Suit by Diners to Proceed Against Food Delivery Platforms

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

More than two years into the COVID-19 pandemic, and driven in part by the suspension of indoor dining, the practices of restaurant platforms and food delivery services are facing increased scrutiny. A few weeks ago, U.S. District Judge Lewis Kaplan denied Grubhub, Postmates and Uber’s joint motion to dismiss in Davitashvili et al. v. Grubhub Inc. et al., allowing the proposed antitrust class action against the food delivery giants to move forward. 

In Davitashvili, plaintiffs accused the three restaurant platforms of leveraging their dominant position in the relevant markets to force restaurants to enter into “no price competition clauses” (“NPCCs”) that had driven up restaurant menu prices. It is alleged that the NPCCs prevented participating restaurants from charging lower menu prices to consumers who dine in person, order food takeout, or delivery directly from the restaurant, and in some cases, also prohibited restaurants from charging lower prices on rival restaurant platforms. Plaintiffs claimed that they had to pay artificially high prices for restaurant meals due to the three companies’ practices. Plaintiffs have sought damages and injunctive relief on behalf of themselves and nationwide classes of others similarly situated.

Despite the nationwide scope of the class, most restaurant dining is a local and varied business. In denying Defendants’ motion to dismiss, Judge Kaplan’s opinion grappled with issues related to the definition of both relevant product and relevant geographic market.

Relevant Product Market

In this case, plaintiffs have pleaded three separate product markets: (1) a restaurant platform market, where diners can search for participating restaurants and place orders through the platform from those restaurants, (2) a direct takeout and delivery market from individual restaurants, and (3) a dine-in market. 

Defendants contended that plaintiffs’ efforts to define separate markets based on how the same product reached the consumer should be rejected. They relied heavily on Bookhouse of Stuyvesant Plaza, Inc. v., Inc., 985 F. Supp. 2d 612, 621 (S.D.N.Y. 2013), where the district court dismissed a claim that alleged separate product markets for print books and e-books, because “print books are an obvious potential substitute for e-books.” 

But in Davitashvili, the court sided with the plaintiffs. First, it acknowledged that restaurant platforms are two-sided platforms, acting as an intermediary to connect restaurants and consumers to the benefit of both. Relying on a recent Supreme Court opinion, it found that “[o]nly other two-sided platforms can compete with a two-sided platform for transactions,” meaning that restaurant platforms compete with one another, but not restaurants themselves. (We have previously written about other cases involving two-sided markets here.) Second, the court analyzed the “practical indicia” of the relevant market and found that restaurant platforms provide functionalities that individual restaurants do not offer, such as search and the ability to read and write reviews. The court therefore found Bookhouse of Stuyvesant Plaza “inapposite,” noting that the more appropriate analogy would be print books and online book platforms. 

Relevant Geographic Market

A geographic market is normally the geographic “area of effective competition,” which courts measure “by determining the areas in which the seller operates and where consumers can turn, as a practical matter, for supply of the relevant product.” Here, plaintiffs have pleaded both national and local geographic markets. 

Defendants took issue with the alleged nationwide market by the plaintiffs, claiming that such a market did not actually exist, because restaurant platforms’ delivery ranges are limited. It is highly unlikely for a consumer in one metropolitan area to order food through a restaurant platform from a restaurant in a far-away metropolitan area.   

But while restaurants may be local, the court found restaurant platforms do compete nationally because they “compete to build a national network of consumers to offer restaurant, and a national network [of restaurants] to offer consumers.” Courts in the S.D.N.Y. have previously recognized the coexistence of national and local markets, even when market participants in some sense operate locally. For example, in New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 205 (S.D.N.Y. 2020), the court determined that a national market coexisted with local markets, despite the fact that a consumer in one city is unlikely to seek wireless services provided out of another city.

This decision, parsing the difference between markets for platforms and the underlying products, may have potential implications going forward in a variety of industries. We will continue to monitor this case and report back as it further develops.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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