Optimal Markets, Inc. v. FTI Consulting, Inc., 2009 WL 1704665 (N.D. Cal. 2009)
There was a fun civil procedure issue addressed in the Northern District of California last Wednesday. The Plaintiff provided software for electronic auctions. The Defendants were two of the Plaintiff’s former employees who were employed by a rival company at the time of the suit. The Plaintiff brought a claim for, among other things, copyright infringement. The Defendants filed counterclaims including one for a declaratory judgment of noninfringement.
The Plaintiff moved to voluntarily dismiss its copyright claim, and argued that the dismissal would result in a lack of subject matter jurisdiction because the rest of its claims were based on state law. Thus, the Plaintiff moved for dismissal of the case with the intention of refiling in state court.
Federal Rule of Civil Procedure 41(a)(2) provides that “[i]f a defendant has pleaded a counterclaim before being served with the plaintiff’s motion to dismiss, the action may be dismissed over the defendant’s objection only if the counterclaim can remain pending for independent adjudication.”
The Plaintiff first asked the Court to dismiss its claim for copyright infringement without prejudice. After the Defendants argued that the Court would still have federal jurisdiction under their counterclaims for a declaratory judgment of noninfringement, the Plaintiff expressed a willingness to dismiss the claim with prejudice on the condition that it wasn’t considered an adjudication on the merits. In the alternative, the Plaintiff asked the Court to dismiss the claim without prejudice but stated that it would be willing to covenant not to sue on the copyright claim.
The Court rejected these two suggestions, noting that a dismissal with prejudice is “tantamount to a judgment on the merits,” Zenith Ins. Co. v. Breslaw, 108 F.3d 205, 207 (9th Cir.1997), and that even if Plaintiff’s covenant not to sue on the copyright claim eliminated the copyright controversy between the parties, the Court still had jurisdiction over Defendants’ counterclaims because they were compulsory; the counterclaims were derived from the same common nucleus of operative facts and remained pending, with or without the Plaintiff’s infringement claim. The Court dismissed the Plaintiff’s claims without prejudice and allowed the counterclaims to proceed.
Why is this case fun?
It’s hornbook law that a federal court doesn’t have jurisdiction to hear a case when a plaintiff files a complaint and then voluntarily amends the complaint removing the claim or claims over which the court had original jurisdiction. Rockwell Int’l Corp. v. United States, 127 S.Ct. 1397, 1409 (2007). And federal jurisdiction cannot rest exclusively on a counterclaim. Holmes Group, Inc. v. Vornado Circulation Systems, Inc. 535 U.S. 826 (2002). A federal court may, however, assert jurisdiction over a case where a plaintiff brings a claim over which the court has original jurisdiction, which the court later dismisses. F.R.C.P. 1367(c)(3).
For the Court in Optimal Markets v. FTI Consulting, Inc. to meet it’s obligations under 41(a)(2) (not to deprive the Defendants the opportunity to adjudicate their counterclaim) and under Rockwell (a federal court has no jurisdiction if a plaintiff amends its complaint removing all claims that would provide a basis for original jurisdiction), it had to dismiss the copyright claim, and not just allow the defendant to amend it’s complaint removing the claim. Civil procedure fun!
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