How a Strategic Counterclaim Can Backfire

Nobody likes to get sued. It can be an expensive and soul-draining proposition, even if you win. Under the so-called “American Rule,” litigants are responsible for paying their own legal fees, regardless of which party wins the case. Obviously, this system engenders some abuse, as crafty, litigious plaintiffs can file frivolous lawsuits knowing that–at the very least–they will cause the defendant to incur large sums of attorneys’ fees. As a defendant in American litigation, a victory at trial merely means you don’t have to pay the plaintiff any money. But you do you have to pay your own attorneys for their time and effort. So even a “win” is often viewed as a net loss in financial terms. One common way to turn the tables on plaintiffs is to file a counterclaim. Assuming the counterclaim itself isn’t completely groundless, it can put the parties on equal footing: if both parties have claims against the other, then both parties have something to lose beyond mere legal fees. Now, even the plaintiff can be liable for a money judgment.

If you file a counterclaim, however, you better mean it. The court may not allow you to withdraw it later if you decide your claims should have been brought as a separate action in a different jurisdiction. If the case has progressed to the point where trial is imminent, you may be forced to litigate the claim or lose it forever.

The rule at issue is Federal Rule of Civil Procedure 41(a)(2). That’s the rule that allows a claimant to withdraw a claim “without prejudice,” and it requires the approval of the judge. The judge has complete discretion under the Rule to allow or disallow dismissal on whatever terms the judge deems proper, but case law offers some guidance on what factors the court should consider.

When considering a defendant’s motion to voluntarily dismiss its own counterclaim without prejudice (leaving the defendant the option of renewing the claims in a different forum), federal courts in Virginia focus on the interests of the other party (the plaintiff). Courts consider the following factors:

  1. the opposing party’s effort and expense in preparing for trial;
  2. excessive delay or lack of diligence on behalf of the movant;
  3. insufficient explanation of the need for dismissal; and
  4. the present state of litigation, i.e., whether a motion for summary judgment is pending.

(See Teck Gen. P’ship v. Crown Cent. Petroleum Corp., 28 F. Supp. 2d 989 (E.D. Va. 1998)).

As always on this blog, I like to provide examples. So take a look at Steves and Sons, Inc. v. Jeld-Wen, Inc., decided a few weeks ago in the Richmond Division of the Eastern District of Virginia.

In June 2016, Steves and Sons sued Jeld-Wen for a number of claims, including breach of contract, breach of warranty, and violation of Section 7 of the Clayton Act (an antitrust claim). After an extensive discovery process, Jeld-Wen sought to add a counterclaim, telling the court that it had uncovered evidence of trade-secret misappropriation during discovery. Jeld-Wen asked the court to allow it to assert claims for misappropriation of trade secrets, violation of the Defend Trade Secrets Act, conspiracy to steal trade secrets, and other claims. Steves main argument against allowing the late counterclaim was that the claims should be litigated in Texas, angry-judge-300x220not Virginia. Jeld-Wen argued “zealously” for prosecution of the claims here in Virginia, and the court decided to allow it. It ordered separate trials, however, for the antitrust claims and the trade-secret counterclaims.

Shortly thereafter, Jeld-Wen filed a separate action in Texas state court, asserting its trade secret claims in that forum, despite its earlier expressed opposition to doing that. It then moved to voluntarily dismiss its counterclaims in the Virginia proceeding. Considering all of the above, as analyzing the facts in light of the four factors outlined in the Teck case, the court said no.

First, the party opposing dismissal had already incurred considerable expense and effort in preparing for trial of both its claims and the counterclaims. Extensive discovery had been completed and all depositions had been taken.

Second, the court found that Jeld-Wen was guilty of excessive delay: “Jeld-Wen sat by idly and did nothing to initiate the Texas case until September 2017, after it had suffered a number of adverse rulings and after almost all the discovery for the trade secrets counterclaims had been completed.”

Third, the court found Jeld-Wen’s explanation of its supposed need for dismissal “disingenuous given its earlier arguments in the case, when it rejected Steves’ invitation to have the counterclaims brought separately in Texas.” Jeld-Wen argued that Texas courts are better suited to made decisions arising under Texas law, but the Virginia judge was unconvinced, noting that the law was straightforward and did not require any particular expertise in Texas law. The court also noted that “it is well-settled that a party cannot seek a voluntary dismissal with the hope of avoiding rulings that have been adverse to it in a pending case.”

Finally, the court examined the present state of litigation. This factor went hand-in-hand with the first; the parties had incurred a great deal of expense in the litigation because it had already progressed almost all the way to trial. Fact discovery was complete, summary judgment proceedings had been scheduled, and trial was imminent. To allow Jeld-Wen to drop its counterclaims and bring them in Texas instead would delay by several months the trial on those claims, resulting in prejudice to Steves.

So the lesson here is: if you decide to file a complaint or a counterclaim in federal court in Virginia, be prepared to go all the way. The court might not allow you to change your mind at a later date.

Contact Us

Virginia: (703) 722-0588
Washington, D.C.: (202) 449-8555
Contact Information