The opinion of the court was delivered by: FRANKLIN VAN ANTWERPEN, District Judge
Presently before the Court is Plaintiffs' Motion To Dismiss the
Defendants' Counterclaims pursuant to Fed.R.Civ.P. 12(b)(1). For the
following reasons, Plaintiffs' motion will be granted.
Plaintiffs Kelly Stewart and Jeffrey Stewart initiated the present
action by filing individually, and subsequently consolidating, complaints
alleging various claims of discrimination stemming from their employment
relationship with Defendants. Specifically, Kelly Stewart asserts that
Defendant Outdoor Marketing Systems, Inc. terminated her "based upon her
gender solely because she was a female and the wife of an employee who
was over the age of forty, and falsely accused of being a racist, and who
Lamar Companies wanted to terminate" in violation of Title VII of the
Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq.
("Title VII"). (Consolidated Compl. ¶ 48.) Jeffrey Stewart alleges
unlawful termination by Defendant Lamar Advertising of Penn, LLC., in
violation of the Age Discrimination in Employment Act ("ADEA"), and Title
VII. (See Consolidated Compl. ¶¶ 18-21, 30-31.) In response to these
allegations, Defendants filed an Answer, Affirmative Defenses And
Counter-Claims. In addition to asserting affirmative defenses of, inter
alia, unclean hands and acting in good faith and for legitimate business
reasons in terminating Plaintiffs, Defendants set forth five
counterclaims: (1) fraud by Kelly Stewart; (2) fraud by Jeffrey Stewart;
(3) unjust enrichment against Kelly Stewart; (4) unjust enrichment by
Jeffrey Stewart; and (5) breach of duty of loyalty against Kelly Stewart
and Jeffrey Stewart. It is these counterclaims that are the subject of
Plaintiffs' Motion To Dismiss.
Plaintiffs move to dismiss Defendants' counterclaims on the basis that
the counterclaims are permissive, rather than compulsory, and that there
is no independent basis of federal
jurisdiction. Defendants contend that the counterclaims are compulsory,
and as such, this Court has jurisdiction to entertain them. As set forth
below, this Court believes that the counterclaims asserted against
Jeffrey Stewart are permissive. Because those counterclaims do not rest
on independent grounds of federal jurisdiction, this Court cannot
consider them. Consequently, Plaintiffs' motion to dismiss the
counterclaims against Jeffrey Stewart is granted without prejudice to
Defendants' right to file the claims in State Court. This Court finds the
counterclaims asserted against Kelly Stewart, however, to be compulsory.
Nonetheless, inadequacies in Defendants' pleadings warrant dismissal of
these counterclaims without prejudice to refile in this Court.
Federal courts possess supplemental jurisdiction over all claims that
are so related to the claims with original jurisdiction that they form
part of the same case or controversy. See 28 U.S.C. § 1367(a).
Generally, a federal court may adjudicate counterclaims advanced without
a separate and independent jurisdictional basis if the counterclaims are
deemed compulsory. Great Lakes Rubber Corp. v. Herbert Cooper Co.,
286 F.2d 631, 634 (3d Cir. 1961). Under Fed.R.Civ.P. 13(a), a
counterclaim is deemed compulsory if it "arises out of the transaction or
occurrence that is the subject matter of the opposing party's claim."
Fed.R.Civ.P. 13(a). If a counterclaim is characterized as compulsory
under this rule, it necessarily derives from the same case or controversy
as the claims over which the court has original jurisdiction. Thus, these
compulsory counterclaims fall within the court's ancillary jurisdiction
and do not require an independent basis of jurisdiction.
The "transaction and occurrence" test of Rule 13(a) is to be liberally
applied and given broad scope, in accordance with the liberal joinder
policy underlying the Federal Rules. 6
CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND
PROCEDURE: CIVIL 2D, § 1409 (2d ed. 1990); see Matter of Penn Cent.
Transp. Co., 419 F. Supp. 1376, 1383 (E.D.Pa. 1976). The goal of Rule
13(a) to promote judicial economy by allowing the adjudication of
related claims in a single action should inform its application.
Consistent with these principles, to determine whether a counterclaim
"arises out of the transaction or occurrence that is the subject matter
of the opposing party's claim," the Third Circuit has endorsed the
flexible "logical relationship" test. See Xerox Corp. v. SCM Corp.,
576 F.2d 1057
, 1059 (1978) (citing Great Lakes, 286 F.2d at 634).
Specifically, the Third Circuit has counseled that:
A counterclaim is logically related to the opposing
party's claim where separate trials on each of their
respective claims would involve a substantial
duplication of effort and time by the parties and the
courts. Where multiple claims involve many of the same
factual issues, or the same factual and legal issues,
or where they are offshoots of the same basic
controversy between the parties, fairness and
considerations of convenience and of economy require
that the counterclaimant be parmitted to maintain his
cause of action. . . . Thus, a detailed analysis must
be made to determine whether the claims involve: (1)
many of the same factual issues; (2) the same factual
and legal issues; or (3) offshoots of the same basic
controversy between the parties.
Great Lakes., 286 F.2d at 634. Pursuant to this standard, "mere
tangential overlap of facts is insufficient, but total congruity between
the operative facts of the two cases is unnecessary." Nanavati v.
Burdette Tomlin Memorial Hosp., 857 F.2d 96
, 105 (3d Cir. 1988).
Generally, the mere fact that state law counterclaims arise from the
same employment relationship as the original claims over which the court
has subject matter jurisdiction is insufficient to render the
counterclaims compulsory. See, e.g., Zambrano v. Chic Marine of
Lauderdale, Inc., No. 00-7632, 2001 U.S. Dist. LEXIS 25342, at *4
(S.D.Fla. June 5, 2001)
(dismissing trade secret counterclaim arising from same employment
relationship as Plaintiff's FLSA claim); Worlds v. Nat'l R.R. Passenger
Corp., No. 84-10027, 1988 WL 139252, at *6 (N.D.Ill. Dec. 22, 1988)
(dismissing counterclaim for check fraud because it was only tangentially
related to Plaintiff's Title VII race discrimination claim even through
check fraud constituted alleged reason for failing to rehire employee
after previous settlement of suit reached); Spencer v. Banco Real, S.A.,
623 F. Supp. 1008, 1012 (S.D.N.Y. 1985) (dismissing counterclaims for
conversion, trespass, unfair competition, breach of fiduciary duty and
tortious interference with business contracts as bearing only some
factual relationship with Plaintiff's employment discrimination claim).
But see Halloum v. Intel Corp., No. 02-2245, 2003 U.S. Dist. LEXIS
20374, at * 7 (D.Ariz. Nov. 5, 2003) (finding counterclaims for breach of
contract, unjust enrichment, and fraud or deceit compulsory because
Plaintiff's employment discrimination claim and the counterclaims are
premised on conduct within the employment relationship); DeShaw v. Lord
& Taylor, No. 90-0490, 1991 U.S. Dist. LEXIS 8048, at *14-15
(S.D.N.Y. June 13, 1991) (finding compulsory counterclaims for breach of
fiduciary duty, unjust enrichment, and tortious interference with
economic advantage because counterclaims and Plaintiff's ADEA claim focus
on Plaintiff's performance while employed). Thus, that Plaintiffs'
discrimination claims and Defendants' counterclaims arise out of the same
employment relationship cannot alone sustain jurisdiction over the
counterclaims. Some greater connection is necessary.
With respect to the counterclaims asserted against Kelly Stewart, it is
apparent that the requisite greater connection is present. Defendants'
Brief argues that Kelly Stewart was not terminated, but instead abandoned
her job or resigned when she failed to appear at work following her
husband's termination. (See Defs.' Br. at 3, 9.) To make out her
under Title VII, Kelly Stewart must show in her prima facie case that she
suffered an adverse employment action as a result of engaging in
protected activity. See Farrell v. Planters Lifesavers Co., 206 F.3d 271,
279 (3d Cir. 2000). Defendants' contention that Kelly Stewart voluntarily
resigned thus represents a defense to her Title VII claim. To prove their
Title VII defense, Defendants will rely on the same essential facts and
proof that support their counterclaims. Specifically, Defendants'
counterclaims of fraud, unjust enrichment, and breach of duty of loyalty
are premised on allegations that Kelly Stewart routinely falsified
mileage reports and time reports, and that her husband regularly
performed her job functions on her behalf. These allegations also
substantiate Defendants' Title VII defense that Kelly Stewart voluntarily
abandoned her position after her husband was terminated because she
either refused or was unable to execute her own job duties. Accordingly,
there is no prejudice in keeping these counterclaims in the case because
the facts and proof being used to establish them also constitute a
defense. See, e.g., Ginsberg v. Valhalla Anesthesia Associates,
971 F. Supp. 144, 147 (S.D.N.Y. 1997). There is a connection extending
beyond the existence of an employment relationship between Kelly
Stewart's claim of gender discrimination resulting in alleged termination
and Defendants' defense and counterclaim averring that she voluntarily
quit because of her husband's involvement in assisting her. Given this
"logical relationship," Defendants' counterclaims against Kelly Stewart
This Court, however, must dismiss the counterclaims without prejudice
to Defendants' right to refile in this Court because Defendants fail to
allege in their Answer, Affirmative Defenses And Counter-Claims that
Kelly Stewart resigned or abandoned her job willingly. Indeed,
Defendants' Ninth Affirmative Defense appears to state the contrary
"Defendants acted in good faith and for legitimate business reasons in
terminating Plaintiffs." (Defs.' Answer at 7.) The failure to allege the
defense that Defendants' Brief asserts in support of their argument that
their counterclaims are compulsory, and the possible inherent
contradiction that arises between this defense and the Ninth Affirmative
Defense in Defendants' pleadings warrants dismissal of these
counterclaims without prejudice.
With respect to Jeffery Stewart, however, Defendants' allegations
regarding his purported fraudulent acts do not relate to the same facts
that are essential to his age and race discrimination claims. Defendants
maintain in their Answer, Affirmative Defenses And Counter-Claims that
Jeffrey Stewart was terminated for legitimate business reasons, including
finding through an internal investigation that he engaged in racial
discrimination towards a co-worker. (Defs.' Answer at 3-4, ¶¶ 17,
23-24.) Significantly, Defendants do not contend that Jeffrey Stewart was
terminated for committing the fraudulent acts that serve as the basis for
their counterclaims. It is clear that the facts, evidence, and proof
required to corroborate Defendants' affirmative defense substantially
differ from those needed to prove their counterclaims. Rather, the sole
connection between Plaintiff's claims and the counterclaims is that both
relate to Jeffrey Stewart's employment. As explained above, this
relationship alone does not suffice to establish that the counterclaim
arises from the same "transaction or occurrence" as Plaintiff's claims.
See, e.g., Richardson v. Trainer, No. 02-60117, 2003 U.S. Dist. LEXIS
13829, at *13-14 (S.D.Fla. May 9, 2003); Adamson v. Dataco Derex, Inc.,
No. 97-2438, 1998 U.S. Dist. LEXIS 2620, at *6 (D.Kan. Feb. 13, 1998).
Defendants marshal several additional arguments to buttress the
assertion that their counterclaims are compulsory. First, Defendants note
that, pursuant to Rule 608(b) of the
Federal Rules of Evidence, Plaintiffs' misconduct could be inquired into
on cross-examination at trial. Thus, the factual issues entrenched in
their counterclaims would arise in the trial on Plaintiffs'
discrimination claims as relevant to Plaintiffs' credibility. Defendants
cite no caselaw in support of the proposition that such a scenario
renders their counterclaims compulsory. Although Rule 13(a) is to be
liberally construed, deeming a counterclaim compulsory simply because the
facts supporting those claims can be used to challenge credibility
completely undermines the definition of a counterclaim as a claim that
"arises out of the transaction or occurrence that is the subject matter
of the opposing party's claim." Fed.R.Civ.P. 13(a). It does not follow
that a counterclaim is logically related to a Plaintiff's claims merely
because its subject matter may arise on cross-examination at trial.
Second, this same analysis applies to Defendants' argument that the
counterclaims are compulsory because their subject matter also
constitutes the basis for the affirmative defense of unclean hands. Quite
simply, the counterclaims do not arise from the same transaction or
occurrence that is the subject matter of Jeffrey Stewart's complaints.
Finally, Defendants rely on the defense of after-acquired evidence to
suggest that their counterclaims are compulsory. Under this doctrine,
after-acquired evidence of an employee's wrongdoing (evidence acquired
after the employee is terminated) can operate to reduce an employee's
recoverable damages if the employer establishes that "the wrongdoing was
of such severity that the employee in fact would have been terminated on
those grounds alone if the employer had known of it at the time of
discharge." McKennon v. Nashville Banner Publ'g Co., 513 U.S. 352,
362-63, 115 S.Ct. 879, 130 L.Ed.2d 852 (1995). Defendants argue that the
facts supporting their counterclaims will be directly relevant to the
disposition of Plaintiffs' damages claims, and that this overlap compels
joinder of the counterclaims. (Defs.' Br. at 11-12.)
While this may be true, to invoke the doctrine Defendants must
demonstrate that they were unaware of the alleged misconduct at the time
of termination or resignation, and that the misconduct was of such
severity to justify discharge and that Defendants in fact would have
discharged Plaintiffs. McKennon, 513 U.S. at 362-63, 115 S.Ct. 879, 130
L.Ed.2d 852. Defendants' pleadings do not contain any such allegations.
Indeed, Defendants' Brief indicates that it was aware of the misconduct
prior to termination: "Thus, under the ultimate stage of the
McDonnell-Douglas standard, Mr. Stewart will have to prove that
Defendants' stated reasons for terminating him are false, and pretexts
for discrimination. This will require an analysis of Defendants'
investigation into Mr. Stewart's conduct, the misconduct it revealed, and
whether that misconduct truly motivated the termination." (Defs.' Br. at
10.) In any event, Defendants' fail to cite a single case where the
after-acquired evidence doctrine was used to support a finding that
counterclaims are compulsory.
Defendants' counterclaims of fraud, unjust enrichment, and breach of
fiduciary duty, as asserted against Jeffrey Stewart, are permissive.
Because there exists no independent basis of jurisdiction over these
state law claims, they must be dismissed ...