Domino's Prevails Against Franchisee in U.S. Supreme Court

The U.S. Supreme Court recently ruled in favor of Domino's Pizza in a case brought under '1981 of the Civil Rights Act of 1866 by the sole shareholder of a corporation who alleged that Domino's breach of several contracts with the corporation was based upon racial animus toward him. Domino's Pizza, Inc. v. McDonald, 126 S.Ct. 1246 (2006).

Domino's had entered into contracts with the corporation for the development of four Domino's Pizza stores in the Las Vegas area. Disputes arose under the contract, and the contract went uncompleted. The corporation filed for Chapter 11 bankruptcy apparently because of the failed contracts. The bankruptcy trustee settled the contract claims with Domino's and gave Domino's a full release.

While the bankruptcy was still pending, the shareholder brought suit against Domino's for violation of '1981. Section 1981 protects the equal right of all persons to make and enforce contracts without regard to race. The statute defines the making and enforcing of contracts to include the making, performance, modification, and termination of contracts and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship. The courts have held that a private right of action exists for violations of '1981. See, Bryant v. Aiken Regional Medical Centers Inc. 333 F.3d 356 (4th Cir. 2003), cert. denied 540 U.S. 1106 (2004). The shareholder alleged that the contract breaches had caused harm to him personally by causing him to suffer monetary damages as well as losses for pain, suffering, emotional distress, and humiliation.

Domino's filed a motion to dismiss the shareholder's complaint on the grounds that the shareholder was not a party to the contract and, therefore, could not bring a claim under '1981. The district court agreed and granted Domino's motion.

On appeal, the Court of Appeals for the Ninth Circuit reversed. It held, contrary to what other circuits have held, that a nonparty to a contract, such as a shareholder in a corporation, could maintain an action under '1981 when there are injuries distinct from those of the corporation that arise out of a breach of contract that is motivated by racial animus.

The Supreme Court disagreed. In an opinion written by Justice Antonin Scalia and joined in by all of the justices who participated in the hearing of the case (Justice Samuel A. Alito took no part in the consideration or decision of the case), the Court, relying on the express language of the statute and its legislative history, held that a plaintiff cannot state a claim under '1981 unless he or she is a party to or has rights under the contract. At best, the shareholder in this case was an agent for the corporation. That status did not give him the right to enforce the contract on his own behalf but only on behalf of the corporation based upon fundamental principles of corporation and agency law that a corporation's shareholders and contracting officers have no rights and are exposed to no liability under contracts entered into by the corporation.

The Court was not persuaded by the shareholder's policy argument that many discriminatory acts would go unpunished unless he was given a cause of action. According to the Court, victims of contract breaches ordinarily will assert their rights and are in the best position to do so. Further, the Court noted that there are other civil rights statutes that are available to punish discrimination, and that there was nothing in the statute or legislative history to indicate that Congress intended '1981 to protect against all racial injustice. In responding to this policy argument, the Court also expressed its concern that if it expanded the scope of '1981 in the manner proposed by the plaintiff, it could 'produce satellite '1981 litigation of immense scope' (eg, class action claims by minority employees of parties to a contract dispute claiming that the contract breaches were racially motivated).

The Court did not rule on whether the corporation could have brought suit under '1981 in connection with its dispute with Domino's, although it did point out that circuit courts have considered that issue and determined that corporations do have standing to raise claims under '1981. See, e.g., Hudson Valley Freedom Theater, Inc. v. Heimback, 671 F.2d 702 (2nd Cir. 1982). The Court also noted that while shareholders of a corporation do not have a claim under that section for contract breaches at the corporate level, third-party beneficiaries to these contacts ordinarily would have standing to assert such claims.

Joseph W. Sheyka is a partner in DLA Piper Rudnick Gray Cary US LLP, in Chicago. He can be contacted at 312-368-4022, or by e-mail at [email protected].

The U.S. Supreme Court recently ruled in favor of Domino's Pizza in a case brought under '1981 of the Civil Rights Act of 1866 by the sole shareholder of a corporation who alleged that Domino's breach of several contracts with the corporation was based upon racial animus toward him. Domino's Pizza, Inc. v. McDonald , 126 S.Ct. 1246 (2006).

Domino's had entered into contracts with the corporation for the development of four Domino's Pizza stores in the Las Vegas area. Disputes arose under the contract, and the contract went uncompleted. The corporation filed for Chapter 11 bankruptcy apparently because of the failed contracts. The bankruptcy trustee settled the contract claims with Domino's and gave Domino's a full release.

While the bankruptcy was still pending, the shareholder brought suit against Domino's for violation of '1981. Section 1981 protects the equal right of all persons to make and enforce contracts without regard to race. The statute defines the making and enforcing of contracts to include the making, performance, modification, and termination of contracts and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship. The courts have held that a private right of action exists for violations of '1981. See , Bryant v. Aiken Regional Medical Centers Inc. 333 F.3d 356 (4th Cir. 2003), cert. denied 540 U.S. 1106 (2004). The shareholder alleged that the contract breaches had caused harm to him personally by causing him to suffer monetary damages as well as losses for pain, suffering, emotional distress, and humiliation.

Domino's filed a motion to dismiss the shareholder's complaint on the grounds that the shareholder was not a party to the contract and, therefore, could not bring a claim under '1981. The district court agreed and granted Domino's motion.

On appeal, the Court of Appeals for the Ninth Circuit reversed. It held, contrary to what other circuits have held, that a nonparty to a contract, such as a shareholder in a corporation, could maintain an action under '1981 when there are injuries distinct from those of the corporation that arise out of a breach of contract that is motivated by racial animus.

The Supreme Court disagreed. In an opinion written by Justice Antonin Scalia and joined in by all of the justices who participated in the hearing of the case (Justice Samuel A. Alito took no part in the consideration or decision of the case), the Court, relying on the express language of the statute and its legislative history, held that a plaintiff cannot state a claim under '1981 unless he or she is a party to or has rights under the contract. At best, the shareholder in this case was an agent for the corporation. That status did not give him the right to enforce the contract on his own behalf but only on behalf of the corporation based upon fundamental principles of corporation and agency law that a corporation's shareholders and contracting officers have no rights and are exposed to no liability under contracts entered into by the corporation.

The Court was not persuaded by the shareholder's policy argument that many discriminatory acts would go unpunished unless he was given a cause of action. According to the Court, victims of contract breaches ordinarily will assert their rights and are in the best position to do so. Further, the Court noted that there are other civil rights statutes that are available to punish discrimination, and that there was nothing in the statute or legislative history to indicate that Congress intended '1981 to protect against all racial injustice. In responding to this policy argument, the Court also expressed its concern that if it expanded the scope of '1981 in the manner proposed by the plaintiff, it could 'produce satellite '1981 litigation of immense scope' (eg, class action claims by minority employees of parties to a contract dispute claiming that the contract breaches were racially motivated).

The Court did not rule on whether the corporation could have brought suit under '1981 in connection with its dispute with Domino's, although it did point out that circuit courts have considered that issue and determined that corporations do have standing to raise claims under '1981. See, e.g., Hudson Valley Freedom Theater, Inc. v. Heimback , 671 F.2d 702 (2nd Cir. 1982). The Court also noted that while shareholders of a corporation do not have a claim under that section for contract breaches at the corporate level, third-party beneficiaries to these contacts ordinarily would have standing to assert such claims.

Joseph W. Sheyka is a partner in DLA Piper Rudnick Gray Cary US LLP, in Chicago. He can be contacted at 312-368-4022, or by e-mail at [email protected].