By Levi Sumagaysay

Stocks fall as Grubhubs hometown city accuses food-delivery companies of experiencing tremendous growth on the backs of restaurants and consumers during pandemic

The city of Chicago filed a wide-ranging lawsuit against DoorDash Inc. and Grubhub Inc. on Friday, accusing the meal-delivery platforms of engaging in deceptive and predatory business practices.

The lawsuit alleges the companies practices harm consumers, delivery workers and restaurants. The city claims DoorDash (DASH) and Grubhub deceive consumers by advertising a lower upfront cost for delivery and sometimes misrepresenting the cost of items at restaurants, which the city calls a bait and switch because in most cases consumers are too invested in an order to back out when they see additional fees at the end of a transaction.

For example, according to the suit, During the ordering process, DoorDash and Caviar withhold the existence and amount of the Service Fee, Small Order Fee, and Chicago Fee on the Platforms until the checkout screen.

The $1.50-per-order Chicago Fee isnt imposed by the city, but rather a reaction by some delivery companies to an earlier attempt by Chicago to rein in the apps fees. The lawsuit says DoorDash is trying to recoup some of the money it lost from a 15% commission cap imposed by the city, which like other cities around the nation has tried to limit what huge companies like DoorDash were collecting from struggling restaurants during the coronavirus pandemic.

DoorDash has experienced tremendous growth on the backs of restaurants andconsumers, the lawsuit states, noting that DoorDash, including its Caviar division, grew its market share in Chicago during the pandemic from 38% to 57%.

See also: The pandemic has more than doubled food-delivery apps business. Now what?

The suit -- which comes after a yearlong investigation into the companies practices -- calls for a jury trial, fines of up to thousands of dollars for each misrepresentation and unfair act and practice, and asks the court to order the companies to change their practices. DoorDash shares fell 1.6% to $187.94 in Fridays trading session, while shares in Just Eat Takeaway NV, the owner of Grubhub, fell 7.4%.

If youre going to be able to influence an industry, you have to have a city big enough to have the courage to take on the giants, Betsy Miller, partner at Cohen Milstein Sellers & Toll, the civil rights law firm working with the city of Chicago on the case, told MarketWatch.

Steve Kane, deputy corporation counsel for the city of Chicago, said the city took on the onus for the lawsuit because arbitration clauses in the companies terms of service and costs of a lawsuit deter individual claims from consumers and restaurants.

Its important for cities and governments to step up, Kane told MarketWatch. The resource disparity [between restaurants and the companies] is massive.

The city also accuses DoorDash and Grubhub of causing problems for restaurants with which they have no partnerships. The lawsuit says the companies scrape information about restaurants and menus online without verifying their accuracy, which can lead to customer-service issues.

Another allegation in the lawsuit is that Grubhub created impostor websites for restaurants that rerouted consumers to Grubhub, which the company says was actually a service it previously provided to restaurants but no longer does.

We are deeply disappointed by Mayor Lightfoots decision to file this baseless lawsuit, said Grant Klinzman, spokesman for Chicago-based Grubhub. Every single allegation is categorically wrong and we will aggressively defend our business practices.

See also: Five things to know about DoorDash

The lawsuit also accuses DoorDash of misleading consumers to think they were tipping delivery workers directly when the company was actually using the tip to subsidize its payment to drivers. The company maintains that delivery workers receive 100% of tips.

DoorDash spokesman Taylor Bennett also said the lawsuit was baseless and referred to the companys actions during the pandemic, saying it has helped Chicago by waiving fees for restaurants and by providing $500,000 in direct grants.

This lawsuit will cost taxpayers and deliver nothing, he said.

-Levi Sumagaysay

 

(END) Dow Jones Newswires

08-30-21 0807ET

Copyright (c) 2021 Dow Jones & Company, Inc.

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