The gavel falls on small business
Of all the arguments the Supreme Court has agreed to hear this term, three little-noticed cases stand to have a big impact on small business.
By Patricia B. Gray, FSB contributor

NEW YORK (FORTUNE Small Business Magazine) - With conservative jurists John Roberts and Samuel Alito now seated, the Supreme Court is generating headlines and protests as it considers such divisive social issues as abortion rights and the death penalty.

But away from the TV lights, several decisions either recently issued or pending could have a big impact on entrepreneurs, in areas that range from outsourcing to sexual harassment.

Small business owners and their supporters are paying close attention to three recent cases that went to the U.S. Supreme Court.
Small business owners and their supporters are paying close attention to three recent cases that went to the U.S. Supreme Court.

Here are the cases that small-business advocates have watched most closely.

RACIAL DISCRIMINATION IN CONTRACTING

Domino's Pizza v. McDonald

"I don't like dealing with you people." That was what John McDonald, an African-American developer, says a Domino's Pizza executive told him in 1997.

Domino's had hired McDonald's small Las Vegas construction company to build four new pizza shops, but when McDonald, 46, missed several deadlines, Domino's refused to pay for the work; McDonald's company filed for bankruptcy protection and was forced into liquidation.

McDonald sued Domino's Pizza (Research), filing as an individual under the Civil Rights Act of 1866, which protects equal rights in contracts. As his company's only shareholder, he says, he was clearly the target of discrimination. The dispute, McDonald claims, cost him $8 million in net worth and destroyed his credit rating.

Because of stress over the incident, he says, his gall bladder had to be removed, his daughter failed some of her classes, and his wife delivered their second child prematurely. Domino's maintains that the contract was a color-blind "company-to-company relationship" that ended because the builder didn't perform the job as promised.

The Supreme Court was not asked to decide whether McDonald was the target of discrimination. Instead, the issue was whether McDonald could file suit as an individual when it was his company that had secured the contract with Domino's.

The court's February ruling: no. Thanks to that decision, says the National Federation of Independent Business, small firms should sigh with relief. The NFIB had worried that a McDonald victory might have created a flood of discrimination lawsuits against companies by individual employees who felt they had been personally harmed in contractual disputes.

SEXUAL HARASSMENT

Arbaugh v. Y&H Corp. (doing business as the Moonlight Cafe)

As a waitress at the Moonlight Cafe in New Orleans, Jenifer Arbaugh, 27, was used to lecherous customers. At least they tipped. But when the cafe owner allegedly made lewd remarks and groped her, she sued for sexual harassment in federal court in late 2001. A jury found Y&H guilty and awarded Arbaugh $40,000.

Y&H then appealed, arguing that it was so small that federal law didn't apply to its case. Companies with under 15 employees can't be held liable for sexual harassment under Title VII of the U.S. Civil Rights Act of 1964, though similar laws in some states apply even to very small companies.

Y&H claimed that the cafe's delivery drivers are independent contractors and that the owners and their wives were also not employees. Excluding them, the cafe's employee headcount was fewer than 15. The federal district court agreed that Y&H was too small to be sued for sexual harassment, as did the federal appeals court.

In February the Supreme Court disagreed, ruling in favor of the waitress.

After losing at trial, the Justices decided, Y&H could not claim the suit was legally unfounded in the first place. Gail Golman Holtzman, co-chairperson of an employment-law committee for the American Bar Association, says the case highlights an important lesson for small-business owners.

Y&H probably could have prevented the case from going to trial if its lawyer had raised the issue of the 15-employee exemption from the outset. He didn't. Had the company hired a lawyer specializing in employment cases, Y&H might have saved itself a trip to the Supreme Court.

ENVIRONMENTAL PROTECTION

Rapanos v. U.S. Army Corps of Engineers

John Rapanos wanted to build a shopping center in Midland, Mich. But when he started to clear his 200-acre plot of what his lawyer calls dry, sandy land, state and federal agencies objected because he didn't have a wetlands permit.

Rapanos's 200 acres is 20 miles from the nearest navigable water, the Kawkawlin River, but because a man-made drain on the property connects to a creek that flows into the river, federal officials claimed a "hydraulic connection" to the Kawkawlin.

At trial Rapanos, 70, was found criminally negligent of violating the U.S. Clean Water Act of 1972, a conviction for which he paid a $185,000 fine and served three years' probation. (He may still face a prison sentence in that case.) In a separate civil case, a trial court found the developer liable for not having a permit, and an appeals court upheld the decision.

Rapanos appealed to the Supreme Court, which heard the case in late February. The developer argues that the federal government is abusing its authority to protect the environment. If the government prevails, his lawyers say, "every puddle will have the full protection of the federal government."

Dramatic, perhaps, but a decision in favor of the feds would probably expand the government's authority to regulate construction, making building of all sorts--commercial, industrial, and residential--more costly. The decision will also be viewed as a key indicator of the court's broader attitude toward property rights.

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The right way to leave a business to your kids. Find out here

How small business can legally mix religion and work. Read about it Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.