The U.S. Court of Appeals for the Third Circuit affirmed a nearly $20 million verdict in favor of a plaintiff-appellee, finding that an additional award of prejudgment interest should be applied from the date when a fraud that resulted in a copyright infringement began, not when the plaintiff discovered the infringement.   William A. Graham Co. v. Haughey et al., Case No. 10-2762 (3d Cir., May 16, 2011) (Smith, J.). 

In 1991, Thomas P. Haughey left his position with The Graham Company, an insurance brokerage, to join USI MidAtlantic Inc., one of Graham’s competitors.  When Haughey left Graham, he took two binders containing hundreds of pages of text describing various types of insurance coverages, exclusions, conditions and similar matter.  The materials had been prepared by Graham employees and were protected by Graham’s copyrights.  From July 1992 until 2005, Haughey and employees at his new employer used the materials to prepare insurance coverage proposals for presentations to clients.

Graham did not discover the unauthorized use of its binder materials until November 2004.   In February 2005, plaintiff Graham filed a copyright infringement suit against Haughey and USI MidAtlantic.  The defendants argued that the Copyright Act’s three-year statute of limitations barred the plaintiff’s claims, but the district court rejected their argument.  The district court determined that the “discovery rule,” which tolls the limitations period until the plaintiff learns of the cause of action or with reasonable diligence could have done so, applied to the Copyright Act.  At trial, the plaintiff did not seek statutory damages, but instead sought actual damages in the form of the defendants’ profits attributable to the infringement.  The plaintiff argued that defendant USI MidAtlantic had earned $32 million in profits that was directly attributable to the infringement, with defendant Haughey personally earning $3 million from the infringement due to commissions.  The burden then shifted back to the defendants to prove that their revenues were attributable to factors other than the copyrighted work.  The jury found for the plaintiff, awarding more than $16.5 million against defendant USI MidAtlantic and nearly $2.3 million from defendant Haughey, representing about 70 percent of USI’s profits and 75 percent of Haughey’s profits.  Subsequently the court set aside the jury’s verdict, determining that Plaintiff had in fact been placed on notice of Defendants’ conduct as early as fall of 1991.  A second trial, limited to damages, resulted in a second jury verdict awarding $1.4 million in damages against defendant USI and $268,000 against defendant Haughey. 

The parties appealed to the 3d Circuit (Graham I).  The plaintiff argued that the district court’s holding regarding notice was mistaken, while the defendants argued that the plaintiff had failed to prove a causal nexus between the defendants’ alleged infringement and profits.  The 3d Circuit ruled in Graham I that the plaintiff had effectively shown causation and that the district court had erred in finding that the plaintiff could have reasonably discovered the infringement before February 2002.  The 3d Circuit remanded the case to the district court for a determination of whether the defendants were correct in their argument that 70 percent and 75 percent apportionments of the defendants’ profits was “excessive.”  On remand, the district court rejected the “excessiveness” argument and reinstated the original jury verdict.

In their second appeal to the 3d Circuit (Graham II), the defendants argued that the nearly $20 million jury verdict “shocks” the judicial conscience and was improper.   The defendants further argued that the award of prejudgment interest dating from when the fraud allegedly began was improper, maintaining that such interest should only be applied from 2004, the date when the plaintiff allegedly discovered the infringement.  The defendants also argued that the district court’s tolling of the limitations period because of the “discovery rule” and USI MidAtlantic’s alleged concealment of the infringement should also toll the interest period. 

The 3d Circuit disagreed, upholding the jury verdict and finding that use of the discovery rule to change the date of accrual and delay the onset of prejudgment interest would “warp its fundamentally plaintiff-friendly purpose” and would “give defendants additional incentive to conceal their tortious or otherwise illegal acts,” given that “a fraudster would owe no interest on his purloined cash until discovery of the theft, and would thus be allowed to benefit from an interest-free loan.”  The 3d Circuit also rejected USI’s arguments that its profits could be attributed to the expertise and hard work of its brokers, more than its use of the plaintiff’s copyrighted materials, noting that while it had some sympathy for USI MidAtlantic, “such sympathy is not, however, sufficient to justify overturning the jury’s verdict.”

Practice Note:   If a plaintiff overcomes the tolling of the statute of limitations based on the “discovery rule,” that rule has no effect on the date upon which prejudgment interest begins to accrue.  Prejudgment interest will accrue beginning on the date the infringement occurred, not the date when the plaintiff discovered the infringement.