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The changing regulatory paradigm for food delivery services

The food and grocery delivery space is a testament to how a regulatory system can grow organically for a fledgling industry that has quickly found itself in the spotlight.

An increase in demand

Although delivery services were already growing rapidly to accommodate the fast-paced lifestyle of consumers, COVID-19 created a massive need that delivery services were happy to fill. Restaurants were forced to close and could only serve customers using third-party delivery services like Grubhub and DoorDash. Aversions to crowded grocery stores meant many consumers stayed home and paid companies like Amazon and Instacart to deliver their groceries.

The increased importance of food delivery services has been accompanied by increased regulatory scrutiny. All major delivery services have been hit by a combination of class actions and enforcement measures by the Federal Trade Commission (FTC) and state attorneys general, and the review has led several states to consider legislation or regulation to limit billing practices.

The toll of fees

There have been a number of class actions delivery costs in the last two years. For example, a class action lawsuit filed in 2020 against DoorDash, postmates and Uber eats alleged that the “exorbitant” fees charged by these entities violated the antitrust laws.

Regulators have also been particularly active in space. To date, the largest regulatory action regarding shipping was held in February 2021 with a $61.7 million settlement between Amazon and FTC. According to FTC, Amazon advertised to its delivery drivers and customers that 100% of tips would go to delivery drivers, when in reality, Amazon lowered delivery driver wages and used tips to make up the shortfall. Similarly, Instacart received a lawsuit in 2020 from the washington d.c. Attorney General following allegations that he pocketed the optional “service fee” the company claimed to use to pay its delivery staff, and the DC Attorney General filed new regulatory action over the fee as recently as March 2022.

Given the importance of delivery services to consumers and restaurants, a number of municipalities have chosen to begin regulating delivery services more directly. Los Angeles, Chicago and other major cities have passed ordinances that limit delivery charges to 15% while pandemic restrictions are in effect. Some cities also require apps to increase fee transparency by showing the restaurant’s actual menu price and app charges, and prohibit apps from keeping tips for restaurant workers.

permanent caps have also been implemented San Francisco and New York City. the New York City the law has been particularly controversial. In June, a class action lawsuit was filed alleging that major delivery apps were willfully flouting the New York City straight. And in September, Grubhub, Uber eats and DoorDash brought an action to prohibit the New York City law, arguing that the legislation “has no connection to a public health emergency and is characterized only as an unconstitutional, harmful and unnecessary government overreach.”

California and Texas have also recently passed laws that regulate more fully industry-statewide. the California The law prohibits a food delivery platform from charging a purchase price higher than a restaurant’s advertised price or retaining any amount designated as a tip or gratuity. The bill also requires delivery platforms to provide consumers with a cost breakdown for each order. the Texas the law takes a lighter hand, simply prohibiting delivery apps from charging restaurant fees unless the restaurant has agreed to those fees in writing.

What’s on the horizon

  • The regulatory scrutiny facing food delivery services shows what can happen when an industry grows rapidly.
  • Regulation begins with individual and targeted actions by regulators and consumers to address particularly harmful practices.
  • But, if a particular industry is seen as wielding too much power, it may find itself subject to a more pervasive regulatory regime.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

M Ronald R. UrbachDavis+Gilbert LLP
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