U.S. District Court, Maryland, Case Summaries: July 7, 2008

Daily Record, The (Baltimore), Jul 7, 2008

U.S. District Court, Maryland

Civil Procedure

Supplemental jurisdiction

BOTTOM LINE: District court granted plaintiffs' motion to dismiss defendant's counterclaims based on lack of supplemental jurisdiction where defendant's counterclaims were permissive.

CASE: Williams, et al. v. Long, No. 07-3459 (filed June 11, 2008) (Judge Motz).

FACTS: From October 2007 through November 2007, plaintiffs Jill Williams and Erin Dechowitz were employed by Sandra Long to make and serve cupcakes at her business, Charm City Cupcaks, or at customers' sites. Long promised to pay Williams and Dechowitz an hourly wage.

Despite working a few hundred hours between them, however, the only wage that either of the plaintiffs received was $20.00, which Long gave Dechowitz as a cash advance against her pay. Thereafter, Long refused to pay them any wages.

Williams and Dechowitz brought an action against Long under the Fair Labor Standards Act of 1938, alleging that Long willfully violated the law by failing to pay them minimum wage and overtime. They further alleged that Long's actions also violated Baltimore City's Wage and Hour Law and Maryland's Wage Payment and Collection Law.

Long brought counterclaims alleging breach of contract, breach of fiduciary duty, and invasion of privacy. Specifically, Long alleged that Williams "made false representations with respect to her background and experiences" in the baked goods industry. Long allegedly obtained "a substantial amount of working capital and capital financing" in reliance upon Williams' "false representations." Accordingly, when Williams "walked away from the business," she allegedly breached the contract and her fiduciary duty to Long, causing Long damages in excess of $500,000.

Williams and Dechowitz moved to dismiss Long's counterclaims on the ground that the court did not have supplemental jurisdiction over them. The district court granted that motion.

LAW: In the instant case, neither diversity nor federal question jurisdiction existed over Long's counterclaims. Therefore, the counterclaims' status as "compulsory" or "permissive" determined whether the court had jurisdiction over them. Painter v. Harvey, 863 F.2d 329, 331 (4th Cir. 1988).

A compulsory counterclaim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim," while a permissive counterclaim does not. See Fed. R. Civ. P. 13(a)-(b). Accordingly, a compulsory counterclaim is "within the ancillary jurisdiction of the court to entertain and no independent basis of federal jurisdiction is required." Painter, 863 F.2d at 331. By contrast, a permissive counterclaim that lacks its own independent jurisdictional basis is not within the jurisdiction of the court.

In Painter, the 4th Circuit suggested four inquiries to determine if a counterclaim is compulsory. Among those inquires is whether the issues of fact and law raised in a claim and counterclaim are largely the same. Id.

Here, the issues of fact and law raised in Williams' and Dechowitz' claims and Long's counterclaims were not "largely the same." Id. The plaintiffs' claims alleged that Long violated the Fair Labor Standards Act of 1938 (FLSA), Maryland's Wage Payment and Collection Law, and Baltimore City's Wage and Hour Law by not paying minimum wage and overtime for their work. By contrast, Long's counterclaims asserted breach of contract, breach of fiduciary duty, and invasion of privacy.

The only issue that arose in both the claims and counterclaims was whether plaintiff Williams was an employee or a joint venture partner. In every other respect, the claims and counterclaims were different in terms of the legal and factual issues involved.

Legal issues raised by a minimum wage and overtime laws are clearly distinct from those raised by the laws of contract, fiduciary duty, and privacy. Likewise, while plaintiffs' claims focused on the factual issues of how many hours they worked, and whether they were paid for that work, Long's counterclaims would have required extensive factual investigation into her allegations of false representation, reliance, and emotional distress.

Federal courts have been reluctant to exercise supplemental jurisdiction over state law claims and counterclaims in the context of a FLSA suit where the only connection is the employee-employer relationship. "Several courts have rejected the notion that the employer-employee relationship single-handedly creates a common nucleus of operative fact between the FLSA claim and peripheral state law claims." Wilhelm v. TLC Lawn Care, Inc., No. 07-2465, 2008 WL 640733, at *3 (D. Kan. March 6, 2008) (citing Lyon v. Whisman, 45 F.3d 758, 762-64 (3d Cir.1995) (where the employment relationship is the only link between the FLSA claim and state law claims, no common nucleus of operative fact exists and Article III bars supplemental jurisdiction); Rivera v. Ndola Pharmacy Corp., 497 F. Supp.2d 381, 395 (E.D.N.Y. 2007) (an employment relationship is insufficient to create common nucleus of operative fact where it is the sole fact connecting the FLSA claim to state law claims).