Restaurant Owners versus Grubhub

Restaurant owners. Many restaurant owners sign up for Grubhub’s (www.grubhub.com) online delivery platform because they value its services. Grubhub handles delivery orders and displays restaurant menus to new customers in exchange for a commission on each order placed through the platform. This service enables restaurants to reach customers who want to order online without having to build and manage their own websites. Further, the platform’s marketing services can replace old-fashioned advertising strategies such as hand-delivering take-out menus.
Grubhub charges anywhere from a 3 to 15 percent commission fee depending on whether a restaurant makes their own deliveries. However, if a customer orders from a restaurant through the Grubhub app or through a non-associated website (discussed below), Grubhub can bill for an additional 20 percent commission on a single order.
Over time, however, restaurant owners began to notice that their profits were decreasing even though their sales were stable. They also discovered that Grubhub’s commission fees had been increasing. According to the owners, Grubhub’s response was to suggest that if the restaurants paid higher fees for marketing promotions, then their search rankings would rise. If they did not, then their restaurants could fall lower on Grubhub’s web page, and they could lose sales.
In addition to higher fees, restaurant owners had three problems with the Grubhub platform: (1) Grubhub’s buying Web domain names of existing restaurants, (2) phone fees, and (3) non-partnered restaurants. We examine each of these issues below.
Buying web domain names. Restaurant owners began to develop their own websites so that they could offer online orders and use a local delivery service that offered a flat monthly rate and no commission fee. However, a serious problem surfaced. Grubhub already owned the web domains that matched many restaurants’ names. In fact, researchers found that as of May 2019 Grubhub had registered 34,000 websites.

Many owners contended that they had never given Grubhub permission to register their restaurants’ names. In fact, the owners believe that Grubhub purchased their restaurants’ Web domains to prevent the restaurants from building their own websites, a process called cybersquatting. Cybersquatting is the act of registering, trafficking in, or using a domain name in bad faith. The domain names that Grubhub purchased resemble the landing pages of the actual restaurants, complete with menus, online ordering forms, and phone numbers, despite the fact that these domains are not actually associated with the restaurants themselves. These domains are known as non-associated websites. Although these websites look like the real restaurant websites, they link only to Grubhub.

Phone fees. The Grubhub app and the non-associated websites also displayed phone numbers that Grubhub controlled to ensure it was receiving its commission. The process worked like this: Grubhub would set up and promote a unique phone number for restaurants listed on their platform. Allegedly, when a customer called a restaurant using that number and the phone call lasted longer than 45 seconds, Grubhub would assume that the customer had placed an order. The platform would then take credit for the “order” and charge the restaurant $5 to $9 per call, even if an order had not actually been placed. The problem was that customers often call restaurants to make reservations, to ask about the status of an order, or for other reasons besides actually ordering food. Not surprisingly, Grubhub’s system results in restaurants being charged with unnecessary additional fees. Restaurant owners sued Grubhub over phone orders, alleging that the company was charging fees for bogus phone calls that did not directly result in an order.
Non-partnered restaurants. Industry analysts noted that Grubhub had listings on its platform for restaurants that it did not partner with. Grubhub had been allowing customers to order food with its app from restaurants that had not signed up to be on Grubhub or its subsidiaries’ platforms. To make matters worse, Grubhub announced that if a restaurant did not want to appear on its platform, then it would need to directly ask Grubhub to be removed.
A large number of restaurant owners complained, resulting in government agencies investigating Grubhub’s actions for potential anticompetitive behaviour. In addition, U.S. senator Chuck Schumer called on Grubhub to pay restaurants back for bogus phone fees, and he asked the company to cooperate with the U.S. Small Business Administration’s probe into the platform’s business practices.

Grubhub. In response to restaurant owners’ complaints and various investigations, Grubhub stated: “Grubhub has never cybersquatted. As a service to our restaurants, we have created microsites for them as another source of orders and to increase their online brand presence. Additionally, we have registered domains on their behalf, consistent with our restaurant contracts. We no longer provide that service, and it has always been our practice to transfer the domain to the restaurant as soon as they request it.”
Grubhub CEO Matt Maloney asserted that restaurants using its food delivery platform had explicitly agreed to Web domain purchases and the creation of websites advertising their businesses. He stated further that Grubhub had a “very clear provision in every one of our restaurant contracts saying that we would provide this service to bring them more orders.”
Maloney also maintained that Grubhub had (1) discontinued the practice of automatically creating websites for restaurants in 2018, (2) charged restaurants substantially less for orders received via those websites than for orders placed directly through the Grubhub app, and (3) turned ownership of the websites over to the restaurants upon their request.
Some reporters who were covering this controversy stated that the contract language between Grubhub and restaurants appeared to support some of Maloney’s assertions. For example, the second item in the terms of service signed by restaurant owners states that Grubhub “may create, maintain and operate a microsite (‘MS’) and obtain the URL for such MS on restaurant’s behalf.”

In response to its critics, in early 2020 Grubhub announced a new plan. First, the platform would extend the time period in which restaurants can review all phone orders from 60 to 120 days. Second, the platform launched a new website to make it easier for restaurants to request direct control of any URLs registered as part of their contract with Grubhub. Third, the platform began to facilitate round-table events to create more direct dialogue with its restaurant partners.
And the bottom line? In the food delivery industry, DoorDash (www.doordash.com) leads with 35 percent of consumer spending, followed by Uber Eats with 28.8 percent, then Grubhub at 21.7 percent. Despite the controversy, Grubhub did report an increase in active diners, growing 28 percent to 22.6 million in 2019 compared to 17.7 million in 2018. Furthermore, Grubhub reported a total revenue of $1.3 billion in 2019. In June 2020 Just Eat Takeaway (www.justeattakeaway.com) purchased Grubhub for $7.3 billion.

Questions

1. Discuss the ethicality and the legality of each of Grubhub’s business practices: registering domain names, phone fees, and non-partnered restaurants.

2. The fundamental tenets of ethics include responsibility, accountability, and liability. Discuss each of these tenets as it applies to Grubhub’s business practices in this case.