Addressing an issue of first impression, the U.S. Court of Appeals for the Third Circuit held that, for purposes of triggering the three-year statue of limitations (SOL), the federal rule regarding discovery of claim governs the accrual of civil claims brought under the Copyright Act. This means that the cause of action accrues “when the plaintiff discovers, or with due diligence should have discovered,” the copyright infringement. The Third Circuit also reversed the lower court’s orders granting the defendants’ motions for a new trial and summary judgment with respect to the accrual of the statute of limitations issues, thus setting the stage for the initial $18.9 million jury verdict to be reinstated. William A. Graham Co., d/b/a The Graham Co. v. Haughey et al., Case No. 08-2111 (3rd Cir., June 5, 2009) (Sloviter, J.)

Plaintiff William A. Graham Company (Graham) is an insurance brokerage firm that developed and copyrighted forms used in preparing insurance proposals. Graham alleged that defendant Thomas Haughey, a former employee, took the copyrighted forms with him in 1991 when he left Graham to join another insurance firm, now known as USI MidAtlantic, Inc. (USI). The defendants allegedly copied Graham’s copyrighted language into at least 857 proposals used to solicit clients. Because it was USI’s policy to keep the proposals confidential, Graham did not discover defendants’ infringement until November 2004. Graham subsequently filed suit in February 2005.

The case proceeded to a jury trial. The jury reached a verdict in favor of Graham on the copyright claim, awarding $18.9 million, and finding that Graham was not on notice of defendants’ infringement prior to February 2002. As such, Graham’s claims were not time-barred under the rule where the SOL trigger is predicated on discovery of the claim. USI subsequently moved for a new trial on the SOL issue. The district court granted the motion, reasoning that Graham knew or should have known of “certain storm warnings” that Haughey would infringe. The court then granted defendants summary judgment on the SOL issue because “sufficient storm warnings existed to put Graham on notice,” thereby barring Graham from recovering on any acts of infringement that occurred prior to February 2002. A second jury trial was held on the issue of damages—limited to acts occurring on or after February 2002—and Graham was awarded $1.7 million in damages.

On appeal, the Third Circuit noted that the issue of whether to apply the discovery rule or the injury rule (which provides that a cause of action accrues at the time of the injury) was one of first impression. Relying on eight of its sister courts of appeals’ decisions, as well as the text, structure and legislative history of the Copyright Act, the court held that the discovery rule should apply. In rejecting the district court’s conclusion that Graham should have discovered the infringement before 2004 in light of certain “storm warnings,” the court explained that the discovery rule does not place “a duty on prospective plaintiffs to inquire into possible future wrongful conduct.” Rather, “[t]he mere fact that a copyright owner has notice that another person also possessed its copyrighted material and may find it useful to copy should not and does not by itself constitute a storm warning of possible infringement.” Because the evidence before the first jury was sufficient to support a finding that Graham was not on notice of the infringement before February 2002, the Third Circuit reversed the lower court’s summary judgment ruling and remanded as to the issues of apportionment and excessiveness.