Concept
Jurisdiction and Limitations
Compulsory counterclaim
Jurisdiction and Limitations
The compulsory label does more than fix what a defendant must plead. Under Rule 13(a)(1)(A), a counterclaim is compulsory when it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim,1 and courts apply that phrase by asking whether the two claims are logically related, even when different evidence will prove each one.2 The same classification answers four questions that have nothing to do with pleading: whether a federal court has power to hear the counterclaim, what becomes of it if the plaintiff’s claim is dismissed, whether venue and personal jurisdiction can keep it out, and whether the statute of limitations has run on it.
The answers matter because the penalty for omission is severe. Suppose cars driven by P and D collide, and P sues D in diversity for personal injury. If D makes no counterclaim, D cannot later sue P for property damage from the same accident in either a federal or a state court, because the claim arose out of the same transaction or occurrence as P’s claim and D never asserted it as a compulsory counterclaim.3 A rule that imposed that forfeiture and then let jurisdiction, venue, or limitations defeat the very claim it compelled the defendant to plead would be a trap. The doctrines below largely avoid that result, and they share a reason: the compulsory counterclaim grows out of events the plaintiff put in issue by choosing the forum. We take them in the order a court would meet them, starting with power.
Supplemental Jurisdiction
A federal court may hear a claim only if it has subject-matter jurisdiction over it, and a defendant’s counterclaim often has none of its own: the claim may rest on state law, and neither federal-question nor diversity jurisdiction may be available for it.4 Supplemental jurisdiction closes that gap. Under 28 U.S.C. § 1367(a), it reaches claims so related to the claims within the court’s original jurisdiction that they form part of the same case or controversy.5 Courts once called the doctrine ancillary jurisdiction and invoked it to supply a basis for compulsory counterclaims, and Congress gave it a statutory footing when it added § 1367 in 1990.6 Rule 13 therefore classifies the claim, and supplemental jurisdiction supplies the power to hear it.
The compulsory counterclaim is the doctrine’s oldest application. In Moore v. New York Cotton Exchange, the Supreme Court sustained jurisdiction over a defendant’s compulsory counterclaim that arose out of the same transaction as the plaintiff’s federal antitrust claim, even though that claim had been dismissed for failure to state a claim and the counterclaim had no independent federal basis.7 The Court cited no cases and explained its holding very little, saying only that the connection between the case stated in the bill and the case set up in the counterclaim was so close that the failure of the first needed only to establish a foundation for the second.8
Later courts treat the result as settled. The Seventh Circuit, deciding a dispute between two Illinois citizens under Illinois law, acknowledged the peculiar position that put it in and held that a compulsory counterclaim needs no independent federal jurisdictional basis.9 In Plant v. Blazer Financial Services, Inc., the court put the rule in jurisdictional terms: a permissive counterclaim must have an independent basis, while a compulsory counterclaim falls within ancillary jurisdiction even if it would ordinarily be a matter for state court.10 Courts say that supplemental jurisdiction would certainly exist over a compulsory counterclaim,11 and the treatises add that it usually does.12
The same comparison settles the pleading question and the jurisdiction question. Rule 13(a)(1)(A) asks whether the counterclaim arises out of the same transaction or occurrence as the plaintiff’s claim, and § 1367(a) asks whether the two claims form one case or controversy. A counterclaim that does not arise from the plaintiff’s transaction almost certainly is not part of the same case or controversy,13 while one that does arise from it falls within the court’s power.14 The shared test also serves a shared policy: courts see no sound reason to permit two suits to settle one controversy between the parties, whatever the evidence needed on each side.15
Jurisdiction reaches a defendant’s related claim so readily because of who chose the forum. The Supreme Court recognized in Owen Equipment & Erection Co. v. Kroger that ancillary jurisdiction should be more readily available to one haled into court against his or her will than to a plaintiff who has chosen the forum.16 The mechanism is easy to trace. The plaintiff selected the court and put the events in issue, and Rule 13(a) obliges the defendant to plead the related claim there. If the court lacked power over that claim, the defendant would have to pursue it in state court and try the same events twice.17
Section 1367(b) trims the grant in certain cases, but the trimming falls on plaintiffs and not on defendants. Its prohibitions apply only to claims brought by plaintiffs or by persons seeking to join as plaintiffs, so defendant counterclaims, third-party actions, and crossclaims among defendants do not run afoul of it.18 A boating-accident case shows the consequence. The defendant added a new party to a compulsory counterclaim, § 1367(a) expressly includes claims that involve the joinder or intervention of additional parties, and the § 1367(b) exceptions did not apply because the party asserting the added claims was not a plaintiff, so the court could hear the counterclaims even though complete diversity was lacking.19 The limit that does bind lies on the plaintiff’s side of the caption. A defendant’s counterclaim cannot be combined with the plaintiff’s claim to reach the jurisdictional amount, so a plaintiff who claims $20,000 does not satisfy the requirement even if the defendant counterclaims for $100,000.20 Whether the counterclaim must itself meet the amount requirement is a separate question, and compulsory counterclaims escape it because supplemental jurisdiction usually reaches them.21
The exam stem that pairs a federal plaintiff with a small state-law counterclaim is asking whether the counterclaim is compulsory. Suppose an employer sues a former executive in diversity for $100,000 for breach of a non-compete provision, and the executive answers with a $50,000 state-law counterclaim alleging that the provision was fraudulently inserted into the contract. The counterclaim has no basis of its own, but it attacks the same contractual terms the employer sues on, so it is compulsory and satisfies § 1367(a).22 A $50,000 counterclaim for bonuses the employer failed to pay three years earlier lands on the other side of the line. It has no connection to the non-compete claim and shares no common nucleus of facts with it, so it is permissive, and supplemental jurisdiction is not available for it.23 The executive could press that claim in federal court only on a basis of its own.
The permissive counterclaim stands differently. By definition it does not arise out of the transaction or occurrence that is the subject matter of the plaintiff’s claim, so it almost certainly is not part of the same case or controversy,24 and courts have consistently held that a Rule 13(b) counterclaim must be supported by independent grounds of federal jurisdiction.25 Moore itself left the point open. The Court held that the counterclaim there fell within the first branch of the equity rule, the branch requiring that the claim be pleaded, and it declined to consider whether the second branch requires independent jurisdiction.26
Jones v. Ford Motor Credit Co. questions that traditional requirement. The Second Circuit observed that Congress had codified supplemental jurisdiction in § 1367(a), so that courts should use the statute’s language to define the extent of their powers, and it drew on Judge Easterbrook’s reasoning in Channell v. Citicorp National Services, Inc. that § 1367’s reach to the limits of Article III requires only a loose factual connection between the claims, a standard broader than the Gibbs test of a common nucleus of operative facts.27 It concluded that § 1367 displaced, rather than codified, the earlier view that a permissive counterclaim requires independent jurisdiction, so the question becomes whether supplemental jurisdiction is available for the counterclaim.28 Channell itself had vacated the dismissal of a permissive counterclaim and remanded for the exercise of the discretion that § 1367 contemplates.29
The two views leave an examinee a clear sequence. Classify the counterclaim first. If it is compulsory, supplemental jurisdiction applies. If it is permissive, state the traditional rule, which requires an independent basis,30 and add that the Second Circuit treats § 1367 as having displaced it.
When the Main Claim Falls
A compulsory counterclaim reaches the federal court on the strength of the plaintiff’s claim, so the dismissal of that claim raises an obvious question: does the counterclaim go down with it? The answer turns on two features of the counterclaim, whether it is compulsory or permissive and whether it has a federal basis of its own.
Moore supplies the baseline. The plaintiff’s antitrust claim there had been dismissed for failure to state a claim, yet the Court sustained jurisdiction over the compulsory counterclaim, which had no independent federal basis.32 The Court’s only explanation was that the connection between the two cases was so close that the failure of the first needed only to establish a foundation for the second.33 Siler v. Louisville & Nashville Railroad Co. points the same way for jurisdiction resting on a colorable federal claim: the court may decide all the questions in the case, even if it decides the federal questions adversely or omits to decide them at all.34 Congress has since written a qualification into the statute. Under § 1367(c)(3), a court may decline supplemental jurisdiction when it “has dismissed all claims over which it has original jurisdiction.”35 The fall of the main claim therefore leaves the court with power over a compulsory counterclaim and a choice about whether to keep it.
A permissive counterclaim with no federal basis of its own gets no such choice. It does not arise out of the transaction the plaintiff sued on, so on the traditional view it needs an independent jurisdictional basis, and once the complaint is dismissed nothing remains to support federal power over it. The court must dismiss it along with the complaint.36 Courts that follow Jones v. Ford Motor Credit Co. see the matter differently, because they hold that supplemental jurisdiction could exist for either kind of counterclaim,37 and on that view even a permissive counterclaim presents a question of supplemental jurisdiction and discretion.
A compulsory counterclaim stands differently because it forms part of the same case or controversy as the plaintiff’s claim, and the court’s power over it does not disappear with that claim. Dismissal is therefore not required, but the court may order it in its discretion once it has dismissed every claim within its original jurisdiction.38
Frumkin v. International Business Machines Corp. states both branches. After the court dismissed the complaint, it dismissed the defendant’s counterclaim for lack of federal subject-matter jurisdiction and denied the defendant’s motion for summary judgment on it.39 The defendant had asserted no independent jurisdictional basis, so the counterclaim had to be dismissed if permissive and could be dismissed in the court’s discretion if compulsory.40 The opinion shows where the label matters: a permissive counterclaim has no discretionary path, and a compulsory one does.
Murphy v. Florida Keys Electrical Cooperative Association shows the discretionary branch at work in the Eleventh Circuit. Florida Keys’ contribution claim against the Ashmans failed on summary judgment, and the district court then dismissed the Ashmans’ counterclaim without prejudice under § 1367(c).41 Florida Keys, apparently preferring to stay in federal court, argued that the counterclaim could have been asserted only under the court’s admiralty jurisdiction, so that dismissal under § 1367(c) was an abuse of discretion.42 The Eleventh Circuit disagreed. Once the district court granted summary judgment on the contribution claim, it had discretion to dismiss the counterclaim, and it did not abuse that discretion.43 The decision also marks the standard of review: the choice belongs to the district court, and an appellate court asks only whether it abused that choice.
In Kristensons-Petroleum, Inc. v. Sealock Tanker Co., Blanc answered the complaint and counterclaimed for a declaration that, under marine fuel supply contracts governed by New York law, KPI held no maritime lien and therefore had no right to proceed in rem against the vessel by arrest in Belgium.44 The court observed that supplemental jurisdiction could exist over either a compulsory or a permissive counterclaim but would certainly exist over a compulsory one.45 That observation frames the whole subsection: classification as compulsory gives the court power, and the only question left when the main claim falls is whether to use it.
All of this assumes the defendant pleaded the counterclaim. Where it did not, the court has nothing to keep or dismiss, and the omission carries its own penalty. In one reported case, a plaintiff sued over a red-light collision and then dismissed her claims with prejudice after a cash settlement, and the defendant had filed no counterclaim.46 A defendant in that position faces the settled rule that failure to plead a compulsory counterclaim bars a later independent action on the claim.47
Step two comes before classification because a counterclaim with its own basis needs no label to stay, and a student who classifies first can reach the right label and still give the wrong result. The usual exam error is to treat a compulsory counterclaim’s fate as automatic in either direction, dismissed because the complaint fell or kept because it is compulsory, when the statute gives the court a choice.
Venue and Personal Jurisdiction
Rule 13(a)(1)(A) compels a defendant to plead any claim that arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim,49 and a claim arising from the same events qualifies even when the evidence needed on each side differs.50 Because the penalty for omission is forfeiture, ordinary forum rules cannot be allowed to close the plaintiff’s chosen court to the very claim the Rule requires. Venue and personal jurisdiction both pose that risk, and the doctrine answers each in a different way.
Venue turns on where a case is “brought,” and the plaintiff has already brought this one. In Wearly v. FTC, the court reasoned in a footnote that, since the plaintiffs had brought suit in that district, the venue requirements did not apply to the compulsory counterclaim, and it added that no independent jurisdictional ground is needed for a compulsory counterclaim.51 The plaintiff chose the district; the defendant did not. The defendant may therefore settle every related dispute there instead of splitting one controversy across two courts.
Personal jurisdiction raises less trouble for a counterclaim against the plaintiff, for a similar reason. The compulsory counterclaim adds a claim between parties who are already properly before the court, and most of the problems that attend the forced joinder of additional parties do not arise.52 A plaintiff who chose the forum can hardly claim to be a stranger to it when the defendant answers about the same events.
The analysis changes when a counterclaim adds a person who is not already in the case. The Rule allows a counterclaim only against an opposing party, and the courts divide on some borderline cases, such as members of a class who are not named plaintiffs and a disinterested stakeholder named as plaintiff in an interpleader action.53 A new party joined to a counterclaim is not already before the court, and the contrast between added claims and added parties marks the point where the difficulties of forced joinder remain.54 The plaintiff’s choice of forum accounts for the plaintiff and not for a stranger the defendant adds, so the court must analyze its power over that party separately. Subject-matter jurisdiction causes little difficulty by comparison: supplemental jurisdiction reaches claims that involve the joinder of additional parties, and § 1367(b) does not restrict a party who is not a plaintiff.55
Tolling the Statute of Limitations
A statute of limitations sets the period within which a claim must be filed, and the defendant’s claim is often close to expiring by the time the plaintiff sues. The classification under Rule 13(a)(1)(A), which makes a counterclaim compulsory when it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim,57 decides what happens to that clock. Although there is some conflict, the majority view is that the institution of the plaintiff’s suit tolls or suspends the running of the statute of limitations governing a compulsory counterclaim.58
Three reasons support suspending the clock, and each rests on a feature of the compulsory counterclaim. In MacDonald v. Riggs, the court weighed them and found the majority federal rule based on sound policy.59 First, the rule prevents a plaintiff, when the claim and the counterclaim are measured by the same period, from delaying suit until the statute has almost run on the defendant’s counterclaim, so that the counterclaim would be barred by the time the defendant advanced it. Second, the plaintiff is unlikely to be prejudiced, since the plaintiff presumably has notice when suing of any counterclaim arising out of the same transaction. Third, the close relationship between the timely claim and the untimely counterclaim should keep the counterclaim from going stale, because the evidence and witnesses should be as accessible for the counterclaim as for the main claim.60
MacDonald shows the rule in operation. Riggs’s defamation counterclaim was logically related to MacDonald’s assault claim: a jury that found for MacDonald on assault could not have found for Riggs on defamation, because a defendant is not liable for true statements.61 The counterclaim was therefore compulsory and relates back to the date of MacDonald’s complaint, so Riggs could recover for defamatory statements made after March 21, 2001.62 Relation back to the complaint’s date, instead of the later date of the answer, fixes how far back the counterclaim reaches.
One state court’s decision does not settle the question elsewhere. One treatise describes the question whether the filing of an action tolls limitations so as to permit an otherwise barred counterclaim as unsettled and probably resolved by state law.63 A complete answer to an exam stem should therefore say whose law governs.
The reasons for suspension depend on the counterclaim’s relation to the plaintiff’s claim, which explains why the usual doctrine, with respectable common-law origins, treats an unrelated counterclaim as barred by the statute of limitations.64 The notice and staleness reasons both assume a counterclaim arising out of the plaintiff’s own transaction, and the anti-delay reason assumes that the claim and the counterclaim run on the same period.65 Employers Insurance of Wausau v. United States divides a claim along the same compulsory-or-permissive line.
The moment a claim expired also matters. One treatise would go further for any counterclaim whose period had not run when the plaintiff sued: it ought to be allowed for all purposes, even though the period expires between the filing of the complaint and the assertion of the counterclaim.66 If the period had run before the plaintiff sued, the usual doctrine bars an unrelated counterclaim outright, while a counterclaim arising out of the plaintiff’s transaction may be asserted for recoupment, to prevent or reduce a judgment for the plaintiff, though affirmative relief will not be given on it.67 Counterclaims against the government under the Federal Tort Claims Act show how harsh the bar can be: a majority of the decisions treat the two-year limitation as a condition on the remedy and refuse the counterclaim even for recoupment.68
Change one fact and the result shifts. Had the defective-goods period ended in December of Year 2, before the manufacturer sued, the suit would have found no running clock to suspend. The distributor could then assert the related claim only for recoupment, to reduce or defeat the manufacturer’s judgment, and could win no affirmative recovery on it.69 An exam stem that places the counterclaim outside the period when it is filed but inside the period when the complaint was filed asks three questions in order. First, does the counterclaim arise out of the transaction the plaintiff sued on? Second, does the governing law follow the majority view that the plaintiff’s suit suspends limitations for compulsory counterclaims? Third, if the period had already run, is the claim being used only defensively?