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Are Restaurant No-Tipping Policies the Product of an Antitrust Conspiracy?

In July of 2013, Danny Meyer, the CEO of the Union Square Hospitality Group, tweeted that he was considering eliminating tipping at his restaurants and solicited the opinion of other restaurant owners.  Meyer and others eventually followed through on this idea and eliminated tipping at some of their restaurants. Instead, they began charging service fees while also raising menu prices to account for the increase in wages needed to compensate previously tipped employees.  A newly filed putative class-action complaint alleges that these no-tipping policies, rather than being undertaken for largely equitable reasons, are in fact a massive antitrust conspiracy among restauranteurs to raise consumer prices.  

The complaint, Brown v. 140 NM LLC et al. (C.D. Cal. 4:17-cv-5782), is filed on behalf a putative class of all persons who purchased food or drinks from a defendant restaurant during the time a no-tipping policy was in place.  It alleges that Meyer “spearheaded” a massive conspiracy among restaurants to charge consumers higher prices by eliminating tipping, thereby “unlawfully transfer[ing] millions of dollars from customers and servers to restaurant owners in violation of federal and state antitrust laws.”  Compl. ¶¶ 2–3.  According to the complaint, the “conspiracy is in its early experimental stage” but has nonetheless raised prices and netted restauranteurs millions of unlawful profits.  Id.  It alleges wide-ranging and ongoing efforts to collude and raise prices among some of New York and San Francisco’s most well-known restauranteurs, including David Chang of the Momofuku group of restaurants and Tom Colicchio of Crafted Hospitality.  It also alleges that Meyer and others discussed and advocated for the move to no-tipping policies at meetings of various industry groups and associations, such as Journee, a trade association of restaurant owners and hospitality professionals, and the International Chef’s Conference.  One such association, the Golden Gate Restaurant Association, is also a named defendant.

The complaint sets forth five causes of action: (1) a violation of Section 1 of the Sherman Act; (2) a RICO violation; (3) a violation of California’s antitrust law; (4) a violation of New York’s antitrust law; and (5) a violation of the California Unfair Competition Law.  It alleges that the defendants agreed among themselves to adopt no-tipping policies and that the agreement amounts to horizontal price fixing and is therefore a per se violation of the Sherman Act.

Much of the complaint focuses on the various defendants’ public statements advocating no-tipping policies, evidence of meetings and alleged discussions among the defendants, and  claims that their public statements that the policy is better for employees conceal their true profit-seeking motives.  Yet, in the end the plaintiff may face an uphill road proving that defendants are engaged in a price-fixing conspiracy.  Exhortations seeking common action may but do not necessarily portend an agreement.  Nor is it clear whether the alleged collusion is economically plausible or would have any injurious effect on competition and consumers. While at the margin certain customers have their favorite eateries and might not be sensitive to price increases, overall the restaurant industry is highly competitive, with relatively low barriers to entry and a plethora of alternatives for consumers if prices rise.  The competitiveness of the industry suggests that the conspiracy alleged in the complaint might not be economically rational, because restaurants charging supra-competitive prices might just lose too much business to others outside the conspiracy for the conduct to be profitable. This in turn raises the question whether migration to a no-tipping policy by some restaurants is the result of conspiracy or just parallel independent behavior—it is entirely possible that the restaurants that decide to adopt a no-tipping policy may have decided, rightly or wrongly, that it was their unilateral best interest for either economic or non-economic reasons.  If they guess wrong and customers desert them, one imagines they will quickly revert to a conventional tipping policy, as it is difficult to see how such a conspiracy could be enforced. It also remains to be seen whether the prices charged by the alleged conspirators are actually higher than what diners were accustomed to paying, with tip.  This case thus presents a classic problem of ascertaining when allegations of conspiracy cross the line from possibility to plausibility pursuant to Twombly, and without a solid economic theory from the plaintiff, the case may face an early dismissal.