Opinion ID: 3044905
Heading Depth: 3
Heading Rank: 3

Heading: Storm Warnings

Text: We reiterate that, under the discovery rule, a cause of action accrues “‘when the plaintiff discovers, or with due diligence should have discovered, the injury that forms the basis for the claim.’” Disabled in Action, 539 F.3d at 209 (quoting Romero, 404 F.3d at 222). Applying that precept here, we ask whether Graham “should have known of the basis for [its] claims [, which] depends on whether [it] had sufficient information of possible wrongdoing to place [it] on inquiry notice or to excite storm warnings of culpable activity.” Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Mgmt. L.P., 435 F.3d 396, 400 (3d Cir. 2006) (quoting In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1325 (3d Cir. 2002)) (internal quotation marks omitted). USI and Haughey bear the burden of demonstrating such storm warnings and, if they do so, “the burden shifts to [Graham] to show that [it] exercised reasonable due diligence and yet [was] unable to discover [its] injuries.” Id. (quoting Mathews v. Kidder, Peabody & Co., Inc., 260 F.3d 239, 252 (3d Cir. 2001)). Graham first contends that the District Court erred because the storm warnings relied upon by the District Court predated the first act of infringement. As we have previously explained, “[b]ecause a potential plaintiff cannot discover his injury before it has occurred, the discovery rule only postpones the accrual date of a claim where the plaintiff is unaware of the injury. It does not accelerate the accrual date when the plaintiff 20 becomes aware that he will suffer injury in the future.” Disabled in Action, 539 F.3d at 214 (quotations, alterations, and internal citation omitted). Thus, “the first step in applying the discovery rule . . . is to establish when the injurious . . . act defined by the statute actually occurred.” Id. Next, we must “determine whether that injury was immediately discoverable, or whether the accrual date will be postponed until it is reasonable to expect the plaintiff to discover the injury.” Id. Although the District Court recognized that the statute of limitations could not have begun to run until the first act of infringement occurred in July 1992, the Court concluded that it saw “no reason why the clock on Graham’s claims should not have started to run at the time when Haughey first began to infringe, since there is no sign that any of the storm warnings had abated by that point. Graham is incorrect in its contention that storm warnings must warn of an actual injury that has already taken place. . . . A copyright owner has the duty to investigate indications that infringement is in the offing, even if, in the course of the investigation, it learns that infringement has not yet occurred.” Graham, 484 F. Supp. 2d at 334 (citing Benak, 435 F.3d at 400-01; Mathews, 260 F.3d at 251-52). We do not agree that the discovery rule operates in the manner suggested by the District Court. Significantly, neither of our precedents relied upon by the District Court for the proposition that a copyright owner has a duty to investigate infringement “in the offing” supports such a rule. In both cases, which dealt with a securities action and RICO action, not copyright infringement, we held that the plaintiffs’ claims were untimely under the discovery rule because storm warnings of the alleged wrongs put the plaintiffs on inquiry notice before the relevant date. In fact, the storm warnings arose after the alleged wrongs. Benak, 435 F.3d at 398-99, 403; Mathews, 260 F.3d at 244, 253-54. Thus, Benak and Mathews do not stand for the proposition that prospective plaintiffs have a duty to inquire into future wrongdoing. Rather, they dealt with the time at which inquiry notice arose for past wrongs. Indeed, we have rejected the proposition that the 21 discovery rule places a duty on prospective plaintiffs to inquire into possible future wrongful conduct. For example, in CGB Occupational Therapy, Inc. v. RHA Health Servs. Inc., 357 F.3d 375, 384 (3d Cir. 2004), we held that several claims for tortious interference of contract did not accrue “until, at least, the plaintiff suffer[ed] injury . . . as a result of the defendant’s conduct.” We rejected the defendant’s argument that “mere notice of termination [of the plaintiff’s contracts] triggered the claim” because the plaintiff did not suffer a legally cognizable injury until the contracts were actually terminated. Id. We stated: “Sunrise [the defendant] attempts to take that unremarkable proposition–that the statute of limitations should be postponed where the victim is unaware of the injury–and reverse it, so as to mandate that the statute of limitations accelerates when the victim becomes aware that he will suffer injury in the future. That is logically fallacious.” Id. Further, we analogized CGB to a case in which one person tells another “that, in three months, he intends to trespass. The tort of trespass has not occurred until the victim’s property is entered by the tortfeasor. That the victim was informed in advance of the inevitable does not alter the accrual of his damages action for trespass.” Id. at 384 n.9. USI’s argument is no different than the one we rejected in CGB. The District Court also saw storm warnings in Haughey’s departure from Graham, even though that departure was ten months before Haughey began to infringe. That departure in itself cannot be considered a storm warning because a copyright owner does not have a duty to ferret out potential acts of infringement before they occur. Cf. MacLean Assocs., Inc. v. Wm. M. Mercer-Meidinger-Hansen, Inc., 952 F.2d 769, 780 (3d Cir. 1991) (rejecting argument that a copyright infringement claim was barred by laches because “the district court’s laches rationale would have put [plaintiff] under a never ending obligation to discover whether anyone to whom he ever supplied his software would copy it,” an obligation that the “Copyright Act does not recognize”). The District Court feared that, if a copyright owner did not have a duty to investigate infringement in the offing, then “Haughey could have told Graham on day one that he was anticipating infringing on day two, and because he 22 was not infringing on day one, the statute of limitations would have been tolled for years without the need for any further action on the part of Graham.” Graham, 484 F. Supp. 2d at 334. That hypothetical is simply not our case. We have previously recognized that the aggregate “‘mix of information’ may constitute a storm warning.” Mathews, 260 F.3d at 252. Before determining whether this is such a case, we must first address each of the District Court’s purported storm warnings separately. High on the District Court’s list of reasons for its conclusion that there were ample storm warnings was its focus on Haughey’s retention of a copy of the Standard Works when he left Graham in September 1991. However, as the District Court recognized, possession of a copy of a work alone does not constitute copyright infringement or a storm warning thereof. Graham, 484 F. Supp. 2d at 331; see also 17 U.S.C. § 106 (enumerating exclusive rights of copyright owner). Nonetheless, the District Court concluded that a storm warning existed here because Graham was on notice that the “only real use Haughey would have for the Works was to copy them in violation of Graham’s copyright.” 484 F. Supp. 2d at 336. That was a jury argument and the record before the first jury did not compel that inference. Although the jury heard evidence that the Works were valuable because they could be easily copied to provide consistent and accurate explanations of coverage, the jury also heard evidence that producers at both Graham and USI used the Works as reference materials (without directly copying any text) because they included instructions and checklists for producers to use when creating proposals for clients. The 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. Cf. Warren Freedenfeld Assocs., 531 F.3d at 45 (“There is no presumption that failed business relationships inevitably will give rise either to tortious conduct or disregard of proprietary rights. That a relationship between an architect and a client has become frayed 23 and the client has decided to forge ahead with the project by engaging some other architect does not, in and of itself, serve as a harbinger of an intention to violate the original architect’s copyright protection.”). The District Court (in its summary judgment decision) also concluded that Graham had a storm warning of Haughey’s (yet-to-occur) infringement based upon Haughey’s improper solicitation of Graham’s clients, in violation of his employment and termination agreements. However, improper solicitation of business, if it in fact occurred, is a far cry from copyright infringement. In In re Merck & Co., Inc. Secs., Derivative & “ERISA” Litig., 543 F.3d 150 (3d Cir. 2008), we dealt with application of the discovery rule to allegations of securities fraud. We held that “simply stating that a smattering of evidence hinted at the possibility of some type of fraud does not answer the question whether there was ‘sufficient information of possible wrongdoing . . . to excite storm warnings of culpable activity’ under the securities laws.” Id. at 164 (quoting Benak, 435 F.3d at 400) (emphasis omitted) (alteration in original). Thus, we concluded that the FDA’s public allegations of misrepresentations by Merck in its consumer advertisements were not a storm warning of the securities fraud alleged. Id. at 169-72. Similarly, even if Graham knew that Haughey had improperly solicited certain of Graham’s clients, that wrongdoing did not put Graham on notice of Haughey’s copyright infringement. The District Court stated that this conduct was a storm warning of infringement because a “person who had breached an agreement with Graham in this regard is likely to infringe the copyright on its Works.” Graham, 484 F. Supp. 2d at 336. However, inquiry notice demands more than evidence that a person is a bad actor in some general sense before a court can conclude that a storm warning exists as to a specific cause of action. Moreover, after Graham discovered Haughey’s alleged improper solicitation of clients in October 1991, it got Haughey to agree to stop and, significantly, in November 1991, just a 24 month later, sold Haughey and FOG six of Haughey’s old client accounts. Thus, by the time of the first act of infringement in July 1992, Haughey’s alleged solicitation of clients was an old problem that the parties had resolved, not a storm warning of Haughey’s infringement. Indeed, Graham’s course of conduct at the time of Haughey’s separation from Graham demonstrates that Graham diligently sought to protect its rights in the Standard Works. In his employment and termination agreements, as well as in the November 1991 agreement selling certain client accounts to FOG, Haughey repeatedly agreed to respect Graham’s rights to its intellectual property, including specifically the Standard Works. The District Court downplayed the significance of Graham’s copyright notices, stating: “Graham obviously did not deem the copyrights on the Works in and of themselves to be a sufficient deterrent to infringement. Otherwise, it would not have needed to negotiate a reaffirmation of Haughey’s obligation to turn over the binders [containing the Works] upon his departure . . . .” Graham, 484 F. Supp. 2d at 333. That is, the District Court seemed to suggest that the fact that Graham sought to buttress its statutory rights under the Copyright Act with contractual obligations implied that Graham was on notice of Haughey’s (yet-to-occur) infringement. The jury was entitled to make the opposite inference, i.e., that Graham was diligently protecting its rights. The evidence before the jury was sufficient to support its conclusion that Graham was not on notice of Haughey’s (and USI’s) infringement prior to February 9, 2002. There is no evidence to suggest that Graham had actual knowledge of any infringement until 2004. Even if Graham was or should have been aware that Haughey possessed a copy of the Standard Works when he left Graham, the jury heard testimony that Haughey was aware that the Standard Works were confidential information and that Graham had copyrighted them. The jury also heard evidence that Haughey promised (in the November 1991 agreement) to hold Graham’s proprietary information, including specifically the Standard Works, “in trust . . . [and] confidence,” app. at 2084, and agreed not to “use, divulge, or 25 otherwise disclose” such information, id. Finally, the jury knew that after Haughey and USI infringed the copyrighted material in the Standard Works in a number of client proposals, these proposals were kept confidential by USI. To summarize, USI was not entitled to judgment as a matter of law on the statute of limitations issue (and therefore the District Court erred in granting USI summary judgment) because the evidence before the first jury was clearly sufficient to support its finding that Graham was not on inquiry notice of Haughey’s and USI’s infringement before February 9, 2002 (and therefore the District Court abused its discretion in granting USI’s motion for a new trial). Our conclusion should lead us to reinstate the first jury’s verdict, but, relying on its ruling with respect to the statute of limitations issue, the District Court declined to reach USI’s alternative arguments for a new trial. First, USI preserved its argument that the jury’s apportionment of the defendants’ profits between those that were attributable to infringement (and thus recoverable by Graham) and those that were attributable to other factors (and thus not properly part of the damages calculation) was against the weight of the evidence. Second, USI argued that the verdict was excessive. We will therefore remand the case to the District Court to allow it to consider these issues in the first instance.