United States District Court, D. South Carolina, Charleston Division
PATRICK MICHAEL DUFFY United States District Judge
matter is before the Court on Defendants Cruz Accessories and
Michael Summer's motion to dismiss for lack of subject
matter jurisdiction pursuant to Federal Rule of Civil
Procedure 12(b)(1) (ECF No. 8). For the reasons set forth
herein, Defendants' motion is denied.
AND PROCEDURAL HISTORY
Cruz Accessories sells jewelry. In August 2016, World End
Imports sued Cruz Accessories and its owner, Defendant
Michael Summer, for alleged copyright infringement and unfair
competition in the United States District Court for the
District of New Jersey (the “underlying
litigation”). Plaintiff Owners Insurance insured Cruz
Accessories under a commercial general liability insurance
policy. Under the policy, Plaintiff agreed to defend and
indemnify Cruz Accessories if it was sued for certain
personal or advertising injuries. Plaintiff has been
providing a defense in the underlying litigation, but brings
the present declaratory judgment action because it believes
the underlying litigation is not covered by Cruz
Accessories' insurance policy. Defendants argue this
Court lacks subject matter jurisdiction and moved to dismiss
under Rule 12(b)(1) on October 30, 2017. Plaintiff responded
on November 10, and Defendants replied on November 17.
Accordingly, this matter is now ripe for review.
a Rule 12(b)(1) motion challenge is raised to the factual
basis for subject matter jurisdiction, the burden of proving
subject matter jurisdiction is on the plaintiff.”
Richmond, Fredericksburg & Potomac R.R. Co. v. United
States, 945 F.2d 765, 768 (4th Cir. 1991). “In
determining whether jurisdiction exists, the district court
is to regard the pleadings' allegations as mere evidence
on the issue, and may consider evidence outside the pleadings
without converting the proceeding to one for summary
judgment.” Id. “The district court
should apply the standard applicable to a motion for summary
judgment, under which the nonmoving party must set forth
specific facts beyond the pleadings to show that a genuine
issue of material fact exists. Id. “The moving
party should prevail only if the material jurisdictional
facts are not in dispute and the moving party is entitled to
prevail as a matter of law.” Id. Where
“the moving party asserts that the
‘jurisdictional allegations of the complaint are not
true, ' . . . the court may look beyond the complaint and
consider other evidence, such as affidavits, depositions, and
live testimony.” Clifton v. Nationstar Mortg.,
LLC, No. 3:12-cv-2074-MBS, 2013 WL 789958, at *2 (D.S.C.
Mar. 4, 2013) (quoting Adams v. Bain, 697 F.3d 1213,
1219 (4th Cir. 1982)).
seek dismissal pursuant to Rule 12(b)(1) on the ground that
this declaratory judgment action does not meet the
amount-in-controversy requirement for diversity jurisdiction,
and thus the Court lacks subject matter jurisdiction.
Diversity jurisdiction exists when there is complete
diversity of citizenship between the parties, and the amount
in controversy exceeds $75, 000. 28 U.S.C. § 1332(a).
Defendants do not contest diversity of citizenship, but argue
that the amount in controversy in this declaratory judgment
action does not exceed $75, 000.
amount in controversy stated in a plaintiff's complaint
generally controls, so long as it is made in good faith.
JTH Tax, Inc. v. Frashier, 624 F.3d 635, 638 (4th
Cir. 2010). A federal court may dismiss a claim for failing
to meet the amount-in-controversy requirement only if
“it is apparent, to a legal certainty, that the
plaintiff cannot recover the amount claimed.”
Id. (quoting St. Paul Mercury Indem. Co. v. Red
Cab Co., 303 U.S. 283, 288 (1938)). “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.” Francis v.
Allstate Ins. Co, 709 F.3d 362, 367 (4th Cir. 2013)
(quoting Hunt v. Wash. State Apple Advert.
Comm'n, 432 U.S. 333, 347 (1977)); see also
Gov't Emps. Ins. Co. v. Lally, 327 F.2d 568, 569
(4th Cir. 1964) (“the amount in controversy is the
pecuniary result to either party which [a declaratory]
judgment would produce”). When an insurer seeks a
declaratory judgment that it does not have a duty to defend
or indemnify an insured party in an underlying action, the
amount in controversy includes the amount at issue in the
underlying action and the cost of the defense in the
underlying action. Francis, 709 F.3d at 367-68.
argue that the amount in controversy for the present action
is measured solely by the amount in controversy in the
underlying litigation. They argue that the value of the
underlying litigation can be measured by the revenue from the
allegedly copyrighted jewelry (allegedly $40, 000), or by the
profits from those sales (allegedly less than $15, 000), or
by one of the settlement offers from that action. Defendants
acknowledge that the underlying plaintiff, World End, seeks
punitive damages, but they argue these cannot be included in
valuing the underlying litigation because (1) World End did
not cite a specific statute that would entitle them to
punitive damages, and (2) their punitive damages claim will
be preempted. Similarly, they argue that World End's
attorney's fees cannot be included because any claim for
recovery of attorney's fees will also be preempted.
Defendants do not cite any cases in support of either of
their preemption arguments.
Court need not delve into each of these under-supported
arguments because they do not approach a showing of a
“legal certainty” that the amount in controversy
does not exceed $75, 000. This is largely because Defendants
have misconstrued the amount-in-controversy calculation,
measuring it solely based on the amount-in-controversy in the
underlying litigation. The Fourth Circuit, applying
Hunt, has made clear that when an insurer seeks a
declaratory judgment that it has no obligation to defend or
indemnify the insured, the amount in controversy is the value
of the underlying litigation as well as the cost of
the defense in the underlying action. Francis, 709
F.3d at 367. If this Court issued the declaratory judgment
Plaintiff seeks, the “pecuniary result, ”
Gov't Emps. Ins. Co., 327 F.2d at 569, would be
that Defendants would have to pay any judgment that results
from the underlying litigation, and could be
required to reimburse Plaintiff for the cost of their
defense. According to an affidavit of Plaintiff's
employee, from the start of the underlying litigation in
August 2016 through October 2017, Plaintiff has spent $53,
517.62 on Defendants' defense. At that time, there were
still months of discovery left. If the case proceeds to
trial, the cost of their defense alone could exceed $75, 000.
the amount at issue in the underlying litigation, Plaintiff
points to the deposition of World End's founder and CEO,
who estimated that World End lost $100, 000 in profits as a
result of Defendants' alleged copyright infringement.
Defendants argue the underlying litigation is only worth $15,
000, the profit they made from the sale of the allegedly
copyrighted goods. Defendants cannot limit the amount at
issue in the underlying claim to the profits they received
though, because 17 U.S.C. § 504(b) provides that a
“copyright owner is entitled to recover the actual
damages suffered by him or her as a result of the
infringement, and any profits of
the infringer that are attributable to the infringement and
are not taken into account in computing the actual
damages.” 17 U.S.C. § 504(b) (emphasis added).
Thus, it is possible that Defendants will have to pay World
End the amount of its actual damages as well as the $15, 000
Defendants made from their alleged infringement. While World
End's damages have not been conclusively established,
Defendants' profits are only a portion of what World End
could recover in the underlying litigation. Defendants'
attempt to limit the value of the underlying litigation to
World End's settlement demands is also unavailing. In
another declaratory judgment action that also involved an
insurer seeking a declaration that it had no obligation to
defend or indemnify the insured, this Court said, “A
settlement demand is not a stipulation of damages.”
Lighthouse Prop. Ins. Corp. v. Rogers, No.
9:17-cv-1553-RMG, 2017 WL 3634593, at *2 (D.S.C. Aug. 22,
2017). Even assuming that the claims for World End's
attorney's fees and punitive damages are preempted,
Defendants have not established an upper limit to World
End's recovery, as a matter of legal certainty.
Court finds that Plaintiff exercised good faith when it
asserted that the financial impact of this declaratory
judgment action, which includes Plaintiff's liability for
the legal ...