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Sec. 1981 race discrimination claims by corporate franchisees against fast-food chain to proceed

By Edward L. Puzzo, J.D.

Race discrimination claims asserted against a restaurant chain by African-American individuals and their corporate entities under Section 1981 could proceed against the franchisor where the claims concerned potential contracts, a federal district court in Illinois ruled (Jones v Culver Franchising System, December 20, 2013, Durkin, T). However, the discrimination claims could be maintained only by the corporate entitles, and not the individuals, where the claims concerned existing contracts.

Section 1981 claims. The plaintiffs, two African-American individuals and their respective corporate entities, were franchisees of Culver’s, a fast-food chain. They brought Sec. 1981 claims against Culver Franchising System alleging race discrimination. Specifically, they contended that Culver violated Sec. 1981 when, due to race, it refused to provide reasonable financial assistance to the plaintiffs of a kind that they had previously provided to white franchisees, thereby impairing an existing contractual relationship between Culver and the plaintiffs. They also alleged Culver violated Sec. 1981 when, due to race, it refused multiple, reasonable proposals by plaintiffs to open additional Culver franchises, thereby preventing them from entering into additional contractual relationships with Culver.

Section 1981 protects equal rights in the making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship, without regard to race. Thus, the statute protects against race discrimination that impairs an existing contractual relationship or blocks the creation of a new contractual relationship.

Existing contracts. The one-person corporate entitles owned by the individual plaintiffs, who were parties to the franchise agreements with Culver, had imputed racial identities through their owners and therefore had standing to bring claims under Sec. 1981, the court ruled. Moreover, the corporate plaintiffs adequately presented a prima facie case of discrimination by alleging that when they were in need of financial assistance for their franchises, Culver failed to assist them although it had provided assistance to white franchisees in the past. Therefore, the claims by the plaintiff’s corporations regarding existing contracts were entitled to proceed

However, because the plaintiff corporations signed the franchise agreements, the individual plaintiffs did not have rights under the existing contract. They lacked the required contractual relationship with Culvers to make out individual Sec. 1981 claims. Citing the Supreme Court case of Domino’s Pizza, Inc. v. McDonald, the court noted that the shareholder and contracting officer of a corporation is exposed to no liability, and has no rights, under the corporation’s contracts. Plaintiffs cannot simultaneously allege that they as individuals and their corporations had one inseparable racial identity, but also pursue separate Sec. 1981 claims. Thus, the individual claims were dismissed.

Potential contracts. Section 1981 also offers relief when race discrimination blocks the creation of a contractual relationship, the court explained, so long as the plaintiff would have rights under the proposed contractual relationship. For that reason, the individual plaintiffs’ Sec. 1981 claims alleging they were prevented from entering into additional contractual relationships with Culver fared better. One individual plaintiff (and his company) claimed that Culver refused multiple reasonable proposals to open restaurants in minority communities within Chicago. The refusals allegedly were based on unlawful considerations of the racial composition of the intended market area. The other plaintiff (and his corporate entity) claimed that Culver refused his request to open additional Culver’s restaurants in Florida when it was expanding in that area, and that this refusal was based on the plaintiff’s race and the race of his potential partner.

The court ruled that the plaintiffs, as individuals, as well as their corporate entities, had standing to make their Sec. 1981 claims regarding potential contracts, and had presented a prima facie case for violations under that section. Accordingly, all of the Sec. 1981 claims regarding potential contracts could proceed.