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Civil Procedure Fall 2014

Applying The Transaction Or Occurrence Requirement.

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Under Rule 13, whether a counterclaim is permissive or compulsory depends on whether that claim “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” But as the debate between Judge Bryan and Judge Friendly in Heyward-Robinson shows, it can be difficult to discern which claims arise from the same transaction or occurrence.

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Although judges usually agree that Rule 13(a)’s transaction or occurrence requirement “should be interpreted liberally,” Rule 13(a)’s requirement remains ambiguous since “courts have refrained from making any serious attempt to define the transaction-or-occurrence concept in a highly explicit fashion.” 6 Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, Federal Practice and Procedure § 1410 (3d ed.).

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In an important case on counterclaims, interpreting and applying an earlier version of Rule 13 known as Equity Rule 13, the Supreme Court attempted to define the transaction or occurrence requirement in the following way:

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‘Transaction’ is a word of flexible meaning. It may comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship. . . . Essential facts alleged by appellant enter into and constitute in part the cause of action set forth in the counterclaim. That they are not precisely identical, or that the counterclaim embraces additional allegations . . . does not matter.

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Moore v. New York Cotton Exch., 270 U.S. 593, 610 (1926).

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Given that even the Supreme Court’s definition of “transaction” noted its flexibility, it is perhaps unsurprising that courts have adopted different approaches to applying the test. Four tests have been offered for applying Rule 13(a):

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1) Are the issues of fact and law raised by the claim and counterclaim largely the same?

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2) Would res judicata (claim preclusion) bar a subsequent suit on defendant's claim absent the compulsory-counterclaim rule?

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3) Will substantially the same evidence support or refute plaintiff's claim as well as defendant's counterclaim?

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4) Is there any logical relationship between the claim and the counterclaim?

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6 Wright, Miller, & Kane, Federal Practice and Procedure § 1410. How might these tests differ in practice? What are the strengths and weaknesses of each approach?

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It is also important to recall that, as with joinder rules generally, some states have chosen not to follow the Federal Rules. Most states have also chosen to distinguish compulsory and permissive counterclaims based on the same transaction or occurrence test. See, e.g., Wash. Ct. R. 13 (using the same language as Rule 13). However, in Virginia, counterclaims are always permissive. See, e.g., Va. Sup. Ct. R. 3:9 (“A defendant may, at that defendant’s option, plead as a counterclaim any cause of action that the defendant has against the plaintiff or all plaintiffs jointly, whether or not it grows out of any transaction mentioned in the complaint . . .”); see also Va. Code. Ann. § 16.1-88.01 (West 2013). Recently, Virginia’s Advisory Committee on Rules of Court urged the state to adopt the transaction or occurrence rule for compulsory counterclaims used by 42 states and the federal system. See Virginia Advisory Committee on Rules of Court, “Should the Raising of Transactionally-Related Counterclaims Be a Required Part of Defendant’s Answer in Virginia Practice” (Oct. 1, 2007), available at www.valawyersweekly.com/wp-files/pdf/va/06/CompulsorySHORT.pdf. But the state supreme court and state legislature have not done so. Why not? What are the strengths and weaknesses of Virginia’s alternative?

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Furthermore, federal law also applies a different, albeit similar, test in one related context. Even though the Federal Rules apply the “transaction or occurrence” requirement to counterclaims, the rules do not guarantee that the federal courts have jurisdiction over those claims. Section 1367, which governs supplemental jurisdiction for such claims (and will be discussed in Section 7.8, infra), states that “the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III.” 28 U.S.C. § 1367(a). What is the relationship between § 1367’s test and the “transaction or occurrence” test? Recent decisions to address this question have found § 1367’s test broader, concluding that supplemental jurisdiction can extend to at least some permissive counterclaims. See, e.g., Global NAPs, Inc. v. Verizon New England Inc., 603 F.3d 71, 87-88 (1st Cir. 2010) (refusing to define the outer boundaries of § 1367, but nevertheless “decid[ing] that supplemental jurisdiction is somewhat broader than the transaction-or-occurrence test.”).