At famed chef and restaurateur Josiah Citrin’s Michelin-rated Melisse in Santa Monica, patrons purchasing $200 French caviar are probably not too concerned with a 3 percent surcharge nestled at the end of the bill.
But this added cost, implemented in response to the Affordable Care Act’s employer health care mandates and a rising minimum wage, has Citrin and other proprietors at high-end L.A. eateries such as Trois Mec, Rustic Canyon, and Lucques, caught up in an alleged “price-fixing conspiracy.”
A lawsuit filed in Los Angeles County Superior Court last year claims the restaurants colluded to add this charge in violation of California’s antitrust act. While the restaurateurs deny any collusion took place, the case survived a critical August hearing after a judge refused to grant a motion to dismiss the suit. Plaintiffs’ lawyers are now able to start the discovery process and dig into the defendants’ records in preparation for a March hearing to determine whether the case warrants class-action certification.
Daniel Sterrett, a Westwood-based attorney handling the case for named plaintiff Margaret Imhoff, said he was confident the suit would continue to move toward a trial.
“Coming together to fix prices has been a per se antitrust violation since the inception of the Sherman Act,” Sterrett said, referring to the antitrust legislation passed by Congress in 1890. “The surcharges might have only amounted to $10 a bill and no one is going to sue over that, which makes it a perfect vehicle for a class action.”
Other attorneys who do antitrust work, however, said the case is still far from proved.
“It’s a very strange case, honestly,” said Rick Stone, a partner in Jenner & Block’s downtown office. “Typically a true cartel or price-fixing conspiracy exists in a very concentrated industry. That is certainly not true of the restaurant business, even the very high end.”
Loaded charge
The surcharge underpinning the suit opens up a window into a larger debate within the restaurant industry over labor costs. Surcharges have been added by many eateries in Los Angeles – not just the named defendants.
And while prices at restaurants such as Melisse make it seem as though proprietors are living in opulence, the reality is even the most expensive restaurants operate on thin profit margins, said restaurateur Josh Loeb, proprietor of Santa Monica eateries Rustic Canyon and Huckleberry Café.
“When a restaurant is doing really well it has maybe a 10 percent profit margin,” he said. “And that’s when almost everything is operating perfectly.”
Loeb, who is a defendant in the suit, said the surcharge was part of an effort to increase transparency about where patrons’ money went.
“We wanted to give a little bit of power back to the customer,” he said. “We wanted customers to know that we were paying for employee health care and what that cost is.”
Bill Chait, who runs the Sprout Restaurant Group and is one of L.A.’s most successful restaurateurs, was at the forefront of the surcharge movement in the area when he instituted one at his Mid-Wilshire restaurant Republique at its opening in late 2013. While some eateries have strategically cut workers’ hours to avoid paying health care costs, Chait opted to use his more than 600 employees as leverage when negotiating premiums with insurance companies.
“We found a solution that that allows us to insure the most number of people, which in turn gives us more bargaining power,” he said.
But why surcharges instead of just raising the cost of a meal by 3 percent?
Chait said front-of-house employees (i.e., wait staff) were the only ones who benefit when a restaurant bakes cost increases into food prices because their tips rise as a result of higher bills. Kitchen staff, on the other hand, are left out.
“Any surcharge put on a check can be distributed anywhere in the restaurant,” he said. “It’s about creating a system that doesn’t pit front-of-the-house employees against the back-of-the-house. (Surcharges) allow restaurants to distribute funds in a more equitable manner.”
While movement away from the traditional tipping model is a business necessity for some restaurants, new methods can attract litigation because they present unfamiliar terms to consumers. That doesn’t mean there’s anything wrong with them or that there’s a viable legal claim, according to Jenner & Block’s Stone.
“It’s beyond debate that the Affordable Care Act has increased costs for employers, so the costs would have gone up at the defendants’ restaurants anyway,” he said. “It’s economically rational to pass along the increased costs to consumers.”
