13 May 2024 • 9 minute read
No time bar on copyright damages for timely claims, Supreme Court rules
On May 10, 2024, in Warner Chappell Music, Inc., et. al. v Nealy et al., the Supreme Court resolved a circuit split on whether monetary recovery for copyright infringement is limited by the Copyright Act’s three-year statute of limitations. It held that, so long as the infringement claim is timely, a plaintiff can seek to recover any actual damages for any infringement that occurred more than three years before a lawsuit’s filing. But how is an infringement claim timely if damages began accruing over three years prior to commencement of litigation?
The answer is the so-called “discovery rule.” The majority assumes (without deciding a different yet highly intertwined circuit split) that a claim is timely under the Copyright Act if brought within three years of discovery of the infringement. The Court focuses only on the issue of whether a plaintiff whose claim satisfies the discovery rule would nonetheless be unable to recover damages for infringements that occurred over three years before the lawsuit.
The Court’s ultimate holding that no such limit on damages exists may significantly increase the filing of “discovery rule” claims. The decision may also create complexities during the damages phase of litigation, as a defendant could be obligated to produce a full accounting of revenues on an alleged infringement that may have begun many years prior to the filing of the case. It would then also need to attempt to prove reasonable overhead expenses from those old revenue figures.
The Copyright Act’s three-year statute of limitations and the “discovery rule”
The Copyright Act expressly requires that a plaintiff file suit “within three years after the claim accrued.” 17 U. S. C. §507(b). What constitutes “claim accrual” under the Copyright Act has been the subject of judicial interpretation, resulting in the court-created doctrine of the discovery rule. Under the rule, copyright claims are allowed to proceed upon the proper showing that a plaintiff could not have reasonably discovered the infringement during the statutory period. Notably, whether a plaintiff could or should have reasonably discovered an infringement is generally considered a fact-intensive inquiry ill-suited for disposition at the pleading stage. And, while the majority of Circuits apply the discovery rule in copyright infringement cases, they disagree on whether monetary damages should be constrained by the Act’s three-year limitations period.
Nealy’s copyright claim and the journey to the Supreme Court
The underlying alleged infringement here commenced in 2008 – ten years before the plaintiff, Sherman Nealy, brought suit in 2018. Nealy was serving prison sentences from 1989 to 2008 and 2012 to 2015, which he claimed were the “circumstances” that prevented discovery of his claim within the three-year limitations period.
The discovery rule is endorsed by the Eleventh Circuit where Nealy brought his claim, and “enables a diligent plaintiff to raise claims about even very old infringement if he discovered them within the prior three years.” Warner Chappell accepted that the Eleventh Circuit followed the discovery rule, but argued that any “actual damages and any additional profits” sought pursuant to 17 U. S. C. § 504 could only be recovered for infringements occurring within the three years prior to filing suit. The district court agreed with Warner Chappell’s argument that Nealy could only seek monetary damages going back three years from suit. It cited to the Second Circuit in support, who in turn cited to Petrella v Metro-Goldwyn-Mayer to find that the Supreme Court “explicitly delimited damages to the three years prior to the commencement of a copyright infringement action.”
The district court thus held that, even though Nealy could bring claims for infringing acts beyond the three-year period, he could not recover any damages arising from them. The Eleventh Circuit reversed, citing to the Ninth Circuit to hold that a timely claim could recover damages for infringement even if those damages occurred more than three years prior to the lawsuit.
The majority decision was written by Kagan, and joined by Roberts, Sotomayor, Kavanaugh, Barrett, and Jackson
The Court granted cert to resolve the Circuit split and affirmed the Eleventh Circuit’s decision. The Court first notes that it has never ruled on – and is not deciding here – whether the discovery rule validly governs the timeliness of copyright claims. It cabined its review to the issue of whether a plaintiff with a timely claim under the rule can obtain damages going back more than three years. The Court affirmed that it can, and that there is no time bar on damages, no matter how long ago the alleged infringement commenced. To reach its holding, the Court relied on the text of the Copyright Act itself, and specifically § 507(b)’s language establishing the three-year period for filing suit as a clock only for when the claim accrues. The Court reasoned that any time limit on damages would have to come from the remedial section of the Act, which does not impose any such time limit on monetary recovery.
The Court critiques the Second Circuit’s view as enabling copyright owners to sue for infringing acts occurring more than three years ago but preventing recovery for those older infringements. The Court characterizes this approach as one that “guts” or “silently eliminates” the discovery rule. Such an interpretation, according to the Court, would essentially turn the discovery rule into the functional equivalent of an accrual rule based on the timing of the infringement. The Court also found that the Second Circuit improperly relied on Petrella to establish the three-year damages cap, stating that Justice Ginsberg’s oft-cited language that copyright plaintiffs can “gain retrospective relief running only three years back from” the filing of a suit” was “taken out of context.” The Court stated that this language “merely described how the limitations provision works when a plaintiff has no timely claims for infringing acts more than three years old. That was the situation in Petrella.”
Gorsuch, joined by Thomas and Alito, filed a dissenting opinion
The dissent critiques the majority for side-stepping the “logically antecedent” issue of whether the Copyright Act allows for a discovery rule of accrual. The dissent would find that the Copyright Act does not authorize a discovery rule and would thus moot the majority’s opinion. The dissent reasons that a discovery rule should not be employed unless explicit in the statute or “in cases of fraud or concealment.” The Copyright Act, according to the dissent, applies the standard incident of injury rule, and thus any action filed more than three years after the alleged infringing acts would be untimely. The dissent would have dismissed this case “as improvidently granted and awaited another squarely presenting the question whether the Copyright Act authorizes the discovery rule,” because Justice Gorsuch believes it “[b]etter, in my view, to answer a question that does matter than one that almost certainly does not.”
Now what? More damages (and more discovery)
The Court clearly left open the issue of whether the discovery rule is a valid interpretation of claim accrual under 17 U. S. C. §507(b). However, until that issue is decided, the Court’s decision permits recovery of damages for infringements beyond the three-year period timely brought under the discovery rule.
The Court’s decision will likely expand the scope of damages in discovery rule cases. The Copyright Act permits the recovery of (1) actual damages and profits or (2) statutory damages for infringement. The expansion of damages beyond the three-year period will significantly impact the discovery burden in cases where actual damages and profits are at issue (and plaintiff has until trial to elect a statutory damage remedy). To establish damages, a copyright defendant is required to produce its gross revenue resulting from the infringement, but is entitled to shrink that number with proof of the “deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” 17 U.S.C. § 504(b).
Discovery rule plaintiffs can now seek monetary recovery for infringements prior to three years from discovery of the infringement. As a result, businesses will likely see an uptick in complaints invoking the discovery rule and be left with the quandary of locating and producing years-old financial information. As noted, whether a claim is timely filed under the discovery rule is generally not suitable for dismissal at the pleading stage, so copyright litigation may now be a much larger and more expensive problem for alleged infringers.
The Ninth Circuit, which employs the approach now endorsed by the Court, provides an instructive view of how the Court’s holding may play out in discovery. For example, in Universal Dyeing & Printing, Inc. v Zoetop Bus. Co., 2023 WL 9004983, at *5 (C.D. Cal. June 23, 2023), the court addressed a dispute over the scope of damages discovery. Plaintiff sought a full and complete accounting of sales, revenues, profits, costs, and allegedly infringing product from the date of the first sale to present. Defendants limited discovery to a three-year period because the complaint did not plead facts to trigger the discovery rule. The court, however, was “not persuaded” that plaintiff “has to plead facts in its operative pleading to support application of the discovery rule as a predicate to seeking financial information beyond the three-year period in discovery.” Id. at *5.
Increased focus and litigation on the discovery rule/timeliness of copyright infringement claims
The Court’s ruling has exponentially increased the economic stakes of proving that a claim was “timely” under the discovery rule. Absent the limitation on recovery, litigants will be much more financially motivated to prove that an infringement could or could not have reasonably been discovered before the three-year period prior to filing suit.
Plaintiffs in discovery rule jurisdictions have made numerous arguments regarding why they could not have discovered the infringement within three years. While Nealy’s argument that he could not reasonably discover the infringement by virtue of his incarceration is fairly unique, there is a potential for plaintiffs to rely on new technologies to make this showing. Specifically, the increasing prevalence of artificial intelligence and large language models may enable copyright owners to uncover decades-old infringements for the first time and which were arguably impossible to find without advanced technology.
The key takeaway from Warner Chappell is that, unless the discovery rule is thrown out in a future Supreme Court decision, the scope of damages discovery will be coextensive with the period of alleged infringement, regardless of how far back it goes. And, even though a plaintiff’s claim may be deemed time-barred via summary judgment or at trial, a defendant could find themselves in the position of trying to establish its reasonable deductions from revenues that occurred decades prior.
For more information, please contact the authors.
The answer is the so-called “discovery rule.” The majority assumes (without deciding a different yet highly intertwined circuit split) that a claim is timely under the Copyright Act if brought within three years of discovery of the infringement. The Court focuses only on the issue of whether a plaintiff whose claim satisfies the discovery rule would nonetheless be unable to recover damages for infringements that occurred over three years before the lawsuit.
The Court’s ultimate holding that no such limit on damages exists may significantly increase the filing of “discovery rule” claims. The decision may also create complexities during the damages phase of litigation, as a defendant could be obligated to produce a full accounting of revenues on an alleged infringement that may have begun many years prior to the filing of the case. It would then also need to attempt to prove reasonable overhead expenses from those old revenue figures.
The Copyright Act’s three-year statute of limitations and the “discovery rule”
The Copyright Act expressly requires that a plaintiff file suit “within three years after the claim accrued.” 17 U. S. C. §507(b). What constitutes “claim accrual” under the Copyright Act has been the subject of judicial interpretation, resulting in the court-created doctrine of the discovery rule. Under the rule, copyright claims are allowed to proceed upon the proper showing that a plaintiff could not have reasonably discovered the infringement during the statutory period. Notably, whether a plaintiff could or should have reasonably discovered an infringement is generally considered a fact-intensive inquiry ill-suited for disposition at the pleading stage. And, while the majority of Circuits apply the discovery rule in copyright infringement cases, they disagree on whether monetary damages should be constrained by the Act’s three-year limitations period.
Nealy’s copyright claim and the journey to the Supreme Court
The underlying alleged infringement here commenced in 2008 – ten years before the plaintiff, Sherman Nealy, brought suit in 2018. Nealy was serving prison sentences from 1989 to 2008 and 2012 to 2015, which he claimed were the “circumstances” that prevented discovery of his claim within the three-year limitations period.
The discovery rule is endorsed by the Eleventh Circuit where Nealy brought his claim, and “enables a diligent plaintiff to raise claims about even very old infringement if he discovered them within the prior three years.” Warner Chappell accepted that the Eleventh Circuit followed the discovery rule, but argued that any “actual damages and any additional profits” sought pursuant to 17 U. S. C. § 504 could only be recovered for infringements occurring within the three years prior to filing suit. The district court agreed with Warner Chappell’s argument that Nealy could only seek monetary damages going back three years from suit. It cited to the Second Circuit in support, who in turn cited to Petrella v Metro-Goldwyn-Mayer to find that the Supreme Court “explicitly delimited damages to the three years prior to the commencement of a copyright infringement action.”
The district court thus held that, even though Nealy could bring claims for infringing acts beyond the three-year period, he could not recover any damages arising from them. The Eleventh Circuit reversed, citing to the Ninth Circuit to hold that a timely claim could recover damages for infringement even if those damages occurred more than three years prior to the lawsuit.
The majority decision was written by Kagan, and joined by Roberts, Sotomayor, Kavanaugh, Barrett, and Jackson
The Court granted cert to resolve the Circuit split and affirmed the Eleventh Circuit’s decision. The Court first notes that it has never ruled on – and is not deciding here – whether the discovery rule validly governs the timeliness of copyright claims. It cabined its review to the issue of whether a plaintiff with a timely claim under the rule can obtain damages going back more than three years. The Court affirmed that it can, and that there is no time bar on damages, no matter how long ago the alleged infringement commenced. To reach its holding, the Court relied on the text of the Copyright Act itself, and specifically § 507(b)’s language establishing the three-year period for filing suit as a clock only for when the claim accrues. The Court reasoned that any time limit on damages would have to come from the remedial section of the Act, which does not impose any such time limit on monetary recovery.
The Court critiques the Second Circuit’s view as enabling copyright owners to sue for infringing acts occurring more than three years ago but preventing recovery for those older infringements. The Court characterizes this approach as one that “guts” or “silently eliminates” the discovery rule. Such an interpretation, according to the Court, would essentially turn the discovery rule into the functional equivalent of an accrual rule based on the timing of the infringement. The Court also found that the Second Circuit improperly relied on Petrella to establish the three-year damages cap, stating that Justice Ginsberg’s oft-cited language that copyright plaintiffs can “gain retrospective relief running only three years back from” the filing of a suit” was “taken out of context.” The Court stated that this language “merely described how the limitations provision works when a plaintiff has no timely claims for infringing acts more than three years old. That was the situation in Petrella.”
Gorsuch, joined by Thomas and Alito, filed a dissenting opinion
The dissent critiques the majority for side-stepping the “logically antecedent” issue of whether the Copyright Act allows for a discovery rule of accrual. The dissent would find that the Copyright Act does not authorize a discovery rule and would thus moot the majority’s opinion. The dissent reasons that a discovery rule should not be employed unless explicit in the statute or “in cases of fraud or concealment.” The Copyright Act, according to the dissent, applies the standard incident of injury rule, and thus any action filed more than three years after the alleged infringing acts would be untimely. The dissent would have dismissed this case “as improvidently granted and awaited another squarely presenting the question whether the Copyright Act authorizes the discovery rule,” because Justice Gorsuch believes it “[b]etter, in my view, to answer a question that does matter than one that almost certainly does not.”
Now what? More damages (and more discovery)
The Court clearly left open the issue of whether the discovery rule is a valid interpretation of claim accrual under 17 U. S. C. §507(b). However, until that issue is decided, the Court’s decision permits recovery of damages for infringements beyond the three-year period timely brought under the discovery rule.
The Court’s decision will likely expand the scope of damages in discovery rule cases. The Copyright Act permits the recovery of (1) actual damages and profits or (2) statutory damages for infringement. The expansion of damages beyond the three-year period will significantly impact the discovery burden in cases where actual damages and profits are at issue (and plaintiff has until trial to elect a statutory damage remedy). To establish damages, a copyright defendant is required to produce its gross revenue resulting from the infringement, but is entitled to shrink that number with proof of the “deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” 17 U.S.C. § 504(b).
Discovery rule plaintiffs can now seek monetary recovery for infringements prior to three years from discovery of the infringement. As a result, businesses will likely see an uptick in complaints invoking the discovery rule and be left with the quandary of locating and producing years-old financial information. As noted, whether a claim is timely filed under the discovery rule is generally not suitable for dismissal at the pleading stage, so copyright litigation may now be a much larger and more expensive problem for alleged infringers.
The Ninth Circuit, which employs the approach now endorsed by the Court, provides an instructive view of how the Court’s holding may play out in discovery. For example, in Universal Dyeing & Printing, Inc. v Zoetop Bus. Co., 2023 WL 9004983, at *5 (C.D. Cal. June 23, 2023), the court addressed a dispute over the scope of damages discovery. Plaintiff sought a full and complete accounting of sales, revenues, profits, costs, and allegedly infringing product from the date of the first sale to present. Defendants limited discovery to a three-year period because the complaint did not plead facts to trigger the discovery rule. The court, however, was “not persuaded” that plaintiff “has to plead facts in its operative pleading to support application of the discovery rule as a predicate to seeking financial information beyond the three-year period in discovery.” Id. at *5.
Increased focus and litigation on the discovery rule/timeliness of copyright infringement claims
The Court’s ruling has exponentially increased the economic stakes of proving that a claim was “timely” under the discovery rule. Absent the limitation on recovery, litigants will be much more financially motivated to prove that an infringement could or could not have reasonably been discovered before the three-year period prior to filing suit.
Plaintiffs in discovery rule jurisdictions have made numerous arguments regarding why they could not have discovered the infringement within three years. While Nealy’s argument that he could not reasonably discover the infringement by virtue of his incarceration is fairly unique, there is a potential for plaintiffs to rely on new technologies to make this showing. Specifically, the increasing prevalence of artificial intelligence and large language models may enable copyright owners to uncover decades-old infringements for the first time and which were arguably impossible to find without advanced technology.
The key takeaway from Warner Chappell is that, unless the discovery rule is thrown out in a future Supreme Court decision, the scope of damages discovery will be coextensive with the period of alleged infringement, regardless of how far back it goes. And, even though a plaintiff’s claim may be deemed time-barred via summary judgment or at trial, a defendant could find themselves in the position of trying to establish its reasonable deductions from revenues that occurred decades prior.
For more information, please contact the authors.
