FTC and Illinois Attorney General Settle with Grubhub for Deceptive Practices

By Leonard L. Gordon & Ellis McKennie

The Federal Trade Commission (FTC) and the Illinois attorney general announced a settlement with Grubhub Inc. to resolve allegations that the company engaged in an array of unfair and deceptive practices that violated Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), the FTC’s new Impersonation Rule, and Illinois state consumer protection laws. The FTC announced the case as Chair Lina Khan’s tenure at the helm of the FTC comes to an end, and the case highlights many of the approaches Khan has pushed for during her reign.

The complaint alleged that Grubhub, an online food ordering and delivery platform, engaged in practices that harmed diners, delivery workers, and restaurant owners. Grubhub reportedly deceived diners by advertising low or no delivery fees but then added hefty charges at checkout. Even members of the company’s subscription program, Grubhub+, who paid $9.99 per month for “unlimited free delivery,” were charged these additional fees without proper disclosure.

Additionally, Grubhub allegedly “blocked” diners’ accounts after adding high-value gift card funds, preventing access to their remaining balances without warning or recourse. Banning surprise junk fees has been the focus of Khan’s tenure, as demonstrated by the FTC’s new Junk Fees Final Rule issued earlier this week, which prohibits junk fees in the short-term lodging and live-event ticketing industries.

The complaint also accused Grubhub of deceiving delivery workers by advertising inflated hourly pay rates well above what drivers could realistically expect to earn. For example, advertisements in Chicago promised earnings of up to $26 per hour, when in fact only 2% of drivers were paid this amount. The FTC under Khan has taken a very aggressive view of how consumers might interpret “up to” claims, and the agency has been active in using the FTC’s authority to protect workers, especially those in the “gig” economy.

Khan has urged the FTC to focus on matters that impact both its consumer protection and competition missions, and the complaint here alleged both types of claims. The complaint charged that Grubhub regularly listed restaurants on its platform without the restaurants’ consent, falsely representing to consumers that Grubhub had an affiliation with those restaurants. The complaint alleged that this conduct constituted an unfair act or practice injuring restaurants (consumer protection), as well as an unfair method of competition in the market for food delivery services.

Under Khan, the FTC has made aggressive use of ROSCA, not only to challenge issues with negative option enrollment and cancellation, but also to go after alleged deception regarding the basics of the offer when it is sold on a subscription basis. The FTC made just such a claim here.

Another signature Khan priority was the reinvigoration of the FTC’s Penalty Offense Authority. Here, as a basis for invoking that authority, the FTC cited its 2021 notice sent to hundreds of companies, including Grubhub, warning them that deceptive earnings claims are illegal.

Finally, to try and address potential challenges to the FTC’s ability to obtain some or all the monetary relief it desired, Khan’s FTC frequently partnered with state AGs to piggyback on the state’s remedial authority. That was done here, too.

Though the settlement passed the commission with a 5-0 vote, FTC commissioner Andrew Ferguson, who is set to become chair next month, disagreed with the accusations that Grubhub’s alleged practice of listing unauthorized restaurants on its platform is an unfair method of competition. In his statement, Ferguson argued that the complaint is devoid of any facts supporting the assertion that Grubhub’s deception affected competitive conditions in the prepared meal delivery market. Commissioner Melissa Holyoak voted against that count as well, but she did not issue a separate statement.

In addition to the $25 million monetary settlement, Grubhub also agreed to make the following substantial changes to its operations:

• Disclose the true cost of delivery
• Refrain from blocking accounts without notifying the consumer, provide a way for consumers to appeal that decision, and quickly provide access to gift card funds if the block is removed
• Stop charging consumers in connection with a negative option feature while they are blocked
• Stop misrepresenting delivery driver earnings
• Stop listing unaffiliated restaurants on the Grubhub platform
• Provide a simple cancellation mechanism for Grubhub+ subscriptions in accordance with the FTC’s new Click-to-Cancel Rule

Whether the Khan FTC has any more “big” announcements remains to be seen. The original chairman once sang that “the end is near.” And as Chair Khan’s time at the FTC comes to an end, she could certainly croon along, “I did it my way.”

The authors thank law clerk Eden Caliendo for her assistance in writing this post.

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