The Third Circuit adopts the “discovery rule” and holds that a copyright infringement claim accrues when a plaintiff discovers, or with reasonable diligence should have discovered, the act of infringementAddressing an issue of first impression for the court, the U.S. Court of Appeals for the Third Circuit held that the discovery rule governs the accrual of claims under the Copyright Act, which has a three-year statute of limitations.
The plaintiff developed and copyrighted forms used in preparing insurance proposals. Plaintiff alleged that defendant Haughey, who had been employed by plaintiff, took plaintiff’s copyrighted forms with him to a competitor and the competitor subsequently copied and distributed the forms for its employees to use when soliciting clients. Plaintiff did not discover that defendant USI MidAtlantic was using its forms until 2004 because the forms were kept confidential. Plaintiff filed suit in 2005, and defendant argued that plaintiff’s claim was barred by the Copyright Act’s three-year statute of limitations because the first act of infringement occurred in 1992.
Plaintiff urged the court to apply the discovery rule to the issue of when plaintiff’s claim accrued. Under the discovery rule, a cause of action for infringement does not accrue until the copyright owner discovers, or with reasonable diligence should have discovered, the act of infringement. The district court adopted the discovery rule and denied defendant USI’s first motion for summary judgment. The case proceeded to a jury trial and the jury reached a verdict in favor of plaintiff on the copyright claim in the amounts of $16,561 against USI and $2,297,397 against Haughey. USI moved for a new trial and the district court granted the motion finding plaintiff knew or should have known of certain storm warnings that Haughey would infringe as early as the fall of 1991. Following cross-motions for summary judgment on the statute of limitations, the district court held that plaintiff could not recovery on any acts of infringement prior to February 9, 2002, because of sufficient storm warnings in 1991. The case proceeded to a second trial resulting in a total verdict of less than $2,000,000 and plaintiff appealed.
The Third Circuit noted that the issue of whether to apply the discovery rule or the injury rule (which provides that the statute of limitations begins to run when the infringement occurs) was one of first impression before the court. The court examined the text, structure, legislative history and underlying policies of the Copyright Act and held that the discovery rule governs the accrual of civil claims brought under the Copyright Act. [One of the Circuits that the court claimed had adopted the discovery rule was the Second Circuit. However, recently a district court in the Second Circuit determined that the Second Circuit had not opined on the issue, and this district court in the Second Circuit adopted the injury rule.]
The court next addressed the district court’s conclusion that plaintiff should have discovered the infringement in light of certain “storm warnings” relating to defendants’ activities. The district court held that plaintiff should have known: that Haughey retained a copy of the copyrighted works in violation of his employment and termination agreement; that he was working as a salesman for a competitor; and that given these facts “it was quite possible, if not likely, that Haughey and [the competitor] would copy” plaintiff’s copyrighted works.
The Third Circuit disagreed with this reasoning, stating that in previous cases the court rejected the proposition that the discovery rule places a duty on the prospective plaintiff to inquire into possible future wrongful conduct.” According to the court, “[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.” The court also held that “inquiry notice demands more than evidence that a person is a bad actor in some general sense before the court can conclude that a storm warning exists as to a specific cause of action.”
Based on these conclusions, the court held that USI was not entitled to judgment as a matter of law on the statute of limitations issue and that the evidence before the first jury was clearly sufficient to support its finding that plaintiff was not on inquiry notice of the infringement before February 9, 2002. However, the court found it could not reinstate the first jury’s verdict because the district court never reached alternative arguments by USI for a new trial. Therefore, the case was remanded to the district court to allow it to consider these arguments.