Discovery Rule Dodge Puts Justices’ Damages Ruling on Thin Ice

The US Supreme Court’s narrow decision allowing damages for belatedly discovered copyright infringement avoided a bigger question and largely preserved a status quo that at least three justices appear itching to overturn.

Justice Elena Kagan’s May 9 majority opinion said copyright holders like rapper Sherman Nealy can seek damages on any claims filed within the Copyright Act’s three-year statute of limitations. But the majority in Warner Chappell Music Inc. v. Nealy assumed, while declining to decide, the “discovery rule” applies to copyright claims. That makes even Nealy’s decade-old claims timely if he sued within three years of when he should have discovered the alleged infringement, rather than just when it occurred.

The 6-3 decision doesn’t change anything about copyright damages in most of the country—11 circuits have allowed the discovery rule for copyright cases, and only the Second Circuit recognized it with a time limit on damages. But the high court’s decision explicitly declines to clarify whether the discovery rule applies.

Justice Neil Gorsuch’s dissent—joined by Justices Samuel A. Alito, and Clarence Thomas—said the rule “almost certainly doesn’t” apply to copyright law, characterizing the case as effectively a waste of the court’s time. If two more justices agree that the clock starts when the infringement happens, the damages question would be moot and Thursday’s opinion evaporates.

The justices could have an opportunity to take on that issue soon, as a petition directly challenging the discovery rule in copyright cases, Hearst Newspapers LLC v. Martinelli, has been pending since November.

The question could be increasingly important in the digital age, noted intellectual property attorney Jeff Van Hoosear of Knobbe Martens. While technology has made it easier to comb the internet for infringement, technology for avoiding detection has also improved, he said. The lack of a discovery rule could have particular impact in the music industry, where infringement is often not wholesale copying, but using samples or other partial replications.

“We represent a lot of independent and smaller entities that have copyrights and don’t have the resources to keep track of infringement,” said Van Hoosear, who said he “can’t imagine” the court has the votes to gut the rule. “Once you discover something, you should have a cause of action.”

Attorneys disagreed whether the Warner Chappell opinion foreshadowed the court’s plans for Hearst, which was filed after the justices agreed to hear Warner Chappell’s case and was discussed during the oral argument. Ruling on the availability of damages under the discovery rule before deciding whether the rule applies to copyright cases may suggest that dissenting justices don’t have enough votes to strike the rule, Van Hoosear said.

“It kind of means to me they have decided that issue, even though they haven’t released an opinion,” Van Hoosear said.

Others warned not to read too much into the Supreme Court’s motivations and machinations. IP attorney Ashok Ramani of Davis Polk called the court a “black box in that regard.” But, he said, it’s possible some judges acted on principles such as deciding cases narrowly or letting broad circuit consensuses stand.

“I could see some institutional desire for the justices to position themselves to take up the cases before them rather than reaching out and deciding related questions that may arise,” Ramani said. “I don’t think we can assume that they lack the votes to take up that question.”

‘Not Enough of a Split’

The choice to rule on damages focuses on the wrong question, the dissenters argued. IP attorney Paul Schoenhard of Fried Frank Harris Shriver & Jacobson LLP agreed, saying it “simply increases our thirst for a decision” on the discovery rule itself.

“The majority appears to have been set on reaching and simply disposing of a damages look-back question without reaching a more significant issue: whether the statute of limitations permits a discovery rule,” Schoenhard said.

Gorsuch’s statement that the Copyright Act “almost certainly does not tolerate a discovery rule” makes the three dissenters’ position clear. That raises the question of whether at least one of the other six think the court should hear the question presented by Hearst.

IP attorney Jason P. Bloom of Haynes and Boone LLP said ruling on damages before deciding whether to hear Hearst didn’t mean it wouldn’t.

“They may not have thought it through in the proper order, but I don’t think that means they won’t take up Hearst,” he said.

The 2014 Supreme Court opinion Petrella v. Metro-Goldwyn-Mayer Inc., which imposed a three-year look-back on copyright damages in a non-discovery rule case, had created confusion that “needed to be cleared up,” Bloom said. That gave the court reason not to simply dismiss the case as improvidently granted as Gorsuch’s dissent suggested. The high court generally doesn’t sit on cases for long after hearing them, he said, making it unlikely the justices would wait until it could hear Hearst.

Even so, Bloom noted that 11 circuits have applied the discovery rule, “so maybe there’s not enough of a split” to take up Hearst on its own.

‘Straightfoward’ Ruling

Nealy’s 2018 suit alleged Warner had acquired rights he owned from someone else in 2008 without his knowledge and had been exploiting them since, including through derivative works like Flo Rida’s “In the Ayer.” He didn’t learn of the alleged infringement until 2016 because he had been in and out of prison and wasn’t wired into the music industry, Nealy said in his lawsuit.

The Eleventh Circuit said the discovery rule allowed for damages for any timely claims, rejecting Warner’s central argument that Petrella effectively barred old damages even for timely claims. The high court majority agreed that Petrella didn’t apply, finding the Second Circuit’s rejection of damages relied on Petrella phrasing “taken out of context” as that case that didn’t invoke the discovery rule at all.

Given the choice to cabin the decision to the damages question, it was “a straightforward and common sense ruling,” IP attorney Jennifer Mauri of Michelman & Robinson LLP said. Finding the Copyright Act allows old infringement to be timely if reasonably discovered more than three years later but denying a remedy would lead to a “hollow victory.” Van Hoosear agreed that result would seem “totally unfair.”

Schoenhard said he was surprised the majority “swept aside statements in Petrella that pretty clearly lean in favor of finding a three-year look-back in damages.”

“It is uncommon for the court to make an unqualified statement about the impact of a law, repeatedly reference that same statement, and then later distinguish it as cabined to its facts,” Schoenhard said.

As to the justices’ discovery rule positions, Schoenhard pointed to Chief Justice John Roberts as a possible fulcrum, noting he dissented from rejecting the equitable doctrine of laches in Petrella but joined the majority giving creators late to discover infringement a chance at damages in Warner Chappell.

“It suggests he would sit in favor of applying the discovery rule,” Schoenhard concluded. “Chief Justice Roberts approaches copyright through the lens of fairness.”

Whatever the reason the justices haven’t decided whether to hear Hearst nearly three months after publicly mulling it’s primacy over the damages question during the Warner Chappell oral argument, the longevity of Thursday’s ruling inherently rests on that decision.

“If the discovery rule goes away, so does this decision,” Mauri said.

The case is Warner Chappell Music Inc. v. Nealy, U.S., No. 22-1078, 5/9/24.