Justices Take on All-or-Nothing ‘Discovery Rule’ Copyright Case

The Supreme Court’s interpretation of a single word in the copyright statute of limitations could be the difference between leaving some infringed creators hopeless and giving them a green light to seek damages spanning decades—with little apparent middle ground.

Producer Sherman Nealy hopes to defend an appeals court ruling that he can reach well beyond the Copyright Act’s three-year statute of limitations because he was unaware Warner Chappell Music LLC used his work for years while he was in and out of prison. But the record label said such an application of the “discovery rule”—which starts the clock when an act is discovered rather than committed—would open defendants to damages spanning decades despite Congress’ apparent intent to limit copyright litigation.

The Supreme Court agreed last week to take up the case, and the resolution of the question—which has split the two predominant copyright circuit courts—carries massive implications for potential liability in the creative industries. It pits the possibility of creators being deprived of any remedy for infringement they couldn’t have discovered earlier against undermining the very purpose of a statute of limitations—not hitting defendants with potentially huge surprise liabilities when evidence and witnesses may be lost to time.

Ultimately, the case comes down to the definition of “accrued” in the Copyright Act, multiple attorneys said.

The law bars suits not “commenced within three years after the claim accrued.” It leaves unanswered whether that statue of limitations can pause until the date an older infringement was or should have been first discovered—the time-frame rule that ten circuit courts have adopted.

“There’s a very clear lack of any indication one way or another in the statute,” said attorney Scott Wilkens, who has worked extensively in the entertainment industry. “There is potentially a lot of money at stake here if the court adopts the discovery rule as a national standard.”

It’s also possible the court addresses the rule more broadly by endorsing, narrowing, or even slashing its application beyond copyright law, attorneys say. The Supreme Court has upheld discovery rules only in very limited instances and has found they don’t apply in many others. It reaffirmed as recently as 2019 its general disfavor of applying a discovery rule where the law isn’t clear.

“I do see the possibility of the court eviscerating the discovery rule,” said Randall K. McCarthy, an intellectual property attorney at Hall Estill. “I think it’s a low probability, but we do have to be prepared for it.”

Differences of Interpretation

Nealy and his company Music Specialist Inc. sued Warner and Sherman Artist Publishing Group LLC in 2018 in the US District Court for the Southern District of Florida. He sought damages stretching back to 2008, when three publishers allegedly acquired invalid licenses to his music. He alleged Atlantic Recording Corp., for example, allowed rapper Flo Rida to incorporate a song into his 2008 hit “In the Ayer.”

Nealy claimed in the suit he first discovered the infringement in 2016. He had suspended business operations in 1989 as he began a prison sentence for cocaine distribution.

The US Court of Appeals for the Eleventh Circuit reversed the Florida district court’s finding that the law precluded damages from pre-2015 actions. The appeals court applied the discovery rule, siding with the Ninth Circuit over the Second Circuit, which had split in their interpretation of the Supreme Court’s 2014 opinion Petrella v. Metro-Goldwyn-Mayer Inc.

In that dispute over the 1980 movie “Raging Bull,” starring Robert De Niro, Paula Petrella claimed in her 2009 complaint that MGM had infringed a screenplay by her father Frank Petrella and boxer Jake LaMotta, on whose life it was based. The high court held that because every new exploitation leading to revenue would be a new infringement that restarts the three-year clock, laches—a doctrine barring unreasonable, prejudicial delay in suing—couldn’t bar Petrella’s claims that occurred within the three-year window.

Petrella never disputed that she long knew about “Raging Bull,” fundamentally separating that ruling from Nealy’s scenario, the Eleventh Circuit said. The Supreme Court also explicitly said in Petrella it hadn’t decided on the propriety of the discovery rule in copyright law.

But the Second Circuit in 2020 held that Petrella effectively barred a photographer from seeking damages for actions outside the three-year window in Sohm v. Scholastic Inc. It said the discovery rule applied and the photographer could sue, but couldn’t recoup money from old infringement because Petrella had “dissociated” the statute of limitations from the time limit on damages.

That’s “kind of nonsensical,” intellectual property attorney Lynda Zadra-Symes of Knobbe Martens said. Echoing the Eleventh Circuit, she noted the three-year bar is found in a “limitations on actions” section of the law—not a “remedies” section—yet the Second Circuit allowed the action but not the remedy. Zadra-Symes said, “there’d be no point in having a discovery rule” without access to damages.

“Even the Second Circuit didn’t like their decision; they just felt bound by Petrella,” Zadra-Symes said. “It feels like it would be very unfair to not allow you to sue for infringement.”

The Ninth Circuit decried the Second Circuit’s interpretation of Petrella in its 2022 opinion in Starz Entertainment v. MGM, where Starz said MGM violated an exclusivity agreement by licensing works to Amazon for streaming. The Ninth Circuit found “absurdity” in how the Second Circuit’s logic would “eviscerate the discovery rule” and said Petrella’s constraints on damages were taken out of context because belated discovery wasn’t at issue.

No Easy Compromise

Justice Ruth Bader Ginsburg’s Petrella opinion laid out a balance in its ruling: plaintiffs couldn’t let decades of damages mount, but didn’t have to sue intermittently over “seemingly innocuous infringements” lest revenues grow later, when they have no way to stop it. Despite an ambiguous statute and a lack of specific high court precedent leaving the justices a relatively “blank slate,” it’s harder to see a way to strike a similarly balanced outcome in this case, Wilkens said.

Warner argued in its petition to the high court that the discovery rule would incentivize meritless litigation that could extract settlements from defendants hamstrung by massive damages exposure, lost evidence, and significant litigation expenses. That could even affect the kinds of contracts companies are willing to sign, Warner said.

“I don’t see that as a realistic scenario,” Wilkens said of plaintiffs “lying in wait” to extract maximum damages from longer infringement periods in hopes they can elude the three-year time bar. “There’s an intuitive sense of fairness” and “good logical reasoning” behind the discovery rule guarding against potential infringement without recourse, he added.

But the resulting open-ended liability seems “contrary to what Congress intended” by enacting the statute of limitations, said McCarthy, who predicted that the court will reverse the Eleventh Circuit. If it doesn’t, he added, it could lead to expensive litigation over alleged infringement decades after it occurs.

“That to me could be potentially chilling, particularly in the internet age where everything is forever,” McCarthy said of a justices-endorsed discovery rule.

One possible way to find ground between the extremes would be to clarify a high barrier for a plaintiff claiming belated discovery. As the appeal was certified before any judgment in the case, a court hasn’t weighed in on Nealy’s claim he couldn’t have discovered infringement sooner. That can be a significant obstacle for plaintiffs like Nealy, though the precise standard or burden of proof is unclear, Zadra-Symes said.

The Supreme Court’s grant of Warner’s petition trimmed it’s question of whether the statute of limitation “precludes retrospective relief” to whether relief was barred “under the discovery accrual rule applied by circuit courts and the Copyright Act’s statute of limitations.” But while the court often takes on the narrowest possible question, the fact it took up a rare interlocutory appeal suggests the justices have something to say, McCarthy said.

“The Supreme Court almost always wants to wait until the dust is settled,” McCarthy said. “Here, they seem to have the desire to step in and bring in some clarity.”

The case is Warner Chappell Music Inc. v. Sherman Nealy, U.S., No. 22-1078.