Opinion
Civil Action No. 03-2914, Civil Action No. 03-5293, Civil Action No. 03-2690, JURY TRIAL DEMANDED (Consolidated)
January 14, 2004
MEMORANDUM AND ORDER
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.
I. FACTUAL BACKGROUND
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.
II. DISCUSSION
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 retaliation claim 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 are compulsory.
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 proposition: "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 without prejudice to Defendants' right to file the claims in State Court.
III. CONCLUSION
For the aforementioned reasons, Plaintiffs' Motion To Dismiss Counterclaims is granted. The counterclaims asserted against Jeffrey Stewart are dismissed without prejudice to Defendants' right to file those claims in State Court. The counterclaims asserted against Kelly Stewart are dismissed without prejudice to Defendants' right to re file in this Court. An appropriate order follows.