Federal Court Dismisses Employer's Counterclaims in FLSA Lawsuit

United States Magistrate Judge Stephanie A. Gallagher recently granted an FLSA Plaintiff employee's Motion to Dismiss Counterclaims filed by his Defendant employer. Detailed excerpts from the Opinion are presented below. Most importantly, the Court notes that cluttering FLSA lawsuits with the minutiae of other employer-employee relationships would be antithetical to the purpose of the FLSA.

I. BACKGROUND

On March 29, 2017, Plaintiff Matt Carroll ("Carroll") filed suit against his former employer, Dan Rainville & Associates, Inc. ("DRA") alleging violations of the Federal Fair Labor Standards Act ("FLSA"), the Maryland Wage and Hour Law, and the Maryland Wage Payment and Collection Law. DRA engages in the business of selling and installing commercial HVAC and ventilation units.  From January, 2016 through August, 2016, Carroll worked as both an estimator and performed inside sales jobs for which he was paid hourly, in addition to earning a 20% commission on sales.  In this lawsuit, Carroll seeks to recover unpaid overtime wages and commissions from his inside sales job. 

On June 12, 2017, DRA filed an Amended Counterclaim asserting the following claims under Maryland law: (1) Breach of Contract — Return of Unearned Draws; (2) Breach of Contract — Noncompetition and Non-solicitation Agreement; (3) Breach of Contract — Use of Confidential Information; (4) Violation of Maryland Trade Secrets Act; (5) Intentional Interference with Business Relations; (6) Detinue; and (7) Civil Conspiracy. Carroll moved to dismiss all seven counterclaims under Federal Rule of Civil Procedure 12(b)(1), citing the Court's lack of subject-matter jurisdiction. 

II. LEGAL ANALYSIS

Federal courts are not courts of general jurisdiction; they have only the power that is authorized by Article III of the Constitution and the statutes enacted by Congress pursuant thereto. Bender v. Williamsport Area Sch. Dist., 475 U.S. 534 , 541  (1986). Subject-matter jurisdiction cannot be conferred by the parties, nor can a defect in subject-matter jurisdiction be waived by the parties. Brickwood Contractors, Inc. v. Datanet Eng'g, Inc., 369 F.3d 385 , 390 (4th Cir. 2004). Thus, questions of subject-matter jurisdiction may be raised at any point during the proceedings and may -- or, more precisely, must -- be raised by the court on its own. Id

Pursuant to the Judicial Improvement Act of 1990, federal courts have supplemental jurisdiction over all other claims that are so related to claims in the action that they form part of the same case or controversy under Article III of the United States Constitution.  See Shanaghan v. Cahill, 58 F.3d 106 , 109 (4th Cir. 1995) (quoting 28 U.S.C. § 1367(a)). To form part of the same case or controversy as the federal claims, the state claims must "derive from a common nucleus of operative fact, such that a plaintiff would ordinarily be expected to try them all in one judicial proceeding." See Hinson v. Norwest Fin. S.C., Inc., 239 F.3d 611 , 615 (4th Cir. 2001). Thus, where a federal court has original federal question or diversity jurisdiction over a claim, parties may append state law claims over which federal courts would otherwise lack jurisdiction, provided they derive from a "common nucleus of operative fact." See Cahill, 58 F.3d at 109 .

A compulsory counterclaim arises out of the transaction or occurrence that is the subject matter of the opposing party's claim, while a permissive claim does not.  Id.  To determine whether a counterclaim is compulsory, courts look to: (1) whether the issues of fact and law raised in the claim and counterclaim are largely the same; (2) whether res judicata would bar a subsequent suit on the party's counterclaim, absent the compulsory counterclaim rule; (3) whether substantially the same evidence supports or refutes the claim as well as the counterclaim; and (4) whether there is any logical relationship between the claim and counterclaim. Painter v. Harvey, 863 F.2d 329 , 331 (4th Cir. 1988). Contrary to a compulsory counterclaim, a permissive counterclaim must have an independent jurisdictional base such as federal question or diversity jurisdiction. See Sue, 538 F.2d 1048, 1051 (4th Cir. 1976).

The Court Lacks Subject-Matter Jurisdiction Over DRA's Counterclaims

Since diversity jurisdiction is lacking in this case and DRA's counterclaims are based solely on state law, for the Court to exercise subject-matter jurisdiction over the counterclaims, they must be "compulsory" pursuant to Federal Rule 13(a). Because the four-pronged inquiry cited in Painter weighs against a finding that DRA's counterclaims arose out of the same transaction or occurrence that created Carroll's claims, the counterclaims are not "compulsory," and the Court lacks subject-matter jurisdiction.

First, the issues of fact and law raised in the claims and counterclaims are not largely the same. Carroll's claims allege only that DRA violated FLSA and Maryland's Wage and Hour Law by not paying him earned overtime wages and commissions on sales.  DRA's counterclaims, meanwhile allege that Carroll: (1) breached his contract by taking his salary in the form of draws against future commissions and terminating his employment with a $20,086.90 deficit; (2) breached his non-compete agreement and tortiously interfered with DRA contracts by forming his own business, "JNG," and soliciting DRA customers; (3) breached his contract and violated the Maryland Trade Secrets Act by disclosing DRA's confidential information, such as pricing, contact lists, sales orders, and product data to his new business; and (4) remains in the wrongful possession of DRA's confidential information and unearned draws.  In other words, the only connection between Carroll and DRA's claims is the employee-employer relationship. Indeed, the legal issues raised by minimum wage and overtime laws are distinct from those raised by the laws of breach of contract, breach of fiduciary duty, violation of the Maryland Trade Secrets Act, intentional interference with business relations, detinue, and civil conspiracy. Thus, because Carroll's claims deal only with the question of the number of hours worked and the compensation paid, the state counterclaims necessarily involve different and separate factual matters.

Second, res judicata will not bar a subsequent suit on DRA's counterclaims. Res judicata bars the re-litigation of a claim if: (1) the parties are the same in both the prior and subsequent litigation; (2) the claim presented in the subsequent action is identical to that determined or that which could have been raised and determined in the prior litigation; and (3) there was a final judgment on the merits in the prior litigation. Here, DRA's counterclaims are not identical to Carroll's claims, and by virtue of the Court's ruling, could not be determined in this litigation.

Third, "substantially the same evidence" will not support or refute the claims and counterclaims in the instant case. Carroll's FLSA and state claims will rely on evidence demonstrating defendant's agreement to pay him, his hours worked, and defendant's refusal to pay him. DRA's counterclaims, however, will rely on almost completely different evidence, with the lone exception of the issue of Carroll's status as an employee. Indeed, DRA's counterclaims will necessarily include evidence alleging: (1) the existence of contracts, their breach, and damages; (2) Carroll's access to information covered by the Maryland Trade Secrets Act and subsequent misappropriation; (3) Carroll's wrongful solicitation of DRA customers and interference with existing DRA contracts; (4) Carroll's continued wrongful possession of DRA property; and (5) Carroll and JNG's conspiracy to use DRA's trade secrets and to profit at DRA's expense. Thus, unlike in cases where all of the evidence focuses on a single factual issue here the evidence supporting and refuting the claims and counterclaims will be significantly different.

Finally, because Carroll's claims and DRA's counterclaims do not relate to one event or issue, there is no logical relationship between them to support the exercise of supplemental jurisdiction. Indeed, where the only connection between the parties' claims and counterclaims is the employer-employee relationship, numerous federal courts have refused to exercise supplemental jurisdiction over counterclaims to a FLSA claim.

Concluding that DRA's counterclaims fail to qualify as "compulsory" under Rule 13 also reflects the federal judiciary's hesitancy to permit an employer to file counterclaims in FLSA suits for money the employer claims the employee owes it, or for damages the employee's tortious conduct allegedly caused. See Ramirez v. Amazing Home Contractors, Inc., No. CIV. JKB-14-2168, 2014 U.S. Dist. LEXIS 164739 , 2014 WL 6845555 , at *4 (D. Md. Nov. 25, 2014). Permitting the employer in a FLSA action to try its private claims, real or imagined, against its employees would delay and even subvert the whole process.  Id.  To clutter these proceedings with the minutiae of other employer-employee relationships would be antithetical to the purpose of the Act.

CONCLUSION

Because DRA's counterclaims were not "compulsory," and otherwise lacked an independent basis of jurisdiction, the Court found that it lacked subject-matter jurisdiction and DRA's Counterclaims were dismissed without prejudice.

 

Subscribe to Employer's Toolbox

Join our list to be notified (never more than once a month) when new resources are posted to the Employer's Toolbox





Schedule Consultation

Fill out our online form

closeClose