Federal Appellate Court Says Franchisor's Claims Belong in Federal System

“We ascertain the value of an injunction for amount in controversy purposes by reference to the larger of two figures: the injunction's worth to the plaintiff or its costs to the defendant.” Id. Liberty proposed two ways of valuing the injunction from Liberty's perspective: valuing franchises at 130% of the previous year's net receipts pursuant to its regular accounting practice (yielding a figure of approximately $79,000) or a reputational value generated by the injunction sought related to “the ongoing diminution in Liberty's market credibility allegedly caused by Frashier's intransigence” (calculating the “reputational value” of the injunction sought to be almost $13 million, the amount Liberty spent on advertising in FY 2009). As for the cost to Frashier, Liberty calculated the amount to be a minimum of $30,000 based on a lease of the office. The Fourth Circuit explained that “all that matters is that we cannot say with legal certainty that Liberty's injunction is worth less than the requisite amount. Indeed, all of Liberty's calculations employ reasoning that is at least facially plausible, and Frashier proposes no methodology of his own suggesting that the injunction lacks the requisite value.” Id. at *4 (emphasis in original).

J. Todd Kennard is a partner at Jones Day in Columbus, OH. He can be contacted at 614-281-3989 or [email protected]. The views set forth herein are the personal views of the author and do not necessarily reflect those of the law firm with which he is associated.

The U.S. Court of Appeals for the Fourth Circuit recently reversed a district court's dismissal of a franchisor's claims, notwithstanding the fact that the franchisor submitted a summary judgment filing that requested less in money damages than the $75,000 referenced in Section 1332(a) of Title 28 of the United States Code. See JTH Tax, Inc. v. Frashier, 2010 WL 4486746 (4th Cir. Nov. 10, 2010).

JTH Tax stands as an important reminder of principles that some federal courts apply in analyzing the amount in controversy requirement. Of particular note is the potential value that requested injunctive relief can play in conducting the analysis, including possible “reputational value” that may be at issue, depending on the specific circumstances of a given case.

According to the court's decision, JTH Tax, Inc. (“Liberty”) franchises thousands of tax preparation offices across the country. The defendant, Harry Frashier, signed a franchise agreement giving him the right to operate Liberty Tax Service franchises in a designated area. Frashier agreed to post-termination provisions that included a covenant not to compete and a requirement that he return all customer lists and equipment. After a dispute arose, Frashier offered to sell Liberty a right of first refusal for $80,000. The parties failed to reach agreement on a sale, and Frashier closed his franchise. Liberty then terminated the agreement and filed suit in federal court, seeking $80,000 in damages and a permanent injunction compelling Frashier to comply with the post-termination obligations, claiming that he used his former office to support a competing business and that he failed to return materials to Liberty.

In connection with subsequent summary judgment proceedings, Liberty refined its damages calculation, seeking $60,456.25 in money damages and injunctive relief, although Liberty never amended its complaint. The district court, on its own accord, dismissed Liberty's complaint for failure to meet the $75,000 diversity jurisdiction amount-in-controversy requirement, which would deprive the district court of jurisdiction.

The Fourth Circuit's Decision

The Fourth Circuit reversed the dismissal. The court explained that “[c]ourts generally determine the amount in controversy by reference to the plaintiff's complaint” and that “[i]f the complaint in good faith alleges a sufficient amount in controversy, events occurring subsequent to the filing of the complaint which reduce the amount recoverable below the statutory limit do not oust jurisdiction.” Id. at *2 (quotations and brackets omitted). “In other words, jurisdiction turns not on the sum contained in Liberty's summary judgment motion, but on the good faith of the allegation in its complaint of an adequate jurisdictional amount.” Id. The court noted that there was no finding or allegation that Liberty made a bad faith claim related to the $80,000 figure referenced in the complaint.

The Fourth Circuit went on to explain that “even a plaintiff whose complaint alleges a sufficient amount in controversy cannot secure jurisdiction if, from the proofs, the court is satisfied to a [legal] certainty that the plaintiff never was entitled to recover that amount.” Id. (quotation omitted; brackets in original). But in this case, dismissal for lack of jurisdiction would still be an error even if Liberty's reassessment of its damages demonstrated to a legal certainty that it could only recover the roughly $60,000 requested in the summary judgment phase. That is because, the court stated, “requests for injunctive relief must be valued in determining whether the plaintiff has alleged a sufficient amount in controversy.” Id. at *3. The court also explained that the monetary damages and value of the injunctive relief should be added together to determine if the $75,000 amount is met: “Even if the $60,456.25 alleged in its summary judgment motion constitutes the sole money damages sought by Liberty, its requested injunctive relief need only have a good faith worth of $14,543.76, i.e. the amount necessary to yield a combined value in excess of $75,000.” Id.

“We ascertain the value of an injunction for amount in controversy purposes by reference to the larger of two figures: the injunction's worth to the plaintiff or its costs to the defendant.” Id. Liberty proposed two ways of valuing the injunction from Liberty's perspective: valuing franchises at 130% of the previous year's net receipts pursuant to its regular accounting practice (yielding a figure of approximately $79,000) or a reputational value generated by the injunction sought related to “the ongoing diminution in Liberty's market credibility allegedly caused by Frashier's intransigence” (calculating the “reputational value” of the injunction sought to be almost $13 million, the amount Liberty spent on advertising in FY 2009). As for the cost to Frashier, Liberty calculated the amount to be a minimum of $30,000 based on a lease of the office. The Fourth Circuit explained that “all that matters is that we cannot say with legal certainty that Liberty's injunction is worth less than the requisite amount. Indeed, all of Liberty's calculations employ reasoning that is at least facially plausible, and Frashier proposes no methodology of his own suggesting that the injunction lacks the requisite value.” Id. at *4 (emphasis in original).

J. Todd Kennard is a partner at Jones Day in Columbus, OH. He can be contacted at 614-281-3989 or [email protected]. The views set forth herein are the personal views of the author and do not necessarily reflect those of the law firm with which he is associated.