Dozens of McDonald’s Corporation’s African American Franchisees Sue Alleging Pervasive Racial Discrimination

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McDonald’s Corporation (“McDonald’s”) is facing two high-profile lawsuits involving allegations of race-based discrimination against franchisees and executives.  On August 31, 2020, McDonald’s was sued by 52 former African-American franchisees (the “Franchisee Lawsuit”) who alleged that McDonald’s discriminated against them based on race by steering them to locations with low-volume sales and higher operating costs, such as higher security costs due to crime, higher insurance rates and higher employee turnover.  Another lawsuit filed in January 2020 by two African-American executives against McDonald’s also alleged systemic racial discrimination at McDonalds with respect to African American franchisees and executives (the “Executive Lawsuit”).  The Franchisee Lawsuit alone seeks approximately $1billion in total damages.

Facts

The Franchisee Lawsuit claims, among other things, that McDonald’s excluded African American franchisees from buying restaurants in the open market because of their race, provided them with misleading financial information to induce them to purchase McDonald’s least desirable franchises and required them to invest in rebuilds and renovations in short time frames not imposed on White franchisees. McDonald’s is alleged to have directed certain African American franchisees to purchase store locations within the McDonald’s system that provided them with lower margins and greater and more frequent capital expenditures than similarly situated White franchisees.   Plaintiffs also allege that they were not offered growth opportunities or the chance to purchase more profitable stores, in some instances even after increasing sales in the less desirable locations.

Plaintiffs in the Franchisee Lawsuit assert four causes of action:

  1. A claim under 42 U.S. Code Section 1981 that provides that all persons shall have the same right in every State and U.S. Territory to make and enforce contracts[1] (a “Section 1981 Claim”);[2]
  2. A bad faith breach of contract claim relating to McDonald’s alleged (a) harsher grading standards for plaintiffs’ restaurants, (b) imposition of expensive and rapid renovation requirements on plaintiffs, (c) failure to provide plaintiffs with support or growth opportunities similar to White owned stores and (d) forced sale of plaintiffs’ franchises at a loss after McDonald’s failed to approve financial assistance or restructuring plans;
  3. A fraudulent inducement claim that McDonald’s caused plaintiffs to purchase substandard locations by telling plaintiffs that only substandard locations were available in their areas and omitting to inform plaintiffs of required costly capital improvements; and
  4. A claim for punitive damages based upon allegations that McDonald’s conduct was willful, wanton, malicious and/or reckless.

A unanimous March 2020 United States Supreme Court opinion found that a plaintiff asserting a Section 1981 Claim has the burden of showing that race was a “but-for” cause of the plaintiff’s injury.[3]  Said more simply, the defendant’s actions with respect to the applicable contract would have been different but for the plaintiff’s race.

The Executive Lawsuit makes Section 1981 Claims based upon allegations that plaintiffs were subjected to systematic racial discrimination and a hostile work environment, and when they protested internally, McDonald’s subjected them to “unlawful retaliation that was irrational, vile and cruel”.

Key Takeaway

McDonald’s exposure to damages in the Franchisee Lawsuit could be $1 billion, which is independent of the unquantifiable cost of the vast amount of negative media coverage, the impact on its brand name, employees, franchisees and customer base.  Employers, including franchisors, would be well advised to have well-reasoned policies and protocols in place that are cognizant of and incorporate the tenets of 42 U.S. Code Section 1981 and Title VII of the Civil Rights Act.

 

[1] See 42 U.S.C. § 1981.

[2] The Guster-Hines & Neal Lawsuit also includes Section 1981 Claims.

[3] See Comcast v. National Association of African American-Owned Media, U.S. S. Ct. (Slip Op., 589 U.S. ____ (2020)).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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