A shop owner in State A sues a distributor, with a wholesaler as third-party defendant. The wholesaler has a counterclaim against the distributor for $60,000. Should the court grant the distributor’s motion to dismiss the counterclaim for lack of subject-matter jurisdiction?

A shop owner in State A sues a distributor, with a wholesaler as third-party defendant. The wholesaler has a counterclaim against the distributor for $60,000. Should the court grant the distributor’s motion to dismiss the counterclaim for lack of subject-matter jurisdiction?

• A. Yes, because the wholesaler and distributor are from the same state
• B. Yes, because there is no federal question and no supplemental jurisdiction
• C. No, because there is no diversity between the distributor and the wholesaler
• D. No, because subject-matter jurisdiction is satisfied by the original claim

Answer: (C)

The key idea is how federal jurisdiction applies to counterclaims in a case. Under federal law, a claim can be heard in federal court only if it has an independent basis for jurisdiction—typically diversity or a federal question—or if it falls within the court’s supplemental jurisdiction because the overall case is within federal jurisdiction. Here, the shop owner sues the distributor, and a wholesaler, as a third-party defendant, asserts a counterclaim against the distributor. The counterclaim involves only the wholesaler and the distributor, both from the same state. That means there is no complete diversity between the parties to the counterclaim. There is also no federal question presented by the counterclaim. Since there is no independent basis for federal jurisdiction over the counterclaim, and the underlying main claim would not be within federal jurisdiction either, supplemental jurisdiction cannot salvage the counterclaim. Therefore, the court should dismiss the counterclaim for lack of subject-matter jurisdiction. If the wholesaler and distributor were from different states, the counterclaim might have a better chance at a federal basis, but with their same-state status, the counterclaim lacks a federal jurisdictional footing.

The key idea is how federal jurisdiction applies to counterclaims in a case. Under federal law, a claim can be heard in federal court only if it has an independent basis for jurisdiction—typically diversity or a federal question—or if it falls within the court’s supplemental jurisdiction because the overall case is within federal jurisdiction.

Here, the shop owner sues the distributor, and a wholesaler, as a third-party defendant, asserts a counterclaim against the distributor. The counterclaim involves only the wholesaler and the distributor, both from the same state. That means there is no complete diversity between the parties to the counterclaim. There is also no federal question presented by the counterclaim.

Since there is no independent basis for federal jurisdiction over the counterclaim, and the underlying main claim would not be within federal jurisdiction either, supplemental jurisdiction cannot salvage the counterclaim. Therefore, the court should dismiss the counterclaim for lack of subject-matter jurisdiction.

If the wholesaler and distributor were from different states, the counterclaim might have a better chance at a federal basis, but with their same-state status, the counterclaim lacks a federal jurisdictional footing.