## Facts

- A.F.A. Tours, Inc. (AFA) operated overseas “deluxe tours” and claimed it developed confidential business information, including customer lists and marketing and tour information.
- Desmond Whitchurch worked for AFA as its exclusive tour escort in Australia, New Zealand, and New Guinea from 1972 to 1989 and allegedly had access to AFA’s confidential information.
- After resigning in 1989, Whitchurch allegedly used AFA’s information to start a competing tour business and to solicit customers from AFA’s customer list.
- AFA sued in federal court under diversity jurisdiction seeking injunctive relief, compensatory damages alleged to exceed $50,000, and punitive damages of at least $250,000.
- Whitchurch denied wrongdoing and argued, among other things, that AFA could not meet the amount-in-controversy requirement.

## Issues

1. Whether a federal court may dismiss a diversity action for failure to satisfy the jurisdictional amount based on the court’s view that the plaintiff is unlikely to recover more than the threshold.
2. Whether the court must give the plaintiff a reasonable opportunity to substantiate a good-faith allegation that recovery could exceed the jurisdictional minimum, including legally available punitive damages.

## Decision

- The Second Circuit vacated the dismissal and remanded.
- The court held that dismissal for failure to meet the amount in controversy is proper only if it appears to a legal certainty that the plaintiff cannot recover the jurisdictional amount.
- The district court erred by using a “no reasonable possibility” approach and by dismissing sua sponte without giving AFA a reasonable opportunity to support its jurisdictional allegations.
- The record did not establish legal certainty that AFA’s recovery would be under $50,000, given potential lost-profit damages and the request for punitive damages potentially available under New York law for willful and wanton misappropriation.

## Legal Principles

- In diversity cases, the amount-in-controversy allegation controls if made in good faith.
- A case may be dismissed for failure to satisfy the jurisdictional amount only when it is legally certain the plaintiff cannot recover the jurisdictional minimum.
- A court may examine facts relevant to jurisdiction, but must apply the legal-certainty standard and allow the plaintiff a reasonable chance to substantiate a good-faith basis for the amount alleged.
- Punitive damages are included in the amount in controversy when they are recoverable as a matter of applicable substantive law.

## Conclusion

The Second Circuit required application of the legal-certainty test and a fair opportunity for the plaintiff to support its jurisdictional allegations, making sua sponte dismissal improper where compensatory and potentially recoverable punitive damages could satisfy the diversity amount-in-controversy requirement.


A.F.A. Tours, Inc. v. Whitchurch, 937 F.2d 82 (2d Cir. 1991)