Baltimore-based Legg Mason Inc. has been ordered by a federal jury to pay almost $20 million to a financial newsletter publisher in a case that could make it easier to punish those who illegally distribute copyrighted works via e-mail or the Internet.
Lowry's Reports Inc., a small but well-known publisher of stock market analysis, alleged in a lawsuit that Legg Mason made unauthorized copies of its newsletter and distributed the information to its 1,300 brokers through an internal Web site and other means.
The North Palm Beach, Fla., company said that the unlawful copying, which dated back to at least 1988, continued even after Legg officials had been notified of the alleged copyright infringement.
The case could force brokerage firms nationwide to rethink how they use and distribute market analysis gathered from outside sources, industry analysts said.
"The more we found out about it, the more we realized there was something massive going on," said Paul Desmond, president and owner of Lowry's, which has seven employees. "It was very much a David-vs.-Goliath situation."
The size of the award stunned Legg officials and surprised analysts, who said the Internet age has made electronic copying of market research fairly common within the financial community.
"We are shocked at the extent of the damages awarded to lawyers by the jury and believe those damages are grossly excessive, and over the course of the next few weeks, we will aggressively pursue all options to protect the interests of our stockholders," said Maura Fox, a Legg spokeswoman.
The company declined to comment further on the case, and lawyers for the firm did not respond to telephone inquiries yesterday.
The award, handed down late Friday by a jury in U.S. District Court in Baltimore, could raise the price copyright violators can expect to pay, legal experts said.
"I assure you, this kind of decision is great precedent for [small and medium-sized] publishers everywhere," said Donna Thomas, a copyright expert and partner at Astrachan Gunst & Thomas, a Baltimore law firm.
Thomas said such cases have become increasingly common in the electronic age. E-mail and the Internet have made it easy to unwittingly disseminate copyrighted material, she said.
"I think most people are not on alert and are not thinking about the consequences of what they are doing," Thomas said.
Legg paid $700 a year for a single subscription to Lowry's Market Trend Analysis newsletter, but made it available to hundreds of employees. The company said it will take a $17.5 million charge against second-quarter earnings to account for the damages from the case.
"I think the award is outrageous," said Michael A. Flanagan, an analyst with Securities Industry Analytics. "Copyrighted material is reproduced around the industry, and so to see a firm so severely punished for copying a $700-a-year publication is really unusual."
Analysts expect Legg to take about a 13-cents-per-share hit on earnings, which amounts to about 15 percent of its second-quarter earnings. But few expect it to have a significant effect on the company's profits. The company's shares closed up 57 cents at $75.60 per share at the end of trading yesterday.
"Short term, some investors might run because of the earnings hit, but this company has been one of the best-performing financial services companies over the past five years," said Bjorn Turnquist, an analyst with SNL Financial.
Court documents say Legg employees routinely faxed copies of the Lowry's newsletter to branch offices over the course of many years, though Legg paid for only one subscription. In July 1999, documents say, the company began posting the newsletter on an internal Web site, known as "Legg Works."
Desmond said Lowry's discovered the unauthorized copying in late 2000 after receiving phone calls from former Legg brokers, who said they had been getting access to the newsletter for years at Legg and wanted to continue receiving it now that they were working at different firms. Founded in 1934, Lowry's provides technical analysis of the stock market but does not recommend individual stocks.
"We felt this sort of thing really threatens our ability to stay in business," said Desmond, who has owned the newsletter since 1972.
Lowry's informed Legg in July 2001 of the copyright violations and was told by Legg officials that the practice would be discontinued, court documents say.
But Lowry's alleged that Legg officials continued to e-mail copies of the newsletter to members of its research department through June 19, 2002. And well into July of that year, a Legg employee continued to e-mail copies of the newsletter to a subordinate, who made a printout of the document.
After four days of testimony, the Baltimore jury decided that the company had "willfully" violated Lowry's copyrights and awarded the publisher $50,000 for each violation between July 1999 and July 30, 2001, before Lowry's cease-and-desist letter. For each violation after that date, the jury penalized Legg $100,000, rather than the $150,000 allowed under copyright law. Combined, the total award was more than $19.7 million.
"Yes, this is a large award, but on the other hand it's unusual to have a situation where an infringer receives notice and agrees to stop and then doesn't," said Thomas W. Kirby, an attorney for Wiley Rein & Fielding LLP, which represented Lowry's. "The jury decided that this case warranted some tough love."