United States: "In The Ayer": The Supreme Court Considers The Availability Of Retrospective Damages For Copyright Infringement

On February 21, 2024, the Supreme Court heard oral argument in Warner Chappell Music, Inc. v. Nealy, a case focusing on the availability of damages for copyright infringement. At issue is whether a copyright plaintiff may obtain retrospective relief for infringing acts that occurred more than three years before the plaintiff filed suit. Importantly, the issue before the Court necessarily assumes that plaintiff's suit is timely under the Copyright Act's statute of limitations and the so-called "discovery rule." This rule provides that a copyright claim is timely if it is filed within three years after the claim was or reasonably should have been discovered. Although almost all Circuit Courts of Appeal apply the discovery rule to copyright infringement claims, it is not clear whether a copyright plaintiff invoking this rule may obtain damages for infringing acts that occurred more than three years before filing suit. For example, if the infringing act occurred in 2000, but the copyright plaintiff did not discover the infringement until 2020, and then the plaintiff timely, under the discovery rule, brought suit in 2022, would the plaintiff be entitled to damages stretching back to 2000?

Background

The dispute arises from music producer Sherman Nealy's copyright infringement suit against Warner Chappell Music, Inc. and others. In 1983, Nealy formed Music Specialist, Inc. (one of the Respondents) with a "disc jockey," Tony Butler. From 1983 to 1986, Music Specialist recorded and released one album and several singles, including a song called "Jam the Box." Subsequently, Nealy was imprisoned from 1989 to 2008 and again from 2012 to 2015. During this time, Butler formed 321 Music, LLC, which, with Butler, entered into an agreement with Artist Publishing Group, LLC (one of the Petitioners). That agreement allowed Artist Publishing to administer Butler's and 321 Music's entire catalog, including the musical works at issue here. Warner, which had an agreement with Artist Publishing, granted a license to interpolate portions of "Jam the Box" in a song called "In the Ayer," recorded by the famous rap artist Flo Rida. "In the Ayer" was a "smash hit," selling millions of copies and reaching No. 9 on the Billboard Chart.

Nealy alleges that Warner is infringing his copyrights to musical works, including "Jam the Box," because Warner is using and licensing the musical works in reliance on invalid licenses. Much of the alleged infringement occurred while Nealy was in jail. Nealy alleges that, due to his incarceration, he did not become aware until 2016 that Butler had licensed Music Specialist's musical works to Warner. Nealy filed suit in 2018, within three years after he allegedly discovered the invalid licenses and consequent infringement.

At the district court, Nealy and Warner both moved for summary judgment. Warner argued that Nealy's claims were barred by the Copyright Act's three-year statute of limitations, which runs from the time a claim accrues. 17 U.S.C. § 507(b). Nealy claimed that although Warner had been openly exploiting his musical works since 2008, he only discovered that Warner was infringing his copyrights in 2016, less than three years before he filed suit. Because a genuine dispute of material fact existed as to when Nealy knew or should have known that Warner was infringing the musical works, the magistrate judge recommended denial of summary judgment for both parties. In a footnote, the magistrate judge stated that Nealy conflated "the issue of when an action accrues, the discovery rule, and how far back [he] can seek damages." Further, the magistrate judge stated that "[a]lthough an action . . . accrues when a plaintiff knew or should have known that their rights were being infringed, their damages are limited to the three-year period before they filed suit even if the infringement went further back than the three-year period. . . . [T]he damages available to [Nealy] are capped to the three-year statutory limit" (emphasis added).

The district court adopted the magistrate judge's report and recommendation, holding that Nealy's potential damages are limited to the three-year period before he filed suit. Because the Eleventh Circuit had not considered the issue, the district court based its holding on the Second Circuit's decision in Sohm v. Scholastic Inc. but certified this holding for interlocutory appeal.

The Eleventh Circuit granted permission to appeal and reversed. The Eleventh Circuit, acknowledging that it had to answer a question of first impression­­­­—whether damages in a copyright action are limited by the Copyright Act's three-year statute of limitations—noted that this issue has divided its sister circuits.

The Copyright Act's statute of limitations, Section 507(b), provides that no "civil action shall be maintained . . . unless it is commenced within three years after the claim accrued." 17 U.S.C. § 507(b). In interpreting this provision, many circuit courts have looked to a 2014 Supreme Court decision in a case called Petrella v Metro-Goldwyn-Mayer, Inc. involving the film "Raging Bull." In Petrella, the purported copyright owner claimed that a movie created decades earlier infringed her copyright, but she sought relief only for the acts of infringement that had occurred within the three years before she filed suit (that is, recent reproduction, distribution, and performance of the film). The Supreme Court held that Petrella's claims, brought within Section 507(b)'s three-year window, were barred by laches because the Copyright Act's statute of limitations "itself takes account of delay." The claim was timely brought, under the "incident of injury rule," because it was brought within three years of when the claim accrued, i.e., when the infringing acts for which relief was sought occurred. The Court held that, under the Copyright Act's three-year provision, "an infringement is actionable within three years, and only three years, of its occurrence." However, the Court noted that, "[a]lthough we have not passed on the question, nine Courts of Appeals have adopted, as an alternative to the incident of injury rule, a 'discovery rule,' which starts the limitations period when 'the plaintiff discovers, or with due diligence should have discovered, the injury that forms the basis for the claim.'"

Following Petrella, circuit courts continued to apply the "discovery rule." In Sohm v. Scholastic Inc., the Second Circuit held that its precedent mandates use of the discovery rule to determine when a copyright infringement claim accrues under the Copyright Act, despite the Supreme Court's decision in Petrella applying the "incident of injury rule." However, recognizing that Petrella "explicitly delimited" damages to the three years prior to filing suit, the Second Circuit held that the plaintiff's recovery, even under the discovery rule, is limited to damages incurred during the three years prior to filing suit.

Meanwhile, the Ninth Circuit, in Starz Entertainment v. MGM, disagreed with the Second Circuit, observing that an absolute three-year bar on damages "would eviscerate the discovery rule." In particular, if no infringing acts had occurred within the three years before a copyright owner learned of an infringement, the copyright owner might have a right to sue but no ability to recover damages. The Ninth Circuit further explained that to impose such a rule would mean that Petrella ignored the plain text of Section 507(b), which "limits civil actions to 'three years after the claim accrued'" but says nothing about remedies.

The Eleventh Circuit, in Nealy, followed the Ninth Circuit's reasoning and held that where a copyright plaintiff has a timely claim for infringement occurring more than three years before the filing of the lawsuit, the plaintiff may obtain retrospective relief for that infringement. The Eleventh Circuit reached this conclusion by assuming that Nealy's claims were timely under the discovery rule and holding that the Supreme Court's decision in Petrella v. MGM did not bar copyright damages in actions that are timely under the discovery rule. The Eleventh Circuit also held that the text of the Copyright Act does not support the existence of a separate damages bar for a timely copyright claim.

Following this decision, Warner filed a petition for certiorari, requesting review of the following question:

However, the Supreme Court granted the petition limited to the following question:

Oral Argument

At oral argument, the Justices focused on the phrasing of the question presented and whether the Court should dismiss certiorari as improvidently granted. Specifically, the question assumes the existence and appropriateness of the discovery accrual rule, but the Justices' questions centered around whether a discovery accrual rule does or should exist, and if so, in what circumstances it should apply. As Justice Gorsuch stated: "We're being asked to decide the scope of something that may or may not exist."

Counsel for Warner made three points to support Warner's argument that Nealy's claims are time-barred and, therefore, the Eleventh Circuit's decision should be reversed. First, the text of Section 507(b) requires a civil action for copyright infringement to be brought "within three years after the claim accrued," and that provision limits retrospective relief to acts that occurred within three years before filing suit. Second, the only version of a discovery rule consistent with Section 507(b) would be the narrower discovery rule traditionally applied by courts of equity in cases of fraud, and that rule does not apply to Nealy's claims because Nealy's claims do not sound in fraud. Third, if the Supreme Court applied the broader discovery rule, it should recognize an equitable exception to the rule and limit retrospective relief to the three years preceding the filing of suit. Therefore, Nealy is still not entitled to relief for acts occurring more than three years before filing suit.

Justices Thomas, Barrett, Jackson, and Alito quickly pointed out that the Court rephrased the question presented and did not ask for arguments regarding the merits of the discovery rule itself. Justice Barrett emphasized that Warner's cert petition even acknowledged that there was no split between the circuit courts as to the existence of a discovery rule and that the split, if any, existed between the Second, Ninth, and Eleventh Circuits as to whether a copyright plaintiff may recover damages for acts that occurred more than three years prior to filing suit. Justice Jackson further stated that the Court was very specific and took off the table the merits of the scope of the discovery rule. Justice Alito was concerned that the Court is being asked to decide a question that may be eliminated as a result of a subsequent decision in Hearst Newspapers, L.L.C. v. Antonio Martinelli, a case from the Fifth Circuit in which the alleged copyright infringer is seeking Supreme Court review of whether the discovery rule even arises in copyright claims.

Justices Sotomayor and Jackson also took issue with the statutory language on which Warner attempted to rely. As Justice Sotomayor said:

And Justice Jackson inquired into how the three-year statute of limitations established in Section 507 is somehow "transported" into the consideration of damages. Justice Jackson further pointed out that she does not see in the statute Warner's position that a plaintiff may not receive damages for acts that occurred more than three years prior to filing suit.

Counsel for Nealy also made three points to support Nealy's argument that his claims are not time-barred and, thus, the Eleventh Circuit's decision should be affirmed. First, the question of whether a discovery rule is applicable in copyright infringement cases is not properly before the Supreme Court and should not be decided. Second, focusing on the question presented, the Supreme Court should adopt the majority rule applied by the Eleventh and Ninth Circuits and reject the Second Circuit's minority rule. The majority rule holds that each act of infringement gives rise to a separate claim, each claim accrues when it is or should have been discovered, each claim is timely if brought within three years of when it accrued, and damages are available (without time limitation) for all timely claims. Third, the Second Circuit's minority rule is incorrect because the Copyright Act has no separate damages bar. The Second Circuit's rule misreads the Supreme Court's Petrella decision, ignores decades of congressional amendments to the Copyright Act (in which Congress could have amended Section 507(b) to add a damages bar), and contravenes the historical purposes of copyright law and remedies.

Justice Jackson questioned counsel for Nealy on whether the Court should dismiss the case. Counsel for Nealy replied that either path is viable: the Court could dismiss the case or affirm the Eleventh Circuit's decision and resolve the current circuit split. Justice Kagan asked counsel what "mischief" the Second Circuit's decision is causing, and counsel replied that it is leading parties to forum-shop to find a friendlier forum depending on the facts of a given case. And Justice Kavanaugh asked counsel whether, if the Second Circuit "hadn't gone the other way and hadn't gone off the path, none of this would be cert worthy is [counsel's] view," to which counsel answered yes.

Takeaways

The Court may dismiss this case as improvidently granted if it grants cert for Hearst Newspapers. In any event, whether in Nealy or in Hearst, the Court is likely to provide litigants with guidance regarding whether the "discovery rule" allows plaintiffs to sue more than three years after infringement began, as long as they file within three years of when they reasonably discovered the claim—and, if so, whether they can then collect damages reaching back to when infringement began.

The case is Warner Chappell Music, Inc. v. Nealy, No. 22-1078 (date argued Feb. 21, 2024).

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