Does 42 U.S.C. § 1981 create a cause of action in one not a party to a contract, but who sustained personal injuries as a result of a breach of that contract, where the breach was motivated by racial discrimination against him?
JWM Investments, Inc., a company wholly owned by Respondent John McDonald, entered into a contract with Petitioner Domino’s Pizza under which it the parties agreed that JVM would build and lease to Domino’s four restaurant buildings. After the relationship began to sour, McDonald, an African-American, demanded that Domino's perform their end of the bargain. Another petitioner Deborah Pear Phillips, employee of Domino's, refused to sign contractually required "estoppel certificates," and the general counsel for Domino's said that it would perform the contracts only if McDonald would agree to amend them, which he refused to do. McDonald claimed that Petitioners' decision to breach the contracts was motivated by racial discrimination and sued under 42 U.S.C § 1981, which protects the right to make and enforce contracts. Petitioners argue that McDonald does not have standing to sue because he was not personally a party to the contract. The Supreme Court will thus decide whether 42 U.S.C. § 1981 creates a cause of action in one who is not a party to a contract, but who sustained personal injuries as a result of a breach of that contract, where the breach was motivated by racial discrimination against him.
Questions as Framed for the Court by the Parties
In the absence of a contractual relationship with the defendant, are allegations of personal injuries alone sufficient to confer standing on a plaintiff pursuant to 42 U.S.C. § 1981?
Domino's Pizza, Inc. ("Domino's") entered into four contracts with JWM Investments, Inc. ("JWM") under which JWM was to build restaurants and lease them to Domino's. Respondent John McDonald, an African-American, was the sole officer, director, and stockholder of JWM. Under the contract, Domino's was required to execute "estoppel certificates" if necessary for JWM to obtain financing for the restaurants. Deborah Pear Phillips, the real estate negotiator for Domino's and one of the petitioners, refused to sign the certificates. Phillips told McDonald that she would see to it that he would experience financial repercussions if he did not cease to pursue his dealings with Domino's. She said, "I don't like dealing with you people anyway," and that she would see to it Domino's did no further business with McDonald.
McDonald's calls were then forwarded to Domino's Vice President and General Counsel Joe Graziani. He told McDonald that Domino's would perform the remaining contracts only if McDonald agreed to amend them. McDonald refused to amend the contracts and Domino's refused to execute the estoppel certificates. Due to its subsequent inability to obtain financing, JWM had financial difficulties and eventually filed for bankruptcy. During the Bankruptcy proceedings, JWM filed a claim against Domino's for breach of contract that was settled for $45,000.
McDonald then brought an action on his own behalf, alleging a violation of 42 U.S.C. § 1981, which protects the right "to make and enforce contracts" free from discrimination. McDonald requested compensatory damages for pain and suffering and emotional distress, as well as punitive damages, costs and attorney's fees. The District Court granted Domino's motion to dismiss for failure to state a claim. The Ninth Circuit Court of Appeals reversed, holding that a party need not be a party to a contract to have standing under § 1981. That court held that McDonald may recover for "individual injuries separate and distinct from contract damages suffered by JWM…" The Supreme Court granted Domino's petition for certiorari on April 25, 2005.
The rights protected by Section 1981
42 U.S.C. § 1981 provides that “[a]ll persons…shall have the same right…to make and enforce contracts…as is enjoyed by white citizens.” 42 U.S.C. § 1981(a). Under the Section, “to make and enforce contracts” includes the right to make, perform, modify, and terminate a contract. 42 U.S.C. § 1981(b). Accordingly, § 1981 prohibits a person from breaching or refusing to enter into a contract based on the race of the other contracting party. See 14 C.J.S. Civil Rights § 43 (citing Faraca v. Clements, 506 F.2d 956 (5th Cir. 1975)). One court has stated that the policy behind § 1981 is to eliminate discriminatory practices by providing remedies to the victim that place him in the same “economic position he would have been in had there been no discrimination.” 14 C.J.S. Civil Rights § 43 (citing Minor v. Lakeview Hospital, 421 F.Supp. 485 (D.C. Wis)).
Insufficiency of the Ninth Circuit’s decision
The Ninth Circuit held that McDonald may recover damagesunder § 1981 for personal injuries that he suffered, which are “separate and distinct from contract damages suffered by JWM Investments, Inc.” McDonald v. Domino’s Pizza, 107 Fed. Appx. 18 (9th Cir. Jun 18, 2004). This decision was based on a rule that the Ninth Circuit established in a similar case, Gomez v. Alexian Bros. Hosp., 698 F.2d 1019, 1021 (9th Cir. 1983). In Gomez, for allegedly racial reasons, a hospital rejected the contract of a corporation that employed a physician of Hispanic origin. Id. The court held that § 1981 gave the physician standing to sue the hospital—that is, the right to make or have a court enforce a legal claim against the hospital, See Black’s Law Dictionary, 8th Ed. 2004. Gomez, 698 F.2d at 1021. The court reasoned that the racial discrimination allegedly caused the physician to suffer personal injuries that were distinct from any injuries the corporation suffered, including loss of employment, humiliation, and embarrassment. Id. Similarly, because McDonald allegedly suffered personal injuries, including significant monetary loss, personal defamation, and humiliation, the Ninth Circuit held that he had standing to sue under § 1981. Id.
Domino’s now argues, contrary to the Ninth Circuit’s holding in this case, that McDonald’s alleged personal injuries are insufficient to provide him with the right to sue under § 1981. Brief of Petitioner at 13. Domino’s argues that McDonald failed to demonstrate, and the Ninth Circuit failed to determine, whether he established the requisite statutory standing to sue. Id. Establishing statutory standing requires a court to determine whether Congress has granted a litigant judicial relief for violations of a right created by statute. Sierra Club v. Morton, 405 U.S. 727, 732 (1972). This determination involves two presumptions that a plaintiff must satisfy: 1) a plaintiff cannot base his claim on the legal rights or interests of a third party, Warth v. Seldin, 422 U.S. 490, 499 (1975); and 2) a plaintiff has standing to sue only if his claim falls within “the zone of interests to be protected” by the statute at issue. Ass’n of Data Processing Serv. Orgs v. Camp, 397 U.S. 150, 153 (1970).
Domino’s argues that McDonald has not overcome either of these presumptions, and that the Ninth Circuit erred in failing to inquire into whether McDonald had established statutory standing. Brief of Petitioner at 13.
The right to “make and enforce” contracts under Section 1981
According to Domino’s, McDonald has not established statutory standing to sue under § 1981, because he has never been denied the right to “make and enforce contracts,” as provided under § 1981. Id. at 20. According to Domino’s, the “make and enforce” provision of § 1981 is triggered only by injuries that a plaintiff suffers when making and enforcing his own contract with the defendant. Id at 20-21. Thus, where a plaintiff does not have his own contract with the defendant, but instead, has one with a third party who contracts with the defendant, neither the injuries of the third party nor the plaintiff can provide the plaintiff with standing to sue the defendant under § 1981. Id. For example, a plaintiff cannot sue if her injuries consist merely of increased expenses or labor in fulfilling her contract with the third party, Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 532 n.25 (1983), or are based on the injuries of the third party. Warth, 422 U.S. at 509.
Applying the foregoing rules to this case, Domino’s first argues that McDonald has no claim under § 1981, because he has not alleged that he was personally a party to any contract with Domino’s. Brief of Petitioner at 25. This conclusion is not weakened by McDonald’s status as president and sole shareholder of JWM, because, in general, “[t]he contract of a corporation is the contract of the legal entity, and not of the shareholders individually.” 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 29, at 497, 500. Further, Domino’s argues that McDonald cannot assert a right through JWM (the third party), because, as described earlier, § 1981 does not suggest that a non-party to a contract has the right to make and enforce it. Brief of Petitioner at 28.
Even assuming that McDonald could sue through a third party intermediary, such as JWM, Domino points out that McDonald had no contract with JWM, and that their relationship is nothing more than that between a corporation and its sole shareholder. Id. at 32. To be sure, McDonald never alleges the existence of an employment contract, and courts are reluctant to presume the existence of one without evidence that one exists. See e.g., Bellows v. Amoco Oil Co., 118 F.3d 268, 275 (5th Cir. 1997).
McDonald responds in several ways. First, he argues that he had two contractual relations with JWM—one as an employee and the other as a shareholder. Respondent’s Brief at 37. Federal law required that McDonald be considered an employee and be paid wages because he performed services for JWM as its president. Id at 37 (citing Spicer Accounting, Inc. v. United States, 918 F.2d 90, 93 (9th Cir. 1990)). As a former employee, he now claims entitlement to wages that he would otherwise have earned absent the alleged discrimination. Id at 37-8. McDonald further argues that contrary to Domino’s assertion, “the relationship between a corporation and its shareholders is contractual.” Id. at 39 (citing 7A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 3634, at 216). In reply, Domino’s argues that no contractual relationship exists because simply “characterizing someone as an ‘employee’ for purposes of federal tax statute does not create a contract under state law.” Petitioner’s Reply Brief at 10.
In addition to asserting a contractual relationship between himself and JWM, McDonald argues in large part that he does not need to contract with Domino’s in order to establish standing under § 1981. Respondent’s Brief at 22. He highlights past Supreme Court cases, such as Goodman v. Lukens Steel Co., 482 U.S. 656 (1987), that conferred standing under § 1981 to persons who were the “actual targets” of contract-related discrimination, regardless of whether the persons actually contracted through another party. Respondent’s Brief at 10 (citing in addition Shaare Tefila Congregation v. Cobb, 481 U.S. 615 (1987); Runyon v. McCrary, 427 U.S. 160 (1976)).
Domino’s, however, argues that McDonald’s “actual target” test simply has no support in either the plain language of § 1981 or the case law. To be sure, Domino’s argues that McDonald’s reliance on past Supreme Court cases is seemingly reasonable but incorrect. For instance, although the plaintiffs in Runyon v. McCrary and other cases were not parties to the underlying contracts, they were intended beneficiaries of the contracts. It is this status as intended beneficiaries, and not simply as the actual targets of discrimination, that creates standing, according to Domino’s. In the present case, McDonald does not argue that he was an intended beneficiary.
McDonald does argue, however, that as a practical matter Domino’s narrow interpretation of § 1981 as requiring a contractual relationship between the plaintiff and defendant would exclude millions of minority workers from the protections of § 1981and would create a serious gap in the enforcement of § 1981. Respondent’s Brief at 24-6. Millions of workers would be excluded because they hold employment contracts, not with a party that discriminates against them, but with their employers, oftentimes corporations or temporary employment agencies. Id. If these employers choose not to sue the wrongdoer—perhaps to avoid upsetting an important customer—the employees are left without a basis to assert a § 1981 claim. Id at 26, 30. If the employees cannot assert a claim, and the employers choose not to do the same, the wrongdoer would in many instances escape liability under § 1981. Id at 26. This situation would only exacerbate racial discrimination and create a serious gap in the enforcement of § 1981 claims. Id. Further, because an agent is rarely a party to an underlying contract between two corporations, Domino’s cramped construction of § 1981 leads to the absurd result that a corporation is left as the only entity with the right to sue under § 1981— which is absurd because a corporation has no racial identity. Id at 14 (citing Village of Arlington Heights v. Metro. Housing Dev. Corp., 492 U.S. 252, 263 (1977)). Finally, a gap is also created under Domino’s interpretation because racial discrimination oftentimes results in non-economic injury, including pain and suffering, mental anguish, and humiliation. Id at 27. Only an individual, however, can seek relief for these types of injuries; “corporations do not themselves have feelings.” Id. at 27-8.
In response to McDonald’s policy argument in favor of broadly interpreting § 1981, Domino’s posits that small entrepreneurial companies, such as JWM, can overcome these barriers erected by a narrow interpretation of § 1981. Specifically, Domino’s questions why the president or sole shareholder of an entrepreneurial business cannot simply elect to conduct business as an individual and not through incorporation. Id. at 31. This arrangement would allow the president to be a party to a business contract, and thus sue under § 1981. Such a choice, McDonald argues, is no choice at all and is prohibitively unworkable in a competitive business environment. Id. “Forcing minority entrepreneurs to forsake incorporation in order to retain the full protection of § 1981 would place them at a serious, perhaps fatal, competitive disadvantage in relation to white entrepreneurs, and would therefore be in itself an improper discriminatory practice.” Id. at 31-32.
McDonald also notes that the core interests protected by § 1981 are the interests of the person who is the target of the discrimination, not the corporation. Id. at 14. Specifically, the core interest in this case is McDonald’s “ability to engage in business and sell his labor free from racial discrimination.” Id. at 15. This conclusion is evinced from the legislative history of § 1981. When Congress enacted § 1981, it relied heavily on a report by Major General Carl Schurz, who, in describing the conditions in the South, “recounted that the newly freed slave ‘is positively prohibited from working or carrying on a business for himself.’” Id. at 16 n.7 (citing the Report of C. Schurz, S. Exec. Doc. No. 2, 39th Cong., 1st Sess. (1865) [link]). The predecessor to § 1981, the 1866 Civil Rights Act, was also adopted to abolish the “Black codes, which severely limited economic rights of the newly freed slaves.” Id. (citing Harold M. Hyman & William M. Wiecek, Equal Justice Under Law 319-20 (1982)).
This legislative intent in promulgating § 1981 also shows that protecting against racial discrimination in the course of business satisfies the requisite show of a “zone of interests to be protected” by§ 1981, see Ass’n of Data Processing Serv. Orgs v. Camp, 397 U.S. at 153. Id. at 17. This zone of interests is distinct from that protected by traditional contract law, as apparent from the main purpose of Reconstruction: “not to deal with a sudden rash of contract violations, but to secure the freedom of the former slaves, and to assure that they could participate in the economic life of the nation unencumbered by race discrimination.” Id.
McDonald’s interpretation of § 1981 as reflecting the goal of eradicating all vestiges of racial discrimination from our economy is too broad, according to Domino’s. Petitioner’s Reply Brief at 3-4. Domino’s suggests a narrower reading of § 1981; one confined to the plain language of § 1981, which protects the right to “make and enforce contracts,” but not to economic equality in general. Id. Domino’s further focuses on the “make and enforce” language of § 1981 by noting that the section mentions nothing about “conferring a substantive right to be free from the derivate consequences of a violation of someone else’s right to make and enforce contracts.” Id. at 16.
This case will determine the scope of the protections of the Civil Rights Act as codified in 42 U.S.C. § 1981. Under § 1981, all persons have the right to make and enforce contracts. The question in this case is what happens when that right is violated—that is, who should be allowed to sue?In this case, JWM, not McDonald, was the party that contracted with Domino's; therefore petitioners argue that only JWM could have had its right to enforce the contract violated. Brief for Petitioner at 21. However, if Domino's breached the contracts with JWM because of racial discrimination towards McDonald, Domino's may have violated § 1981. McDonald agues that, as employee of JWM and as target of the racism in question, he was injured by this violation. Brief for Respondent at 7. Thus, the question is whether Domino's possible violation of § 1981 with respect to its contracts with JWM, which caused injury to McDonald, gives McDonald standing to sue for his injuries.
A finding in favor of Domino's might limit the ability of the civil rights laws in deter discriminatory behavior in business dealings. Domino's argues that because McDonald choose to conduct business through a corporation, and was not personally a contracting party, his right to make and enforce contracts could not have been violated. Brief for Petitioner at 22. Domino's may argue that in this case, the injuries to JWM and those to McDonald are indistinguishable because the company his wholly owned and operated by him, and that only JWM may sue Domino's, which it already has.[Y2] Of course, a corporation cannot be racially discriminated against. The civil rights laws were not enacted to protect corporations. McDonald argues that the laws were intended to create a cause of action for people who were both injured by and the target of racism in business dealings, as was McDonald in this case. Brief for Respondent at 20.
Whether or not a corporation itself has standing to sue based on a § 1981 violation, there may still be an argument that other victims, not in privity of contract, should have the right to sue for that violation. We can imagine cases where the injuries to the corporation and the individual are more clearly distinct, and where the corporation as the contracting party may choose not to sue. In such a case, discrimination in contracting may cause real injury without possibility of redress. Domino's seems to argue that this is a good thing because corporations may choose not to sue in order to stay on good terms with clients. Brief for Petitioner at 38.
McDonald argues alternatively that Domino's actions can be seen as an interference with McDonald's contractual relationship with JWM. Brief for Respondent at 15. He argues that this case is analogous to cases where one party harasses another because they hire minority employees. If Domino's would refuse to deal with JWM because JWM's operator and sole shareholder is African American, McDonald argues that this is a violation of his right to contract with JWM. Domino's argues, first, that McDonald's complaint did not allege a contractual relationship between JWM and McDonald. Second, he argues that it would be nonsensical to say that Domino's could induce JWM, which is entirely controlled by McDonald, to break a contract with McDonald. Brief for Petitioner at 32.
Domino's argues that creating a cause of action in this statute for persons not parties to a contract would lead to a drastic increase in the class of people who can sue for discrimination. Brief for Petitioner at 37. Any employee or shareholder of a company (or perhaps even a bystander) could sue for their own damages when one party breaches a contract with another for racially discriminatory reasons. Id. Domino's argues that, for example, if a company lost a contract because of discrimination, every employee might have a cause of action against the breaching party. Id. McDonald argues that this is not a concern because in that case it is unlikely that each employee suffered injury distinct from the injury to the company. Brief for Respondent at 26. In McDonald's case, the racism was directed at him and he suffered injury distinct from that of the corporation JWM. The concern the Supreme Court must consider is whether they can articulate a principled way of allowing people like McDonald to sue without expanding the scope of the protections of§ 1981 beyond the class that the statute was intended to protect.
A finding for McDonald in this case may have negative economic consequences by increasing the cost of contracting. Any time the potential liability associated with an action is increased, that action becomes more expensive. Even slight increases in the cost of an activity will render it too expensive for some. Thus it is possible that small businesses that can now barely survive would be driven out of business by the increased cost of contracting. In fact, it may increase the cost of contracting the most for companies operated by minorities. Other companies may not want to contract with a company like JWM for fear that a breach of the contract could lead to § 1981 liability. Avoidance of contracting with companies operated by minorities is ironically the same conduct § 1981 is meant to prevent.
The Supreme Court’s holding in this case will determine whether a plaintiff who is the actual target of racial discrimination may sue under 42 U.S.C. § 1981, even though she is not a party to an underlying contract with the defendant. McDonald’s strong policy arguments in favor of permitting the plaintiff to sue are consistent with much of the history and legislative intent behind the enactment of § 1981. Domino’s arguments rely in large part on past court decisions that would deprive a plaintiff in McDonald’s situation of standing. The Court’s decision will undoubtedly either augment or deprive minority employees around the United States of their ability to redress injuries caused by racial discrimination.
- Tony Batt, Feud between LV man, Domino's to be heard by supreme court, Las Vegas Review-Journal (Apr. 26, 2005), available at http://www.reviewjournal.com/lvrj_home/2005/Apr-26-Tue-2005/business/1301677.html.
- Alana Roberts, High Court Changes Might Affect LV Suit, In Business Las Vegas (Nov. 4, 2005), available at http://www.inbusinesslasvegas.com/2005/11/04/lawlabor.html