Federal Courts' Compulsory Counterclaim Rule vs. New York's Permissive Rule

In his New York Practice column, Patrick M. Connors writes that a plaintiff might elect to sue in a federal court hoping to compel the defendant to interpose as a counterclaim any claim arising out of the transaction on which the plaintiff's claim is based. This would, in effect, deny the defendant an independent choice of forum on the counterclaim. This proposition was recently tested in 'Paramount Pictures Corp. v. Allianz Risk Transfer AG,' which is currently before the New York Court of Appeals.

July 26, 2017 at 02:04 PM

9 minute read

By Patrick M. Connors

Under Rule 13(a) of the Federal Rules of Civil Procedure (FRCP), entitled “Compulsory Counterclaim,” the defendant must plead a counterclaim that arises out of the same “transaction or occurrence” as plaintiff's main claim, or it is deemed waived. See Siegel, New York Practice §632 (Thomson 5th ed. 2011). The risk of waiver based on a pleading failure suggests that any doubt about whether a counterclaim has the kind of relationship to the main claim that would make it compulsory should be resolved in favor of pleading it instead of suing on it separately. This is especially so because the policy underlying this rule is judicial economy. See Transamerica Occidental Life Ins. v. Aviation Office of Am., 292 F.3d 384, 389 (3d Cir. 2002).

The “transaction or occurrence” standard in FRCP 13(a)(1)(A) has been liberally construed by most courts and looks to whether claims “'are so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.'” United States v. Aquavella, 615 F.2d 12, 22 (2d Cir. 1979). In other words, for a claim to qualify as a compulsory counterclaim under FRCP 13(a), there need not be a precise identity of issues and facts between the main claim and the counterclaim. See Xerox v. SCM, 576 F.2d 1057, 1059 (3d Cir. 1978).

Subject Matter Jurisdiction

The above rules deal primarily with pleading. There may also be an independent problem with subject matter jurisdiction of the counterclaim. Jurisdiction of the main claim may be based on a federal question, for example, and the counterclaim may not have that or any other predicate for subject matter jurisdiction. Or, if the main claim is based on diversity, which would serve the defendant's counterclaim as well, the main claim may satisfy the monetary jurisdiction required by the diversity statute, 28 U.S.C.A. §1332(a) (exceeding $75,000), while the counterclaim may not. Here, the ancillary jurisdiction doctrine, codified in 28 U.S.C.A. §1367 as “supplemental jurisdiction,” comes into play. See Siegel, New York Practice §630. If it applies, it would support jurisdiction of the counterclaim as “ancillary” or “supplemental” to the main claim, even if the counterclaim standing alone would lack jurisdiction.

The doctrine of supplemental jurisdiction will apply to provide jurisdictional support to a compulsory counterclaim. See Baker v. Gold Seal Liquors, 417 U.S. 467, 469 n. 1 (1974). If the counterclaim is permissive, the defendant must independently demonstrate a ground for subject matter jurisdiction. See Federman v. Empire Fire and Marine Ins., 597 F.2d 798, 812 (2d Cir. 1979) (counterclaims that were not compulsory as defined by Rule 13(a) “were not automatically within the scope of the district court's ancillary jurisdiction”); see also Jones v. Ford Motor Credit, 358 F.3d 205 (2004) (concluding that “supplemental jurisdiction” may sometimes be available even for a merely “permissive” counterclaim).

State Court Actions

What happens if the plaintiff commences an action in federal court, where counterclaims are “compulsory,” and the defendant withholds a counterclaim that arises out of the same transaction or occurrence as plaintiff's claim? Can the defendant in the federal court action then turn to state court and commence an action to assert that claim there under a state's permissive counterclaim rule?