Great Lakes Rubber Corp. v. Herbert Cooper Co

Brief Fact Summary. Plaintiff sued Defendant in federal court based on diversity jurisdiction alleging unfair competition and business practices, to which Defendant filed counterclaims alleging violations of the Sherman Act and that the lawsuits brought against Defendant were in bad faith and for purposes of harassment. Plaintiff’s complaint was dismissed for lack of diversity and jurisdiction was retained over Defendant’s Sherman Act claims. Plaintiff filed a counterclaim against Defendant alleging the facts contained in Plaintiff’s dismissed complaint with additional allegations of misconduct.

Synopsis of Rule of Law. A counterclaim bears a “logical relationship” to the subject matter of the litigation so as to make it compulsory when trying the cases separately would require duplication of much of the same factual and legal issues or if fairness and convenience of the parties would require resolution of the counterclaim in the same suit.

Facts. Plaintiff Great Lakes Rubber Corp. sued Defendant Herbert Cooper Co. allegedly based on diversity. The complaint alleged the following: (1) that the founders of Defendant were former employees of Plaintiff and that they misappropriated information from Plaintiff; (2) the former employees left Plaintiff to found Defendant; (3) Defendant used information taken from Plaintiff to compete with Plaintiff; (4) Defendant bid and obtained several contracts from the U.S. Army and Air Force using information obtained from Plaintiff; (5) Defendant should be enjoined from further competing with Plaintiff and compensate Plaintiff for its unfair competition practices. Defendant counterclaimed alleging violations of the Sherman Act and that Plaintiff filed lawsuits in bad faith and for the sole purpose of harassing Defendant. Defendant moved to dismiss Plaintiff’s complaint for lack of diversity, which the District Court granted. The Court retained jurisdiction over Defendant’s counterclaim. Plaintiff filed a counterclaim against Defendant making the same allegations contained in the previous complaint with additional allegations of Defendant’s misconduct. Defendant moved to dismiss the counterclaim for lack of subject matter jurisdiction. Plaintiff argued the Court had ancillary jurisdiction over Plaintiff’s counterclaim because it was a compulsory counterclaim to Defendant’s claim alleging Sherman Act violations. The Court granted Defendant’s motion to dismiss finding that Plaintiff’s counterclaim was not a compulsory counterclaim. Plaintiff appealed.

Issue. Does Plaintiff’s claim have a logical relationship to Defendant’s claim under the Sherman Act such to make it a compulsory counterclaim under Rule 13(a) of the Federal Rules of Civil Procedure?

Held. Yes. Judgment reversed. Questions of whether a counterclaim is compulsory under Rule 13(a) of the Federal Rules of Civil Procedure and whether a court has ancillary jurisdiction over a claim are governed by the same test. The reason the tests are the same is because the policy behind both rules is the same: to avoid piecemeal litigation in federal court. A counterclaim is “compulsory” if it bears a “logical relationship” to the subject matter of the litigation. There is a logical relationship to the claim if trying both cases separately would involve substantial duplication of the work done on the case. Fairness and convenience of the parties as well as the effect of res judicata on the counterclaim are considerations to be given when determining whether a claim is compulsory. Defendant’s claim that the allegations in Plaintiff’s original complaint and subsequently restated in Plaintiff’s counterclaim are in bad faith and intended to harass Defendant and prevent it from competing with Plaintiff have a logical relationship as it will require a determination of whether Plaintiff’s allegations are in bad faith or harassing and/or have merit. Therefore, Plaintiff’s counterclaim is compulsory.

Discussion. The court’s opinion demonstrates that Defendant’s allegations that Plaintiff’s claim was harassing and in bad faith created the “logical relationship” that made Plaintiff’s claim “compulsory.” If the Court had ruled that the Plaintiff’s claims, which formed the subject matter of the Defendant’s counterclaims (which the Court retained jurisdiction over), must be tried separately (and in another forum), then the Plaintiff would be bound in its own case should the Defendant prevail on the counterclaims herein.