File Counterclaims

April 13, 2006

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The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation.

A counterclaim can represent an indirect way for a defendant to make the loser pay and recover his attorney's fees and related costs, in the absence of a contract or statutory exception that otherwise allows it. In fact, a successful counterclaim will result in the defendant being awarded damages that will be more than sufficient to compensate for these fees and costs. In addition, a counterclaim can be used as significant leverage to convince the plaintiff to drop the lawsuit.

The defendant can assert a counterclaim against the plaintiff in answer to the complaint. In the counterclaim, the defendant goes on the offensive, reversing the roles of the two parties. In essence, the defendant seeks monetary damages from the plaintiff. Clearly, for this to be effective, the defendant must have a sound cause of action against the plaintiff. In many suits between business parties, this is a real possibility, especially in light of the court's expansive definitions for the terms "unfair and deceptive" business practices and "racketeering," as well as the complex provisions imposed by many laws (e.g., the Federal Trade Commission Act (FTC) and state laws that govern franchisors).

Ideally, the defendant will be in a position where he or she also can seek punitive damages in his counterclaim. The same standards and limitations that govern punitive damage awards to plaintiffs also would apply to the defendants in a counterclaim.

Finally, in a counterclaim, the defendant is essentially acting as a plaintiff. Thus, a one-sided provision in a statute or a contract that authorizes reimbursement only to a successful party who brings the claim would fully apply to a counterclaim. So, a defendant may be able to base his counterclaim on a cause of action that authorizes reimbursement of attorney's fees and related costs, such as a state's version of the FTC Act, RICO, or a provision in a contract between the parties. Here, the reimbursement would be for the attorney's fees and related costs incurred in bringing the counterclaim. However, this reimbursement, of course, would be in addition to the compensatory (and possibly punitive) damages that would be awarded to the defendant for the counterclaim itself.

Clearly, a counterclaim based on a provision that authorizes such reimbursement and one that seeks punitive damages would be especially likely to provoke a favorable outcome. The party who brought the suit would then face a triple-threat from the defendant:

the possibility of an award of compensatory damages for the counterclaim itself
reimbursement to the defendant of his attorney's fees and related costs incurred in bringing the counterclaim
a separate award for punitive damages

Even a plaintiff who is a big risk taker may decide to drop the claim when faced with these risks.

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The plaintiff begins a lawsuit by having a summons and complaint served on the defendant (usually by a sheriff). The defendant will then respond by filing an appearance and an answer.

The plaintiff's complaint must both:

recite the material facts of the case, so as to establish a cause of action or legal right to sue
request a remedy, which usually will be monetary damages

The defendant's answer will contain:

point-by-point responses to the statements made in the plaintiff's complaint; these responses will be comprised of admissions, denials or statements that the defendant doesn't know whether or not an allegation is true

The defendant's answer also may contain:

an affirmative defense to the cause of action
a counterclaim, wherein the defendant asserts a cause of action against, and seeks monetary damages from, the plaintiff