December 3, 2010 - 12:15am
According to the Fourth Circuit Damages Alleged at Summary Judgment not Fatal to Federal Court Jurisdiction Posted by:


In JTH Tax, Inc. v. Frashier (No. 09-2262), the Fourth Circuit considered whether a plaintiff’s recalculation of damages in its summary judgment motion divested the district court of jurisdiction.  Frashier involved a dispute between JTH Tax (“Liberty”), and one of its franchisees, Frashier.  Frashier had signed a franchise agreement with Liberty, which contained several post-termination provisions, including a covenant not to compete and a requirement that he return all customer lists and equipment to Liberty.  Their relationship soured in 2008, and, after an attempt to work out an agreement by which Liberty would purchase a right of first refusal for the purchase of Frashier’s franchise territory, Liberty terminated its franchise agreement with Frashier.


Frashier, however, allegedly breached his post-termination duties by using the former office to support a competing tax preparation enterprise and failing to return Liberty’s equipment and customer lists.  Because of the breach, Liberty filed suit in the Eastern District of Virginia seeking $80,000 in damages and a permanent injunction forcing Frashier to comply with the post-termination covenants.


Liberty never amended its complaint, but, in its subsequent summary judgment motion, Liberty refined its damages calculation to $60,456.25 in money damages, while continuing to assert a claim for permanent injunctive relief.  The district court sua sponte dismissed Liberty’s complaint for failure to meet the $75,000 threshold for diversity jurisdiction.  The Fourth Circuit reversed.


In its opinion, the Fourth Circuit restated the rule that courts generally refer to a plaintiff’s complaint when determining whether the amount in controversy requirement has been met.  If the complaint in good faith alleges a sufficient amount, “events occurring subsequent” to the filing of the complaint “which reduce the amount recoverable below the statutory limit do not oust jurisdiction.”  St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288 (1938).


Applying this standard, the court found that Liberty’s downward adjusted damages figure did not “constitute a subsequent reduction of the amount claimed to oust the district court’s jurisdiction.”  Put another way, diversity jurisdiction did not turn on the amount stated in Liberty’s summary judgment motion, but on the good faith allegation in its complaint of an adequate jurisdictional amount.  Without a showing that Liberty’s original $80,000 claim was made in bad faith, the district court retained jurisdiction.


In addition, the court found that even if the amount Liberty claimed in damages fell below the $75,000 amount in controversy requirement, diversity jurisdiction could still be established.  This is so because, like requests for money damages, requests for injunctive relief must be valued in determining whether the plaintiff has alleged a sufficient amount in controversy.  See Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 347 (1977) (“In actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation.”).


To ascertain the value of an injunction, the Fourth Circuit looks to the larger of two figures:  the injunction’s worth to the plaintiff or its cost to the defendant.  The court found that, whether valued by the benefit conferred to Liberty or the detriment imposed upon Frashier, the value of the injunctive relief would have made up the shortfall caused by Liberty’s subsequent downward adjustment of its damages claim.


The court gave great deference to the amount in controversy alleged by the plaintiff in its complaint and emphasized that the benchmark for satisfying the amount in controversy requirement is a good faith allegation that the claim is worth more than $75,000.  To convince a court to dismiss for failure to satisfy that requirement, a defendant must prove that it is apparent “to a legal certainty” that the plaintiff cannot recover the amount claimed.  This standard is exceedingly difficult to satisfy.


This same “legal certainty” standard applies to a defendant’s attempt to claim an injunction request falls below the amount in controversy threshold.  To be sure, a plaintiff need only offer calculations that are facially plausible to establish that the amount in controversy requirement has been met.