The Case Against Counterclaim Class Actions

Should a party that brings a simple lawsuit to collect an unpaid debt or for breach of contract run the risk of having that case transformed into a multimillion-dollar class action against it? That is one of the issues presented when a defendant responds to a lawsuit with a counterclaim that seeks relief on a class-wide basis. A number of state and federal courts have assumed, typically with little substantive analysis, that a class action can properly be pled in a counterclaim. See, e.g., Westwood Apex v. Contreras, 644 F.3d 799 (9th Cir. 2011) (affirming remand of a counterclaim class action without questioning the permissibility of such class actions). Many parties facing such a counterclaim fail to fully litigate the issue of whether class allegations should be allowed in response to a complaint. However, a counterclaim class action arguably violates the applicable rules of civil procedure and undeniably creates numerous unmanageable practical problems. Creative "solutions" to many of those practical problems often trample on the rights of the plaintiff or absent class members.

Counterclaim class actions most often arise in consumer litigation. Typically, a consumer breaches the contract by failing to make required payments, and the other contracting party—often a financial institution—files a lawsuit based on the contract. In response, the consumer asserts a counterclaim alleging that a term in the contract or some other practice of the financial institution violates a state consumer-protection law or another type of regulation. The consumer then purports to bring that counterclaim on behalf of a class subjected to the allegedly unlawful practice or contract term. The propriety of counterclaim class actions often goes unchallenged. However, on close examination, their very existence is built on a shaky legal foundation.

A Rule-Based Analysis

The first issue that must be considered is whether the applicable procedural rules permit class allegations to be asserted in a counterclaim. In some states, the rules at least implicitly allow for counterclaim class actions. See, e.g., Cal. Civ. Proc. Code § 428.20 (providing that counterclaiming defendant "may join any person as a cross-complainant or cross-defendant, whether or not such person is already a party to the action, if, had the cross-complaint been filed as an independent action, the joinder of that party would have been permitted"); Fla. R. Civ. P. 1.220(c) (setting out requirements for bringing claim on behalf of class in "[a]ny pleading, counterclaim, or crossclaim"). While the practical concerns addressed below suggest that such rules may be unwise, the analysis here is limited to the federal rules and their state analogues.

Counterclaims May Be Brought Against an "Opposing Party"

Fed. R. Civ. P. 13 governs counterclaims. Rule 13(a) defines "compulsory" counterclaims, which arise when the counterclaim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim." If a counterclaim that is compulsory is not asserted, it becomes barred and may not later be asserted. See, e.g., Ross ex rel. Ross v. Bd. of Educ. of Twp. High Sch. Dist. 211, 486 F.3d 279, 284 (7th Cir. 2007) (citing Baker & Gold Seal Liquors, Inc., 417 U.S. 467, 469 n.1 (1974)). Rule 13(b) allows permissive counterclaims, which are essentially defined as "any claim that is not compulsory." Fed. R. Civ. P. 13(b). Both subsections state that counterclaims may be brought against "an opposing party." Fed. R. Civ. P. 13(a)(1), (b).

This requirement presents the first textual obstacle to a counterclaim class action. As discussed below, under Rule 13(h), a defendant asserting a counterclaim may bring in new "parties" as counterclaim defendants if those parties are being joined as parties in the sense of Rules 19 and 20, whether it be as parties needed to adjudicate the counterclaim under Rule 19 or parties who may be joined permissively under Rule 20. But there is no textual basis in Rule 13 to allow uninvolved persons to effectively bring counterclaims without becoming actual parties to the case, particularly when those claims are not against a party that was previously opposing those uninvolved persons.

In the original action in the example given above, the only parties are the financial institution and the consumer; similarly situated consumers are nowhere to be found and thus are clearly not parties the plaintiff was opposing. Therefore, their inclusion as part of a counterclaim class does not comport with Rule 13's requirement that counterclaims be directed by a party to opposing parties...