Quick-service brand operator Yum Brands sued Grubhub on Thursday, arguing that the delivery provider is trying to back out of a two-year-old agreement and dramatically raise prices for delivery customers at Taco Bell and KFC.
The lawsuit, filed in a state court in New York, argues that Grubhub moved earlier this month to get out of a mutual services agreement “without warning or justification.”
Yum, which owns KFC, Taco Bell and Pizza Hut, argued that the company’s moves would lead to a 40% increase in fees that will ultimately be paid by customers.
“Grubhub’s improper efforts to rid itself of a deal it no longer wanted and to line its pockets will cause enormous harm to consumers at a time when they can least afford it,” Yum Brands argued in its complaint.
In a statement, Grubhub denied the allegations. “We vigorously deny the allegations in the complaint,” the company said. “It is unfortunate that Yum has taken this step and we are very sorry about the situation Yum franchisees are in with millions of dollars at risk especially in the midst of this challenging environment.
“We’re happy to work with Yum to resolve our contract dispute, but we intend to ensure that Grubhub and its stakeholders are protected against Yum’s breach of the exclusivity provisions of the agreement.”
The lawsuit was filed just one day after the delivery provider announced a deal to sell itself to the Amsterdam-based delivery provider Just Eat Takeaway in a $7.3 billion deal.
Yum and Grubhub reached their landmark master services agreement (MSA) in 2018, when Yum agreed to invest $200 million in Grubhub for a 3% stake. In exchange, Grubhub provided KFC and Taco Bell franchisees with delivery and online ordering services at favorable rates. Pizza Hut CEO Artie Starrs was made a director of Grubhub.
According to Yum, the agreement came with a $50 million termination fee. The Louisville, Ky.-based company said that, given the Just Eat deal, the fee “may well be relevant.”
As part of the deal, Grubhub received six commercial, marketing and operational exclusivities for Taco Bell and KFC, including nationwide advertising. Taco Bell and KFC have promoted Grubhub since the start of the agreement, Yum said.
Grubhub also received the exclusive right to integrate with the brands’ point-of-sale system.
At issue has been Yum’s more recent use of other third-party players. Yum argues in its complaint that its agreement gave the company the right to use other services, such as Uber Eats and Postmates, as long as the various contractual restrictions were followed.
Yum says it has been expanding its work with the other delivery providers, particularly since the pandemic hit. “The pandemic increased the importance, for consumers and small-business restaurant owners alike, of reliable and accessible delivery across every part of the country,” Yum said.
The restaurant company argues that Grubhub has long wanted out of its deal. “It has been clear for some time that Grubhub regrets the economics of the MSA,” Yum said. “This regret has been expressed verbally and has been demonstrated in Grubhub’s actions.”
Yum says Grubhub at times blacked out restaurants that were open for business and sometimes extracted payments for services that were supposed to be provided for free under their agreement.
Yum also argues that Grubhub wouldn’t allow Taco Bell and KFC to participate in its subscription service, Grubhub+, unless they paid an additional fee.
On June 2, Grubhub CEO Matt Maloney emailed a document to Yum Brands, in which he argues that Yum breached the agreement by working with competing delivery providers. In the process, Maloney said that various requirements under the deal no longer applied.
The letter said Yum and operators would be charged order processing fees of 3.05% plus 30 cents per transaction, and that Grubhub would be able to charge diners 17% commissions on their orders.
On June 8, Grubhub then sent Taco Bell and KFC franchisees a letter notifying them of the new fee structure. That letter told operators that “all fees would be paid by the diner.”
Yum also said that Grubhub sent messages threatening to increase pricing at Pizza Hut.
UPDATE: This story has been updated to include comment from Grubhub.
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