United States: Massachusetts AG Secures $3.5 Million Settlement Against Grubhub

Massachusetts AG Andrea Joy Campbell recently announced that Grubhub, one of the nation's most prominent food delivery platforms, will pay more than $3.5 million to settle claims that it overcharged restaurants in violation of a specific emergency fee cap imposed during the pandemic.

Massachusetts shuttered indoor dining in response to COVID, which triggered the passing of legislation intended to reduce the economic burden on restaurants, which supplemented the state's pre-existing price-gouging statute. This temporary statute (in place from January to June of 2021) prohibited third-party delivery platforms like Grubhub from charging restaurants with less than 25 locations in Massachusetts more than 15% of an order's purchase price in fees (delivery fee cap). Pursuant to the statute, a violation of the delivery fee cap was an unfair and deceptive trade practice in violation of the state's UDAP law.

The temporary statute also prohibited delivery platforms from reducing driver compensation. In drafting this portion of the statute, legislators may have considered the D.C. AG's settlement in 2020. There, DoorDash paid $2.5 million to resolve allegations that it had mislead consumers to believe that their tips would boost worker pay when, in reality, the tips went to the company to offset the compensation it already agreed to pay its drivers.

As a result of the temporary statute, Grubhub reduced its commission to 15% of the order price but continued to charge a credit card processing fee of about 3% on all noncash orders. The state AG's office filed suit in July of 2021, alleging this additional cost brought Grubhub's total fee above the legal cap. In March of 2023, Massachusetts won summary judgment when the court rejected Grubhub's argument that the processing charge was a pass-through fee outside of the statutory limit and its constitutional challenges, especially in light of the COVID-19 pandemic.

Continued Crackdown on Junk Fees and Price Gouging

This is hardly the delivery behemoth's first brush with state enforcement. Attorneys General in Washington, D.C. and Pennsylvania have also targeted Grubhub over its fees.

In December, Grubhub agreed to pay $3.5 million to settle claims that it violated D.C. consumer protection laws including more COVID-19 related claims. As you may recall, the AG's office alleged Grubhub charged hidden and deceptive fees by advertising one "delivery fee" upfront but then charging a "service fee" and "small order fee" (where applicable) only at the final stage of checkout. Among several other counts, the office also alleged that Grubhub ran a promotion falsely claiming to help struggling restaurants during the pandemic when, in reality, it passed most of the costs of discounted prices along to those restaurants and charged its full commission.

In Pennsylvania in 2022, the company agreed to add new fee disclosures to its platforms and donate $125,000 to Pennsylvania food banks in response to a lawsuit. Among other claims, the AG's office alleged that Grubhub did not clearly disclose to consumers that prices were sometimes higher through the platform than at the restaurant. We discussed that in detail here.

Takeaways

More broadly, "junk fees" and price gouging continue to be a key enforcement area for state and federal enforcers. We've covered Massachusetts' draft regulations to prohibit junk fees (here), California's recent junk fee statute (here), and the FTC's proposed junk fee rule (here).

Businesses shouldn't forget that price gouging statutes didn't begin or end with the pandemic – several states have warned recently about price gouging violations in light of recent winter storms, for instance. Some states take the position that their statutes are triggered by general terms such as an abnormal market disruption, so they may not require a state of emergency or specific disaster declaration. And be aware that definitions or interpretations of excessive or exorbitant pricing vary.

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