In Nealy, Supreme Court set to resolve circuit split on Copyright damages

Last month, the Supreme Court granted certiorari in Nealy v. Warner Chappell Music, Inc., 60 F.4th 1325 (11th Cir. 2023), to address “[w]hether, under the discovery accrual rule applied by the circuit courts and the Copyright Act’s statute of limitations for civil actions, 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.”

The Copyright Act’s statute of limitations bars plaintiffs from bringing infringement suits more than three years after a claim has accrued. It does not, on its face, limit the time period prior to a timely suit during which damages may accrue on that claim. But practically speaking, when a plaintiff brings suit within three years of the defendant’s infringement, the only potential damages for that infringement will have accrued during the three-year period. However, not all timely copyright suits are filed within three years of infringement. Under the “discovery rule” applied by every circuit to consider the question, the three-year limitation period does not begin to run until the plaintiff knows or should have known of the infringement. So in a case made timely only by operation of the discovery rule (e.g., a case brought six years after initial infringement), the plaintiff may have accrued damages that go back further than three years. In Nealy, the Court will resolve a circuit split as to whether such a plaintiff can recover all of those damages, or whether its damages are limited to those accrued in the three years preceding the filing of suit.

Nealy comes to the Supreme Court from the Eleventh Circuit, which aligned with the Ninth Circuit to hold that the Copyright Act’s statute of limitations does not limit damages for timely claims. The Second Circuit holds that it does. Because the Second and Ninth Circuits are the two most significant forums for copyright litigation, this split has resulted in substantial uniformity and forum-shopping concerns—and Nealy, which came to the Eleventh Circuit as a certified question of pure law, provides the Supreme Court with a clean means of resolving it.

The circuit split emerged from divergent readings of the Supreme Court’s most recent foray into the Copyright Act’s statute of limitations, Petrella v. MGM, 572 U.S. 663 (2014). In Petrella, the Supreme Court considered whether laches could bar a suit filed within the three-year limitations period. There, the plaintiff had been aware of the defendants’ copyright violations for eighteen years but sued only for those infringements that had occurred in the last three years. The defendant argued that the doctrine of laches should bar relief even for those violations.

The Supreme Court rejected the laches defense, holding that Section 507(b) was both the start and end of the story: if a lawsuit was filed within the three-year limitations period, it could go forward; if it was filed outside the limitations period, it could not. But in its reasoning, the Court included a line that has driven the current circuit split: “[A] successful plaintiff can gain retrospective relief only three years back from the time of suit.” Id. at 677.

Petrella was not a discovery rule case—the Petrella plaintiff brought a claim (and sought damages) only for infringements that had occurred within three years of the suit. And in a footnote, the Court explicitly acknowledged that the discovery rule existed as an alternative limitations rule. All the same, litigants began using Petrella’s emphatic language in discovery rule cases to argue that the Supreme Court had created a strict three-year damages bar.

In Sohm v. Scholastic Inc., 959 F.3d 39 (2nd Cir. 2020), the Second Circuit proved receptive to this argument. The Sohm court did not question the validity of the discovery rule itself. Yet the court found that “Petrella’s plain language explicitly dissociated the Copyright Act’s statute of limitations from its time limit on damages.” Id. at 52. In other words, a plaintiff who discovered a copyright violation more than three years after it occurred could properly file suit but would not be able to recover any damages outside the three-year period. This, despite the fact that the statute of limitations on its face limits only the time for filing suit.

Two years later, in Starz Ent., LLC v. MGM Domestic TV Distribution, LLC, 39 F.4th 1236 (9th Cir. 2022), the Ninth Circuit forcefully rejected the Second Circuit’s view. The Starz court emphasized that the discovery rule had not been implicated in Petrella, and that transplanting Petrella’s language to the discovery rule context gravely misread the Supreme Court’s intent. The Starz court also found the idea of preserving the discovery rule while imposing a three-year damages bar inherently contradictory. For the discovery rule to be implicated, the injury in question must have occurred more than three years ago—outside the Second Circuit’s three-year damages period. Under Sohm, a plaintiff who discovered a copyright violation more than three years old would be permitted to bring a claim but would be unable to recover. As the Ninth Circuit noted (quoting the district court), “[t]o the extent the discovery rule ‘saved’ the claims,” such a victory would be “pyrrhic.” Id.

The Eleventh Circuit sided with the Ninth Circuit in Nealy, as have the majority of district courts to consider the question. With this trend, Sohm increasingly looks like an outlier. Given the Second Circuit’s prominence as a copyright venue, however, it is an outlier with an outsized effect. For any plaintiff with claims accruing under the discovery rule, the Second Circuit has become hostile territory. And copyright litigants outside the Second, Ninth, and Eleventh Circuits face uncertainty over whether their circuit will adopt the Sohm damages bar, hollowing out the discovery rule.

Whether or not the Supreme Court decides to quell the outlier view, its ruling should restore uniformity on the issue of copyright damages.