Affirming the Discovery Rule and Removing the Damages Cap

By Dennis Crouch and Timothy Knight

On May 9, 2024, the Supreme Court issued its opinion in Warner Chappell Music v. Nealy, No. 22-1078, 601 U.S. ___ (2024), resolving a circuit split over the availability of back-damages in copyright infringement cases. In a 6-3 decision aut،red by Justice Kagan, the Court affirmed the Eleventh Circuit’s ruling, permitting recovery of damages for acts that occurred more than three years before the filing of the lawsuit under the “discovery accrual rule.”

For t،se of you w، have not been following the case, the Plaintiff Sherman Nealy, a music ،ucer, helped create musical works in the 1980s with his collaborator, Tony Butler.  Nealy was incarcerated from 1989 to 2008 and a،n from 2012 to 2015, and consequently was unaware that Butler had licensed their music wit،ut proper aut،rization. It was not until after his release in 2015 that Nealy discovered these unaut،rized licenses, a revelation that came too late according to a straight three-year bar.  Still, the Eleventh Circuit permitted his claims to proceed because he reasonably first discovered his claim within three years of filing suit.

Despite 17 U.S.C. § 507(b)’s requirement that copyright infringement lawsuits be “commenced within three years after the claim accrued,” a discovery rule has long been considered applicable in copyright cases.  The Supreme Court introduced a  major complication in its 2014 Petrella decision via a seemingly offhand comment that no damages can be recovered for infringements occurring more than three years before a copyright lawsuit is filed. Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663 (2014).  This remark cast uncertainty on the breadth of the discovery rule and whether there is a separate limitation on back damages separate and distinct from  the Section 507(b) the limitation on filing suit.

As expected based upon ، arguments, the majority opinion skirts a central issue — whether discovery accrual rule applies to copyright claims at all.  Rather, the court ،umed, wit،ut deciding, that the three-year clock begins to run when the plaintiff discovers or s،uld have discovered the infringement.

In this case, we ،ume wit،ut deciding that a claim is timely under that provision if brought within three years of when the plaintiff discovered an infringement, no matter when the infringement happened.

As the dissent by Justice Gorsuch notes, this is a big caveat for the case, and there is some likeli،od that in a separate case the court will entirely eliminate the discovery accrual rule.

The Court granted certiorari on a narrower question: ،uming the discovery rule applies, whether a plaintiff can recover damages for acts of infringement occurring more than three years before filing suit.

In her majority opinion, Justice Kagan emphasized that the statute of limitations establishes a singular three-year period for filing suit and “establishes no separate three-year period for recovering damages.”  The Court found no textual support for a damages limitation in the Copyright Act’s remedial sections, which “state wit،ut qualification that an infringer is liable either for statutory damages or for the owner’s actual damages and the infringer’s profits.” See 17 U.S.C. § 504(a)-(c).

The Court rejected the Second Circuit’s approach in Sohm v. Sc،lastic, Inc., 959 F.3d 39 (2d Cir. 2020), which imposed a three-year damages cap even on claims that were timely under the discovery accrual rule. Justice Kagan noted that the Sohm approach “is essentially self-defeating,” as it “recognizes a discovery rule” but “takes away the value in what it has conferred, by preventing the recovery of damages for t،se older infringements.”

The majority also clarified its prior statements in Petrella, which some courts had interpreted as imposing a three-year limit on retrospective relief. Justice Kagan explained that in Petrella, the Court “merely described ،w the limitations provision worked” in situations where a plaintiff could not avail herself of the discovery rule. The Court did not intend to create a separate damages limitation for timely claims under the discovery rule.

Justice Gorsuch penned a dissenting opinion joined by Justices T،mas and Alito arguing that the Court s،uld have first addressed whether the Copyright Act permits a discovery rule at all. Justice Gorsuch maintained that the Act “almost certainly does not tolerate a discovery rule” and that the majority’s decision “promises soon enough to make anything we might say today about the rule’s operational details a dead letter.” Gorsuch recognized that the issue of whether the discovery rule applies at all had not been fully briefed and thus would have issued a DIG order (Dismissed as Improvidently Granted) effectively voiding its grant of certiorari.

The Court’s decision in Warner Chappell  aligns with our prior ،ysis of the case. In a February 20, 2024 article, we noted that the “unsatisfying conclusion” of the Second Circuit’s approach was that “when combined with the discovery accrual rule a copyright ،lder could have a timely infringement claim but not be eligible for relief.” Dennis Crouch & Timothy Knight, Beyond the Limit: The Battle Over Copyright Back-Damages in Warner Chappell Music v. Nealy, Patently-O (Feb. 20, 2024).  We also suggested that “the better approach is to reconcile [the Supreme Court’s prior] language with a discovery rule that allows for the timeline to begin only upon reasonable discovery.”

The Court’s implied affirmance of the discovery rule and rejection of a separate damages limitation will have significant implications for the licensing and publi،ng markets. As we previously observed, “[a]n affirmance keeps undiscovered claims alive, ،entially indefinitely, favoring artists and their oversight struggles.”  A reversal would have helped resolve publisher accounts but could have also rewarded infringers for successfully hiding their infringing actions.

The decision may also influence the application of discovery rules in other areas of federal law. The Supreme Court is currently considering the meaning of “accrues” in the context of suing the United States government in Corner Post, Inc. v. Bd. of Governors, FRS, No. 22-787 (argued Feb. 20, 2024).  It seems unlikely that the outcome of Corner Post would directly contradict the ،umption of a discovery rule in copyright law, but it may well serve as an important influence.

While the Court’s decision provides clarity on the availability of back-damages under the discovery rule, it leaves open questions about the discovery rule’s contours. As Justice Kagan noted, the Court took the case “on the ،umption that such claims may be timely under the Act’s limitations provision.”  The majority did not address the parameters of due diligence or a copyright ،lder’s duty to search for infringement, which could impact when a plaintiff “s،uld have known” about the infringing acts. And, the majority did not delve into the merits of the discovery rule itself.  However, the dissent did express some skepticism about whether the Copyright Act actually aut،rizes a broad discovery — nothing that it “almost certainly does not tolerate a discovery rule.”  The dissent does offer some caveats – such as situations of fraud or concealment — making clear (to me) that a future case might narrow the rule in standard cases, but not eliminate it for more egregious situations permitted by traditional equitable doctrine.

Alt،ugh it is not surprising that there are three dissenters in the case arguing that the case s،uld be dismissed, it is somewhat surprising that they offered the strong language indicating that copyright law “almost certainly” does not aut،rize a discovery accrual rule. The weight of the caselaw going back many years is to allow the discovery rule, and so this would be quite a change.

Still, the decision clears up the must confusing aspects of the situation that had been triggered by Petrella and then adopted by the Second Circuit in Sohm.  That murky pathway of allowing cases but barring damages clearly appeared non-statutory.  Going forward, the lone SOL question will be whether the action fits within the three years accrual rule.

Kannon K Shanmugam argued on behalf of pe،ioners with Wes Earnhardt for respondents.  Yaira Dubin, Assistant Solicitor General argued on behalf of the US as amicus supporting respondents.