Counterclaims, Civil Actions, and the Elusive Reach of the Well-Pleaded Complaint Rule

The role of counterclaims in federal subject-matter jurisdiction is widely misunderstood. The Supreme Court has entrenched one misunderstanding into law by holding that a counterclaim cannot provide the basis for statutory arising-under jurisdiction over a civil action. In so holding, the Court relied on a literal reading of the well-pleaded complaint rule. Others have invoked the Court’s decision to argue that the well-pleaded complaint rule also governs diversity jurisdiction under 28 U.S.C. § 1332(a).

The Court’s holding and efforts to extend it distort the law by conflating the well-pleaded complaint rule with the separate procedural principle that the plaintiff is the master of her complaint. Properly understood, the well-pleaded complaint rule does no more than bar defenses from providing a basis for arising-under jurisdiction. By contrast, the master-of-the-complaint principle—as given effect by the general removal statute—permits a plaintiff through her complaint to determine the availability of a federal forum in statutory arising-under and diversity jurisdiction cases alike.

The role of counterclaims has also been misconceived because of a widespread failure to grasp that Sections 1331 and 1332(a) grant jurisdiction over civil actions, not claims. That grant—together with the nature of arising-under jurisdiction—means that arising-under jurisdiction exists over a claim only if the claim itself provides a basis for arising-under jurisdiction over the civil action. And the Court has held that a counterclaim cannot serve that function. By contrast, Section 1332(a)’s amount-in-controversy requirement looks to the amount at stake in the action as a whole. And the Court’s decisions indicate that a civil action for this purpose consists of the plaintiff’s claims and the defendant’s counterclaims.