Supreme Court Allows Copyright Damages Dating Back More Than Three Years—At Least So Long as the Discovery Rule Remains Alive

Supreme Court Allows Copyright Damages Dating Back More Than Three Years—At Least So Long as the Discovery Rule Remains Alive

May 10, 2024, Covington Alert

Yesterday, the Supreme Court held in Nealy v. Warner Chappell Music, Inc. that where a copyright plaintiff timely files an infringement lawsuit (based on the discovery rule applied by circuit courts), the plaintiff may recover damages for infringements occurring more than three years before the commencement of the lawsuit. As explained here, this ruling eliminates a sharp difference between the Second and Ninth Circuits regarding the damages available in infringement actions, and provides nationwide uniformity on an issue of importance for content owners.

At the same time, the Nealy dissent raises the possibility that the applicability of the discovery rule in infringement cases may itself soon be before the Court. The dissent took issue with the majority’s choice to assume—without deciding—that the discovery rule applies, and opined that the Nealy petition should have been dismissed in favor of “another squarely presenting the question of whether the Copyright Act authorizes the discovery rule”—perhaps a reference to the petition for certiorari currently pending in Hearst Newspapers, L.L.C., et al. v. Antonio Martinelli.

Below, we discuss (1) the circuit split on retrospective damages in copyright cases, (2) the majority’s reasoning in declining to impose a time bar for damages in copyright cases brought in reliance on the discovery rule, and (3) the outlook for the discovery rule following the Nealy dissent.

1. The Circuit Split Resolved by Nealy

The Copyright Act provides that “[n]o civil action shall be maintained under the provisions of this title unless it is commenced within three years after the claim accrued.”[1] Though claims normally “accrue” when the alleged infringement occurs, each of the eleven federal courts of appeals to consider the issue has also adopted the “discovery rule”: that is, a copyright claim accrues when the plaintiff discovers, or reasonably should have discovered, the infringement, regardless of when it occurred.

A circuit split soon emerged, however, between the Second Circuit, on one hand, and the Ninth and Eleventh Circuits, on the other, as to whether, when a claim is brought within three years of discovery of the infringement, damages are limited to the three years prior to the filing of a complaint.

The Second Circuit, in Sohm v. Scholastic Inc., found such a bar, largely relying on language from the Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer, Inc. [2] In Petrella, the Supreme Court addressed whether a laches defense could bar copyright claims timely brought within the three-year limitations period.[3] The Court held that laches could not bar Petrella’s claims, reasoning, in part, that the Copyright Act’s three-year statute of limitations “itself takes account of delay” and that “a successful plaintiff can gain retrospective relief only three years back from the time of suit.”[4] Sohm relied on this “retrospective relief” language to conclude that copyright plaintiffs are limited to damages for only a three-year lookback from the filing of the complaint.

The Ninth Circuit (in Starz Entertainment, LLC v. MGM Domestic Television Distribution, LLC[5]) and Eleventh Circuit (in Nealy[6]) rejected the Sohm damages bar, finding that it would eviscerate the discovery rule. Those courts also concluded that the Petrella language relied on by Sohm does not apply to discovery-rule cases, because the plaintiff in Petrella had concededly discovered the bases for her claims decades before filing suit, but limited her claims to the specific acts of infringement occurring in the three years prior to filing.

2. The Nealy Majority’s Rejection of a Time Limit on Damages in Discovery-Rule Cases

In the 6-3 decision authored by Justice Kagan,[7] the Supreme Court affirmed the Eleventh Circuit’s ruling and held that the Copyright Act entitles a copyright owner to recover all monetary damages flowing from a timely infringement claim, even if the infringement at issue occurred more than three years before initiation of the suit.

First, the Court looked to the text of the Copyright Act and found no support for the Second Circuit’s damages bar there. The Court reasoned that the three-year limitations period in Section 507(b) is a “time-to-sue prescription,” not a separate damages period; any limitations on damages, therefore, would need to be found in Section 504, covering remedies. The Court held that Section 504, in turn, contains no time limit on recovery, as it states “without qualification” that a copyright plaintiff is entitled to actual damages and profits or statutory damages.

Next, the Court observed that the Second Circuit’s rule, on top of having no textual support, is “essentially self-defeating” in providing for a discovery rule on the one hand, but “tak[ing] away [its] value” on the other.

Finally, the Court clarified that the language in Petrella relied on by the Second Circuit did not create a damages bar in discovery-rule cases. The Nealy Court stated that this language had been “taken out of context” in Sohm and confirmed that Petrella “did not go beyond the case’s facts to say that even if the limitations provision allows a claim for earlier infringement, the plaintiff may not obtain monetary relief.”

3. Outlook for the Discovery Rule Following the Nealy Dissent

In Nealy, the question on which review was granted assumed the existence of the discovery rule: “whether under the discovery accrual rule applied by the circuit courts and the Copyright Act’s statute of limitations, 17 U.S.C. 507(b), a copyright plaintiff can recover damages for acts that allegedly occurred more than three years before the filing of a lawsuit.”

In their merits briefing, however, the petitioners focused almost entirely on the argument that the Court should limit the discovery rule to cases of fraud or concealment, and did not defend the Sohm rule creating the circuit split. As a result, the justices devoted significant time at oral argument to whether the petition should be dismissed as improvidently granted.

In choosing to nonetheless resolve the circuit split, the majority took pains to clarify it was not opining on the applicability of the discovery rule, as it was not challenged below. The dissent, however, argued that the petition should have been dismissed, so that the Court could “await[] another [petition] squarely presenting the question whether the Copyright Act authorizes the discovery rule.”

And the dissent went further, stating that the discovery rule should not apply except in cases of fraud or concealment. Justice Gorsuch’s opinion relied on recent precedents warning against the expansive approach to the discovery rule to argue that the “standard language” on limitations in the Copyright Act “calls for the application of the standard incident of injury rule.” The dissent also augured that this “fact promises soon enough to make anything we might say today about the [discovery] rule’s operational details a dead letter.”

The dissent’s reference to awaiting another petition appears to be a reference to the petition filed in Hearst Newspapers, L.L.C., et al. v. Antonio Martinelli.[8] Unlike in Nealy, the applicability of the discovery rule was challenged below in that case, and is the focus of the petition. The Hearst petition was distributed for the Court’s February 16 conference, but the Court has yet to decide whether to grant certiorari. Assuming that all three of the dissenting justices in Nealy are in favor of granting cert, only one of the majority justices would need to vote to grant the petition in Martinelli for the applicability of the discovery rule in copyright infringement matters to be before the Court.

The Court’s decision on the Martinelli petition will be significant in all events. If cert is denied, it seems likely that the Supreme Court will decline to take up the discovery rule in copyright cases for the foreseeable future. If cert is granted, then the resulting review has the potential to substantially alter the landscape of copyright litigation by, among other things, requiring copyright owners to more vigilantly monitor for infringement in order to ensure that any claims are brought within three years of the actual infringement, and not just its discovery.

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