Caseflicks

Court of Appeals for the Second Circuit • 1991

A.F.A. Tours, Inc., Doing Business as Alumni Flights Abroad v. Desmond Whitchurch

937 F.2d 82 | 1991 U.S. App. LEXIS 14879

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Takeaway

In short, this case confirms that a diversity action cannot be dismissed for insufficient amount in controversy unless recovery below the threshold is legally certain, and that disputed evidence concerning the secrecy of a customer list ordinarily requires factfinding rather than summary judgment.

Background

A.F.A. Tours, Inc. (“AFA”) operated deluxe overseas tours, including trips to Australia, New Zealand, and New Guinea. It alleged that it had spent substantial time and more than $1 million developing a confidential customer list, marketing information, and tour information. Desmond Whitchurch worked as AFA’s exclusive escort for tours in those regions from 1972 through 1989 and had access to information about participants on the tours he led.

After resigning, Whitchurch attempted to organize a competing South Pacific tour. He wrote to roughly 100 to 200 former AFA participants whom he had escorted, informed them that he had left AFA, and solicited their business. Only two people reserved space, so that proposed tour was canceled. AFA sued in federal diversity court, alleging misappropriation of trade secrets. It sought damages believed to exceed $50,000, punitive damages of at least $250,000, and an injunction barring Whitchurch from using its confidential information.

Whitchurch moved for summary judgment, arguing that AFA’s customer information was not confidential. AFA responded with evidence that its customer list was password protected, assembled through expensive advertising and referrals, unavailable from public sources, and disclosed only on a limited need-to-know basis. It also asserted that disclosures to hotels carried confidentiality notices and that Whitchurch knew the information was confidential.

At oral argument, the district court raised the diversity amount-in-controversy requirement on its own initiative. It concluded that no factfinder could award AFA more than $50,000, relying largely on Whitchurch’s unsuccessful first solicitation effort and the age of some former customers. Although the court described its ruling as summary judgment, it did not decide whether the information was a trade secret; instead, it dismissed because it believed the jurisdictional amount could not be met. AFA appealed.

Issues

Issue #1

Whether the district court properly dismissed the action for failure to satisfy the $50,000 diversity amount-in-controversy requirement.

Holding

No. The record did not establish to a legal certainty that AFA’s claims were worth less than $50,000, and AFA was not given an appropriate opportunity to substantiate its good-faith jurisdictional allegation.

Reasoning

Under St. Paul Mercury Indemnity Co. v. Red Cab Co., the amount claimed controls when made in good faith unless it appears to a legal certainty that the plaintiff cannot recover the jurisdictional amount. Before dismissing on that ground, a court must give the plaintiff an appropriate and reasonable opportunity to show that recovery above the threshold is reasonably possible. Here, the district court first raised the issue at argument and dismissed at the end of that hearing, without allowing AFA to present evidence directed specifically to valuation.

The existing record did not foreclose damages above $50,000. Whitchurch had led about seven tours per year over seventeen years, with approximately ten to fifteen participants per tour, supporting an inference that he had escorted roughly 1,500 or more AFA customers. Although the record did not establish AFA’s precise profit per customer, it supported the possibility that a competing operator could earn enough from even a small percentage of those customers to exceed $50,000.

Whitchurch’s initial failure to attract more than two customers did not make larger future harm legally impossible. The record showed that repeat business was a realistic prospect: some AFA customers had taken multiple AFA tours, nearly one-third of quoted recent participants expressed interest in future tours or described prior trips, and two former customers did respond favorably to Whitchurch’s first solicitation.

AFA sought more than compensation for already completed solicitations. Its requested injunction would bar any use or disclosure of the customer information, including a possible sale or disclosure to other tour operators who might be more successful than Whitchurch in exploiting it. The value of requested injunctive relief may include future harm that the injunction would prevent.

AFA also sought $250,000 in punitive damages. New York law permits punitive damages in a trade-secret case when the defendant’s conduct is sufficiently gross and wanton. The court did not decide whether AFA could prove that standard, but the record did not rule out punitive damages as a possible additional basis for satisfying the jurisdictional amount.

Issue #2

Whether the district court’s ruling could alternatively be sustained as summary judgment on the merits of AFA’s trade-secret claim.

Holding

No. Genuine disputes of material fact existed as to whether AFA’s customer list was confidential trade-secret information and whether AFA took reasonable measures to protect it.

Reasoning

The court treated the lower court’s actual ruling as jurisdictional because the district judge repeatedly focused on the inability to reach $50,000 and expressly declined to resolve the trade-secret question. But even if the ruling had been a merits disposition, summary judgment would have been improper.

Whether a customer list is a trade secret is generally a factual question. The inquiry includes whether the information could readily be obtained from proper outside sources and whether the owner took reasonable measures to keep it secret. An employee’s access to information does not defeat secrecy, provided the employer takes suitable steps to communicate and protect its confidential character.

AFA offered evidence from which a factfinder could find protectable secrecy. It stated that the list was developed from nonpublic responses to alumni-magazine advertising and referrals; that the relevant universities generally did not sell alumni lists for commercial use; that AFA had spent more than $1 million developing the list; and that its computer file was password protected.

AFA also presented evidence of limited disclosure and confidentiality safeguards. Whitchurch received only participant information for the tours he escorted, rather than the full customer list. Hotels and other providers received information only as needed to serve a particular tour, accompanied by a statement that it was strictly confidential. AFA further claimed it refused requests for customers’ contact information and relayed messages rather than disclosing addresses or telephone numbers. Viewing these facts and inferences in AFA’s favor, as summary-judgment rules require, a court could not decide as a matter of law that the list lacked confidentiality or protection.