Legal Alert: Supreme Court Prohibits Section 1981 Lawsuit by Corporate Officer

Date   Feb 27, 2006
The U.S. Supreme Court has held that a corporate officer cannot sue for race discrimination in his own right under 42 U.S.C.  § 1981 based on a contract between his corporation and the company sued. 
The U.S. Supreme Court has held that a corporate officer cannot sue for race discrimination in his own right under 42 U.S.C.  § 1981 based on a contract between his corporation and the company sued.  See Domino's Pizza, Inc. v. McDonald (Feb. 22, 2006).  Among other things, § 1981 protects the right of all people "to make and enforce contracts" without respect to race.  The statute protects not only the right to enter into a contract, but all the rights and benefits inherent in the contractual relationship, including performance, modification and termination. 
In this case, McDonald was the sole shareholder and officer of a corporation (JMW) that had several contracts with Domino's.  McDonald claimed Domino's breached these contracts because of his race.  Ultimately, JMW filed bankruptcy, partially, according to McDonald, as a result of Domino's breach of contract.  The bankruptcy trustee sued Domino's for breach of contract and ultimately settled this claim in exchange for a complete release, which meant JMW could not file any other suit against Domino's. 
Subsequently, McDonald sued Domino's in his own capacity for race discrimination under § 1981, claiming the statute gave him a cause of action because he made and enforced contracts for JMW.  The Court rejected this argument, noting that the right to make and enforce contracts is not the insignificant right to act as an agent for someone else's contracting.  Rather it is the right to give and receive contractual rights on one's own behalf. 
The Court held that to permit McDonald to sue in his own right based on a contract between JMW and Domino's would mean ignoring fundamental corporation and agency law, which provides that a corporation's shareholder and contracting officer has no rights and is exposed to no liability under the corporation's contracts.  The Court noted that Domino's filed a proof of claim against JMW in its bankruptcy proceedings; it did not sue McDonald personally.  Just as the corporate form and rules of agency protected McDonald in this situation, they denied him rights under JMW's contracts.  
The Court also rejected McDonald's argument that a person who is the "actual target" of discrimination and loses some benefit that he otherwise would have obtained if a contract not been impaired should be permitted to sue under § 1981.  The Court held that this argument ignores the specific language of § 1981 that limits the statute's protection to a person whose right to make and enforce contracts has been impaired because of race. 
Finally, the Court rejected McDonald's "policy" argument, that unless his interpretation of the statute is followed, many acts of racial discrimination will go unpunished.  The Court held that nothing in the statute indicates that it was meant to provide an omnibus remedy for all racial injustice.  If so, it would not have been limited to situations involving contracts.  The Court stated that "trying to make it a cure-all not only goes beyond any expression of congressional intent but would produce satellite § 1981 litigation of immense scope."

Employers' Bottom Line:

This decision is good news because it appropriately limits the applicability of § 1981 to the language and intent of the statute; only those who can identify injuries based on a racially motivated breach of their own contractual relationship, not that of someone else, can sue under § 1981.  Any other holding would have resulted in a substantial increase in § 1981 litigation. 
If you have any questions regarding this case or any other labor or employment related issue, please contact the Ford & Harrison attorney with whom you usually work.