue an obvious secondary revenue stream. In fact, this isn’t merely a hypothetical: Uber recently responded to 10% price caps in Jersey City andum. Portland in eachcom case by adding a $3 customer surcharge to delivery orders.
This response isn’t ideal for the platforms: shifting costs previously borne by the restaurant onto the diner increases consumer prices, thereby reducing demand and rendering platform orders less competitive with direct orders from the restaurant.
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That said, it’s an option that the platforms could—and presumably would—pursue, and is yet another factor that would pose a barrier to a court throwing the fee caps out under a “fair return” standard.
Contracts clause. Although the takings clause may represent the most promising line of attack on fee caps, it’s far from the only constitutional argument the platforms could invoke—another line of attack would involve Article 1, Section 10 of the Constitution, which provides that no state shall “pass any…law impairing the obligation of contracts.”
On this front, the platforms may argue that a fee cap would impair their existing contracts with restaurants. In fact, DoorDash’s press release responding to the proposed Chicago fee cap described the proposal as a ”clear violation of the Contracts Clause of both the U.S. and Illinois Constitutions.”
But although courts during the early days of the Republic viewed the contracts clause as a meaningful barrier to state economic regulation, the Supreme Court’s 1934 Blaisdell decision largely defanged it, in favor of a standard that upholds state legislative actions in nearly all circumstances.
“The contracts clause has kind of withered away,” said Merrill, noting the Court’s willingness to accept legislative defenses based on public policy and necessity. “The general trend has been very deferential.”
To be sure, the clause enjoyed a brief resurgence in the late 1970s, most notably in the Supreme Court’s 1977 United States Trust decision. However, shortly thereafter the Court’s Allied Structural (1978) and Energy Reserves Group (1983) decisions upheld state price controls against contracts clause challenges.
“After [United States Trust] everything sort of disappeared at the Supreme Court level, and there hasn’t been a lot of encouragement from the Supreme Court about reviving these claims,” Merrill said.
This case law, and courts’ broader deference to um.lawmakers, could com create significant headwinds to a contracts clause claim against the caps. Under existing case law, states are permitted to “substantially impair” contracts provided that the regulation is drawn in an “appropriate” and “reasonable” way in pursuit of “a significant and legitimate public purpose.”
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In the first instance, it’s not clear that the fee caps actually “substantially impair” the contracts— although they do in some cases alter contracted-for marketplace and/or delivery fees, they leave the rest of the contract between the platforms and restaurants untouched.
In fact, the platforms—with a few notable exceptions—have largely complied with the city fee caps that took effect as early as April. And the fact that the platforms have done so for the past several months could cut against the argument that the caps truly substantially impair the existing contractual relationships.
But even if the caps would have such an effect, a court will uphold them provided that they advance a significant and legitimate public purpose. In considering this question, a court’s initial inquiry is into whether the government is “exercising its police power, rather than providing a benefit to special interests,” the Court said in its 1983 Energy Reserves decision.
Here, the platforms could argue that cities are doing exactly that—seeking to benefit restaurants, a special interest. And unlike, for example, rent control or utility regulation, which involves resources crucial to public safety and necessity, the caps here simply redistribute margin between two private actors, raising questions about whether they fulfill a “legitimate public purpose.”
This argument isn’t without logic. Nonetheless, certain outliers aside, including Third Circuit (2012) and the Eighth Circuit (2019) decisions throwing out non-price cap state legislation, courts typically grant significant deference to legislatures on these questions, and plaintiffs seeking to invoke the contracts clause to challenge economic regulation almost always face an uphill climb, experts said.
“It is for the most part very deferential, particularly when it comes to emergency,” said Somin. “They [cases] are on the books, and it doesn't seem very likely to the Supreme Court will seriously change the precedent in the near future,” he said.
Due process and equal protection. A final constitutional argument against the caps would involve due process and equal protection, both of which stem from the Fourteenth Amendment’s prohibition on states “depriv[ing] any person of…property, without due process of law,” or denying persons “the equal protection of the laws.” um. com
On this front, the platforms could argue that caps single them out for unfair treatment, perhaps due to political bias.
The New York City cap applies to “third-party food delivery service[s],” defined as “any website, mobile application or other internet service that offers or arranges for the sale of food and beverages
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prepared by, and the same-day delivery or same-day pickup of food and beverages from, no fewer than 20 food service establishments.”
However, other firms that offer some of these same services to restaurants, for example marketing and credit card processing, are left unscathed.
Healy’s August 13 written testimony also advanced a second, Grubhub-specific Fourteenth Amendment argument.
“The existing fee cap in New York City is an arbitrary and unsupported cap on the fees that one group of businesses can charge another. But even worse, this particular cap, with an arbitrary split of a 15% cap on delivery and a 5% cap on marketing, is not applied fairly to all competitors and their respective business models,” she said.
The caps, she added, would allow delivery-focused companies like DoorDash and Uber to charge restaurants 20% of an order price, while capping Grubhub’s take at just 5%.
Healy’s argument flows from the fact that many orders placed through Grubhub’s platform involve the restaurant, rather than Grubhub’s own couriers, delivering a meal. Uber, DoorDash, and Postmates, by contrast, fulfill a relatively higher percentage of their online orders using their own couriers.
Like Grubhub, these platforms typically charge restaurants a marketing fee for orders placed through their platforms, regardless of who delivers it. The New York City legislation caps these fees at 5%. And like its competitors, Grubhub charges restaurants a delivery fee for meals ordered through its platform that its own couriers deliver. The New York City bill caps all platforms’ take on such orders at 20% in the aggregate.
Deferential standard. Given its outsize reliance on self-delivery and marketplace fees, the New York City cap is certainly worse for Grubhub than it is for its competitors. That said, the caps—on their face—apply to all platforms equally. And the leap from the cap structure hurting Grubhub disproportionately—to the conclusion that a court should invalidate it on Fourteenth Amendment grounds as singling out the company for unfair treatmentum.—is probablycom a stretch under the current case law.
In fact, absent an impact on a suspect class (i.e. race, religion) or fundamental interest (privacy, marriage), courts are typically very deferential to legislatures in due process and equal protection challenges. That said, this deference isn’t unlimited—which is why Healy’s repeated descriptions of the caps as “arbitrary” almost certainly isn’t by happenstance.
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“The standard for determining whether a state price-control regulation is constitutional under the Due Process Clause is well established: Price control is unconstitutional…if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt,” the Court wrote in its 1988 Pennell decision.
And on equal protection, the Court “will not overturn [a statute that does not burden a suspect class or a fundamental interest] unless the varying treatment of different groups or persons is so unrelated to the achievement of any combination of legitimate purposes that we can only conclude that the legislature's actions were irrational,” the decision added.
But the argument for New York City’s move to cap marketplace fees at a lower rate than delivery fees is fairly straightforward. Delivery involves significant costs, as a platform must pay a courier to pick up and transport the food. However, marketplace orders—credit card processing aside— lack any real costs for the platform. In fact, example orders from an April 2019 Grubhub investor presentation show a 76% profit margin on a self-delivery meal, compared with a 31% margin when the platform handles delivery itself.
To be sure, there are no shortage of economists who would testify that fee caps increase prices and reduce demand for food delivery, and are therefore an irrational means of protecting local restaurants. By that same token, the economics literature attacking rent control as counterproductive itself suffers from no dearth of entries, yet has done little to convince courts that the statutes actually lack any rational basis.
Arbitrary? A final line of attack against New York City’s 20% aggregate cap would involve painting the number as so arbitrarily chosen that it runs afoul of the Fourteenth Amendment.
On this front, the platforms could cite a 2019 New York State appeals court decision striking down a New York State Department of Financial Services (DFS) regulation that capped the fees title insurance agencies could impose for certain services.
There, the appeals court upheld the trial court’s conclusion that the DFS record was “devoid of any economic or other analysis justifying the 200%um. caps,” and wascom an “arbitrary, across-the-board percentage figure.” Such actions violate New York State law as “arbitrary and capricious” when they’re “taken without sound basis in reason or regard to the facts,” the court said.
Similar arguments could be made against the City Council’s 20% cap. Importantly, however, the City Council is a legislative body, rather than an administrative agency like the DFS, and rational
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basis review under the Fourteenth Amendment is even more deferential to legislative actions than the “arbitrary and capricious” standard courts apply to administrative decisions.
“Rational basis means that almost any minimally plausible reason will do,” said Somin. “If the court only applies very minimal rational basis review the government could just say, well, it's hard to be completely precise and we had to draw a line somewhere, 20% is a plausible way to do it,” he said.
In light of courts’ deference to legislatures on these questions, due process or equal protection attacks on price caps are typically long shots, said Drobak.
“Due process just requires that there be a legitimate government purpose and a rational means to accomplish that, and it's pretty well settled that price controls satisfy that,” he said.
And although there’s no special emergency exception in due process, takings and contracts clause doctrine, in practice, the fact that many caps—including New York City’s—are tied a state of emergency would probably further increase a court’s deference to legislative action under a rational basis review, said Somin.
Preliminary injunction? Ultimate merits aside, any court challenge to city prices caps would also raise a key near-term question: because the litigation process could be a years-long effort, a challenging platform would also probably move first for a preliminary injunction to prevent the cap from taking effect in the interim. Courts can oftentimes rule on a motion for preliminary injunction in a couple of months, lawyers said.
Plaintiffs seeking a preliminary injunction must show that they’re likely to succeed on the merits, are likely to suffer irreparable harm without an injunction, that the balance of equities is in their favor, and that an injunction is in the public interest. The burden in showing these factors is on the movant—in this case, the platforms.
As a general matter, courts are more likely to preliminarily enjoin legislation raising constitutional questions if the statute alters the status quo. Although new legislation typically fits this description, it wouldn’t necessarily do so here, given that theum. jurisdictions consideringcom new fee caps will in all likelihood simply cement their temporary bills’ rate structure.
New York City’s initial fee cap, for example, took effect on June 2. And if the City Council, as expected, votes to extend the fee cap on August 27, and Grubhub seeks to enjoin the bill shortly thereafter, it will be asking the court to alter a status quo that’s been in effect for around three months.
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Ultimately, however, the key question in a court’s decision on a preliminary injunction motion is the likelihood of success on the merits.
And here, where the case turns primarily on legal rather than factual questions, the preliminary injunction decision will take on outsize importance, as it typically provides a strong indication into how a judge will come out on the ultimate merits, lawyers said.
um. com
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