Civil procedure--supplemental jurisdiction and the expansion of the independent basis for subject matter jurisdiction requirement--Global Naps, Inc. v. Verizon New England, Inc., 603 F.3d 71 (1st Cir. 2010).

Author:Gleason, Randall

In order for a United States federal district court to exercise jurisdiction over claims brought by a plaintiff, the claims must either be of sufficient federal substance, or be based on diversity between the parties with an amount in controversy exceeding $75,000 (1) When the parties are in federal court based on a federal question, the court's supplemental jurisdiction extends to other non-federal compulsory counterclaims that a defendant is required to bring, and the court may exercise jurisdiction over so called "permissive counterclaims" so long as they form part of the same Article III case or controversy as the original claim. (2) In Global NAPs, Inc. v. Verizon New England, Inc., (3) the United States Court of Appeals for the First Circuit addressed whether a federal court could properly exercise jurisdiction over a permissive counterclaim that did not have its own independent basis for subject matter jurisdiction, but rather was related to another counterclaim raised by the defendant. (4) The court held that it could properly exercise supplemental jurisdiction over the defendant's counterclaim because according to the language of 28 U.S.C. [section] 1367 the jurisdictional limit for counterclaims is the Article III case or controversy standard. (5)

Appellant Global NAPs, Inc. ("GNAP") and appellee Verizon New England, Inc. ("Verizon") disagreed about an interconnectivity agreement ("ICA") they entered into in 2002 that determined how payments would be made to each company regarding charges for Internet service provider ("ISP") traffic. (6) Later in 2002, as a result of arbitration, the Massachusetts Department of Technology and Energy (DTE) ordered a new agreement whereby GNAP would have to pay Verizon for ISPs located outside of the local calling area. (7) Following that decision, GNAP filed, and lost, a series of lawsuits against Verizon attempting to avoid enforcement of the new ICA. (8) In addition to the many lawsuits it already had pending against Verizon, GNAP also filed suit in 2005 seeking payment for charges GNAP claimed Verizon owed it under the ICA. (9) Verizon subsequently filed a compulsory counterclaim for breach of contract and sought recovery of access charges Verizon claimed it was owed under the 2002 ICA. (10) After finding that the district court had jurisdiction to enforce the ICA, the court next found that jurisdiction was proper over the first count of Verizon's counterclaims based on supplemental jurisdiction. (11)

The district court addressed Verizon's counterclaim in 2008 and held that, under the ICA, GNAP owed Verizon $57,716,714. (12) Prior to this judgment, Verizon, concerned about GNAP's ability to pay, attached GNAP's assets and amended its counterclaim to assert two additional claims. (13) Count two asserted that GNAP had commingled funds, and count three claimed "alter ego liability and disregard of the corporate form." (14) Count three required joining additional parties to the lawsuit: Global NAPs New Hampshire, Global NAPs Networks, Global NAPs Realty, Ferrous, a holding company, and Frank Gangi "[the] founder and sole shareholder of Ferrous." (15) After an unsuccessful attempt by GNAP to have counts two and three dismissed as permissive counterclaims, the court entered a default judgment for Verizon based on GNAP's discovery violations and held all of the defendants jointly and severally liable for the full amount of the judgment. (16) On appeal, the First Circuit considered whether Verizon's counterclaims were permissive, and if so, whether they required an independent basis for subject matter jurisdiction. (17)

Prior to the 1990 enactment of 28 U.S.C. [section] 1367, district courts addressed compulsory and permissive counterclaims through what was deemed pendent and ancillary jurisdiction. (18) While pendent jurisdiction over plaintiffs' claims was generally accepted in federal court, an exercise of ancillary jurisdiction required separate examination. (19) After enaction of the Federal Rules of Civil Procedure, federal courts were unsure about their jurisdiction regarding the ability of one party to join additional parties under so-called "pendent-party jurisdiction." (20) In United Mine Workers v. Gibbs (21) the United States Supreme Court finally established some ground rules to clear up confusion among the circuit courts regarding supplemental jurisdiction. (22) The Court in Gibbs gave federal courts jurisdiction over federal and state claims that "derive from a common nucleus of operative fact." (23) Gibbs primarily dealt with the issue of pendent jurisdiction but some commentators suggest the decision encompasses ancillary jurisdiction as well. (24)

While this proposition may seem obvious today, many courts struggled with Gibbs' breadth in the wake of that landmark decision. (25) In fact, several decisions following this seminal case rejected applying the Gibbs formulation to determine proper jurisdiction in certain instances. (26) Adding to the confusion of pendent and ancillary jurisdiction was whether permissive counterclaims, under Federal Rule of Civil Procedure 13(b), came in under the court's supplemental jurisdiction. (27) While several courts focused on the language of 13(a) regarding the "same transaction or occurrence" to distinguish between compulsory and permissive, other courts began to move away from this trend. (28)

Because of the perplexity of this judge-made law, in 1990, Congress acted to explain and codify Gibbs with the enactment of 28 U.S.C. [section] 1367. (29) The inclusion of pendent, ancillary, and pendent-party jurisdiction under supplemental jurisdiction has alleviated some of the burden on courts to decipher between these claims. (30) Nevertheless, circuit courts remain divided on the issue of whether permissive counterclaims can be heard under the court's supplemental jurisdiction, while it is a generally accepted principle that compulsory counterclaims must be heard due to the preclusive effect of res judicata. (31) 28 U.S.C. [section] 1367(a) explains that claims may be heard if they form part of the same Article III case or controversy, but defining the meaning of that statement has remained elusive. (32) In lieu of this lack of a definitive standard some courts are now taking the view that "same case or controversy" under 1367(a) is broader in scope than the "transaction or occurrence" standard of Rule 13 to justify exercising jurisdiction over permissive counterclaims. (33)

In Global NAPs, Inc. v. Verizon New England, Inc., the First Circuit addressed whether jurisdiction was proper where a permissive counterclaim was related, not to the plaintiff's claim, but to a compulsory counterclaim asserted by the defendant. (34) The court upheld the district court's exercise of jurisdiction over this counterclaim stating jurisdiction was proper "regardless of whether [the claim] is compulsive or permissive." (35) The court based this holding on its view that the enactment of 28 U.S.C. [section] 1367 "supersedes case law" that had previously made a distinction between permissive and compulsory counterclaims. (36) The court posited that even subsequent to the enactment of [section] 1367, prior case law had embraced the distinction between these types of claims, however, the Supreme Court had resolved this issue in Exxon Mobil Corporation v. Allapattah Services. (37)

In so holding, the court embraced the view of the Second and Seventh Circuits that supplemental jurisdiction extends to claims forming part of the same Article III case or controversy. (38) While the court recognizes there is much debate over the meaning of the terms "case" and "controversy," it stops short of defining these terms, stating the Article III standard is broader than the "same transaction or occurrence test." (39) The court notes that the Supreme Court never endorsed the "same transaction or occurrence test," and opines all that is required under Gibbs is that the claims "ar[i]se from a 'common nucleus of operative fact.'" (40) Based on the court's expanded view of supplemental jurisdiction, it finds that [section] 1367(a) is applicable and that the alter-ego claim was "sufficiently related to the underlying litigation" so that jurisdiction under the statute was proper. (41) Similarly, the court concludes that while [section] 1367(c) provides discretionary factors for courts to consider before exercising jurisdiction over a supplemental claim, the district court did not abuse its discretion in this instance. (42)

Based on the long history of jurisprudence and statutory authority regarding federal supplemental jurisdiction, the First Circuit correctly recognized and adopted an expanded view of supplemental jurisdiction. (43) The court appropriately recognized that statutory supplemental jurisdiction is broader than prior judge made law regarding pendent, ancillary, and pendent party jurisdiction. (44) Because of this realization, it was proper for the First Circuit to reassess prior cases, such as Iglesias, decided prior to the enactment of 28 U.S.C. [section] 1367. (45) In reversing these previous cases, the First Circuit properly applied United States Supreme Court decisions like Allapattah, which held "[section] 1367 do[es] not acknowledge any distinction between pendent jurisdiction and ... ancillary jurisdiction." (46) In addition, given the highly fact specific nature of the present case, it may have been appropriate for the court to exercise discretion over count three of Verizon's counterclaim in the interests of judicial economy, convenience, and fairness to the litigants. (47)

Nonetheless, the First Circuit inappropriately, and...

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