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WO

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Navajo Arts & Crafts Enterprise, 

Plaintiff, 

v. 

Barbara A McGough, 

Defendant. 

No. CV-17-08239-PCT-DLR 

ORDER 

 

 Before the Court is Plaintiff/Counterdefendant Navajo Arts & Crafts Enterprise’s 

(“NACE”) motion to dismiss counterclaims, which is fully briefed. (Docs. 16, 18, 19.) 

Neither party requested oral argument. For reasons stated below, the motion is granted. 

I. Background 

 NACE is a Navajo Nation enterprise that sells Native American arts and crafts in 

Arizona and New Mexico. In July 2008, NACE and Defendant/Counterclaimant Barbara 

McGough entered into a Temporary Employment Agreement whereby NACE hired 

McGough as its acting CEO. In August 2009, NACE and McGough terminated the 

Temporary Employment Agreement and entered into a new Employment Agreement 

whereby NACE again hired McGough as its CEO. In July 2017, NACE terminated 

McGough’s employment. 

 On November 14, 2017, NACE filed a complaint asserting five claims against 

McGough: breach of contract, common law fraud, conversion, unjust enrichment, and 
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breach of fiduciary duty. (Doc. 1.) On January 10, 2018, McGough filed an answer and 

counterclaim asserting three causes of action: breach of contract, wrongful termination, 

and defamation. (Doc. 11.) NACE moves to dismiss the counterclaims on the basis of 

tribal sovereign immunity pursuant to Federal Rule of Civil Procedure 12(b)(1), which 

allows a party to raise lack of subject-matter jurisdiction in a motion to dismiss. See

Pistor v. Garcia, 791 F.3d 1104, 1111 (9th Cir. 2015) (“Although sovereign immunity is 

only quasi-jurisdictional in nature, Rule 12(b)(1) is still a proper vehicle for invoking 

sovereign immunity from suit.”). 

II. Discussion

 Native American tribes “have long been recognized as possessing the commonlaw immunity from suit traditionally enjoyed by sovereign powers.” Santa Clara Pueblo 

v. Martinez, 436 U.S. 49, 58 (1978). “As a matter of federal law, an Indian tribe is 

subject to suit only where Congress has authorized the suit or the tribe has waived its 

immunity.” Kiowa Tribe of Okla. v. Mfg. Techs., Inc., 523 U.S. 751, 754 (1998). Tribal 

sovereign immunity “applies to the tribe’s commercial as well as governmental 

activities.”1

 Miller v. Wright, 705 F.3d 919, 923 (9th Cir. 2013) (internal quotation and 

citation omitted). The immunity covers commercial activities “even when they take 

place off Indian lands.” Mich. v. Bay Mills Indian Cmty., 134 S.Ct. 2024, 2031 (2014). 

 Both congressional abrogation and tribal waiver of sovereign immunity must be 

clear and unequivocally expressed, and cannot be implied. Santa Clara Pueblo, 436 U.S. 

at 58; C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 

411, 418 (2001). Furthermore, “[t]he Supreme Court has repeatedly declared a 

presumption favoring tribal sovereign immunity.” Demontiney v. U.S. ex rel. Dep’t. of 

Interior, Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001). “Initiation of a 

lawsuit necessarily establishes consent to the court’s adjudication to the merits of that 

particular controversy.” McClendon v. U.S., 885 F.2d 627, 630 (9th Cir. 1989). A tribe 

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that initiates litigation, however, does not waive immunity with respect to counterclaims, 

even compulsory counterclaims, without explicit consent. See Okla. Tax Comm’n v. 

Citizens Band Potawatomi Indian Tribe, 498 U.S. 505, 509 (1991). 

 Here, Congress has not authorized suit against NACE, McGough’s counterclaims 

do not involve congressional legislation, and NACE has not waived its sovereign 

immunity, either through explicit waiver or by filing its complaint. Nonetheless, 

McGough brought three counterclaims against NACE, which NACE argues are barred by 

tribal sovereign immunity. In response to NACE’s motion to dismiss, McGough failed to 

address or otherwise defend her wrongful termination and defamation counterclaims and 

therefore has implicitly conceded that dismissal of those counterclaims is appropriate. 

See LRCiv 7.2(i). 

 McGough defends only her breach of contract claim, arguing it is viable because it 

sounds in recoupment. Claims for recoupment fall within an established exception to 

sovereign immunity. Tohono O’odham Nation v. Ducey, 174 F. Supp. 3d 1194, 1202 (D. 

Ariz. 2016). Recoupment “allows a defendant sued by a sovereign to recast an 

affirmative defense (typically, a set-off, contribution, or indemnity defense) as a 

counterclaim.” Id. (citing Bull v. United States, 295 U.S. 247, 262 (1935)). A 

counterclaim sounds in recoupment if it seeks to “defeat or diminish recovery by the 

sovereign,” but does not seek affirmative relief. United States v. Agnew, 423 F.2d 513, 

514 (9th Cir. 1970). “To constitute a claim in recoupment, a defendant’s claim must (1) 

arise from the same transaction or occurrence as the plaintiff’s suit; (2) seek relief of the 

same kind or nature as the plaintiff’s suit; and (3) seek an amount not in excess of the 

plaintiff’s claim.” United States v. Wash., 853 F.3d 946, 968 (9th Cir. 2017) (internal 

quotation and citation omitted). If counterclaims ask the court to do “more than deny 

th[e] relief the [tribe] seeks, they cannot proceed in recoupment.” Tohono O’odham, 174 

F. Supp. 3d at 1202 (internal quotation and citation omitted). 

 As pled, McGough’s requested relief is outside the scope of recoupment. She 

specifically requests that the Court “dismiss the Plaintiff’s Complaint with prejudice, 
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enter judgment against NACE and in her favor for damages in an amount to be 

determined at trial, plus punitive damages, costs, fees, pre- and post-judgment interests, 

and such other relief that the Court deems just.” (Doc. 11 at 16.) Such relief goes 

beyond the relief the tribe seeks, so the recoupment exception does not apply. 

 Nonetheless, it is possible that modification to her counterclaim could cure the 

jurisdictional issue with respect to her breach of contract claim. Although McGough has 

not requested leave to amend, the Court will grant her an opportunity to file such a 

motion if she believes her requested relief can be modified to fall within the scope of 

recoupment. Accordingly, 

 IT IS ORDERED that NACE’s motion to dismiss the counterclaim (Doc. 16) is 

GRANTED. 

IT IS FURTHER ORDERED that McGough may move for leave to amend her 

counterclaim in a manner that complies with LRCiv 15.1 within fourteen (14) days of 

the date of this order. 

 Dated this 25th day of June, 2018. 

Douglas L. Rayes 

United States District Judge