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Tuesday’s Argument: Domino’s Pizza, Inc. et al. v. John McDonald

On Tuesday, the Court will hear oral argument in Domino’s Pizza, Inc. et al. v. John McDonald, No. 04-593, a case involving the interpretation of 42 U.S.C. 1981. That provision provides that “[a]ll persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts.” The question presented is whether a plaintiff may state a claim under Section 1981 even though he does not have a contractual relationship with the defendant.

Maureen E. Mahoney will argue the case for petitioner. Allen Lichtenstein will argue the case for the respondent.

The briefs for petitioner and respondent are available here.

This case was dismissed by the district court and so the facts of the complaint are assumed to be true. John McDonald is the president and sole shareholder of JWM Investments Inc., a Nevada Corp. In 1997, JWM and Domino’s Pizza signed four contracts that provided that JWM would acquire real estate, construct four restaurants, and then lease the restaurants back to Domino’s. After the construction of the first restaurant, relations between JWM and Domino’s soured. One particularly important manifestation of this was Domino’s refusal to perform on its obligation to execute “estoppel certificates,” which are a tenant’s description of its interest in a property and are thus very helpful in borrowing money for the underlying project. There also were other problems, such as non-payment of rent for completed restaurants and derogatory statements by Domino’s about McDonald to third-parties.

McDonald had a telephone conversation with Debbie Pear, the real estate negotiator for Domino’s, to discuss these problems. Pear threatened McDonald with financial ruin if he didn’t voluntarily terminate his dealings with Domino’s despite McDonald’s stated intent to perform on the remaining contracts. Pear also said to McDonald “I don’t like dealing with you people anyway” and henceforth routed all of McDonald’s calls to Domino’s General Counsel.

McDonald did proceed to perform on his contracts, which turned out to be very costly, especially in the absence of the estoppel certificates. JWM eventually had to declare bankruptcy. As part of its bankruptcy proceedings, JWM brought a suit for its contract claims against Domino’s. The bankruptcy trustee settled JWM’s claims against Domino’s for $45,000, in return for which Domino’s obtained a complete release from JWM.

McDonald then sued Domino’s in his personal capacity under 42 U.S.C. 1981 alleging emotional distress and dignitary harms, as well as personal economic harms, such as loss of “front pay.” The district court dismissed for lack of statutory standing, holding that Section 1981 only confers standing to plaintiffs actually in a contractual relationship with the defendant, and that McDonald could “not step into the shoes of the corporation.” The Ninth Circuit reversed in a brief unpublished summary order, following its own precedent in Gomez v. Alexian Brothers.

The following summary of the arguments is, by necessity, not comprehensive. One collateral issue of particular interest is whether and how this decision would affect the states, whose officials (and local governments) are already liable for civil rights claims under 42 U.S.C 1983.

In its opening brief, the petitioner acknowledges that the actual injuries allegedly suffered by McDonald are sufficient for standing under Article III, and thus section 1981 could have provided respondent with standing. The mistake of the Ninth Circuit was in not conducting an analysis as to whether Congress actually intended this statute to confer standing on this plaintiff. If it had done so, petitioner contends, then it would have concluded that McDonald clearly falls outside the “zone of interests” that Congress intended. After all, petitioner argues, the Court presumes that Congress did not intend to confer rights to sue upon third-parties, and so any evidence that the statute intended to grant McDonald a cause of action must overcome this presumption. In arguing against such a reading of the statute, petitioner first relies on the text of the statute, which confers standing in the context of “mak[ing] and enforc[ing] contracts” and not generally permissive language like that in the Endangered Species Act, namely that “any person may commence a civil suit.” Second, petitioner argues that there is nothing inconsistent with this plain meaning in the legislative history, which focused on the eradication of the Black Codes after the Civil War that had created legal obstacles to black people contracting at all. Third, petitioner notes that the Court’s leading cases interpreting section 1981, such as Runyon v. McCrary, all involved a plaintiff frustrated in his or her attempt to make a contract (at most there is a third-party beneficiary involved). Fourth, Congress’s 1991 additions to 42 U.S.C 1981, though it extended the reach of the statute to post-contract performance, still described the right as emerging from a “contractual relationship.” Respondent also appeals to general common law principles of the sort that the Court has used to analyze standing in the context of other statutes, notably the Clayton Act, arguing that the common law does not generally provide for third-party standing. In petitioner’s reply brief in particular, the policy arguments for this cabining of liability are elaborated upon – the need to avoid complicated apportionment, the danger of double-collection, interference with the collection of the party directly injured etc. Petitioner also argues at some length that respondents’ alternative approach, allowing intended actual victims of contract-related discrimination to sue, provides no limit to liability at all.

Finally, petitioner argues that McDonald is not fairly seen as a party to the JWM-Domino’s contracts and that McDonald waived any argument that petitioner interfered with any contract he had with JWM. As for the JWM-Domino’s contract, petitioners argue that McDonald was clearly not a party and, in fact, chose not to be a party in adopting the corporate form. Indeed, McDonald personally benefited from the corporate form insofar as his company’s bankruptcy did not affect his personal assets, and so, petitioner argues, it is incongruous that he should now seek to collect as an individual. As for any contract between JWM and McDonald, petitioner claims first that any such claim is waived because not raised below. Furthermore, petitioner notes that there is no allegation that Domino’s intentionally interfered with McDonald’s employment contract with JWM (say by insisting that he be fired), even if such a contract is comprehensible given that he is the president and sole shareholder of JWM (petitioner thinks not).

Respondent argues that McDonald did not forfeit the protection of section 1981 by choosing to do business through the corporate form. There would be no question, respondent notes, that McDonald would have standing to pursue a section 1981 claim if he had been doing business as a sole proprietor. Why should minority business people have to choose between the protections of section 1981 and the use of business organizations that are now ubiquitous, and with good reason, given the liability and tax concerns that these structures are designed to deal with? Returning to the plain language of the statute, respondent notes that the statute does not require proof that the defendant interfered with the “mak[ing]” and “enforc[ing]” of “one’s own contracts.” Respondent thus argues that petitioners are reading in a limitation that guts the efficacy of Congress’s clear intent to combat discrimination and to allow racial minorities to engage fully in the economic life of the nation. It would be exceptionally perverse (and dissonant with the “free labor” history of the statute, which shows some specific concern with allowing blacks to operate their own businesses), respondent argues, to construe this statute such that only the labor of minority employees are protected, but not the labor of minority entrepreneurs. Not surprisingly, according to respondents, none of the Court’s cases construing section 1981 feature such a “cramped” reading of the statute (petitioner objects to this interpretation of these cases in its reply brief).

According to the respondents, the better reading of the statute is that it protects individuals from (1) “purposeful racial discrimination” that is (2) “directed intentionally” at a “plaintiff or a party with whom the plaintiff is in privity” and that is (3)”intended to impair the formation, performance, enforcement, or enjoyment by the plaintiff of benefits from a specific contractual opportunity.” According to respondents, this reading cabins liability and also comports with common sense insofar as corporations and individuals suffering from discrimination in connection with contracts will often suffer different harms (say loss of business versus personal humiliation) and have different interests (perhaps a corporation may choose not to sue for its loss of profits in order to maintain a business relationship). Given that corporations do not have a race, it would be especially perverse, respondent argues, to find that compensation for a corporation’s injuries precludes compensation for the separate injuries suffered by the natural persons who were the target of the racial animus. Finally, respondent also argues that he stated a claim that Domino’s impaired a contract between JWM and himself (either as an employee or shareholder) and that he preserved that theory on appeal.

This case features an arguably ambiguous statutory text, a rich legislative history, and important policy concerns animated by striking hypotheticals. It will be very interesting to see how the Court goes about approaching this complicated nest of issues.