Supreme Court Set to Tackle Copyright Damages ‘Discovery’ Rule

Copyright owners’ ability to reach back and recover many years’ worth of damages when they didn’t discover infringement within the statute of limitations will be on the line before the US Supreme Court Wednesday.

The justices will hear a dispute involving rapper and producer Sherman Nealy, who is seeking damages for Warner Chappell Music Inc.'s alleged infringement dating back over a decade.

Normally US copyright law bars lawsuits over infringement older than three years, but Nealy said he couldn’t have been aware of the infringement, which occurred largely while he was in prison, and he argued he should be allowed to collect for the full duration.

Warner indicated in its brief it will argue that, at the very least, damages from any infringement should be limited to only those from the three years before the lawsuit was filed, consistent with the Copyright Act’s three-year statute of limitations.

Nealy’s filing countered that the US Court of Appeals for the Eleventh Circuit correctly left older damages on the table under what’s known as the “discovery rule,” which pauses the countdown to sue until the claimant discovers or should discover the infringement.

The parties’ court documents, along with various friend-of-the-court briefs, point to high-stakes implications flowing from either result. Nealy and its backers say that with damages unavailable, a rightsholder who couldn’t find the infringement within three years would have no remedy. Conversely, Warner and its supporters posit, potential liability dating back indefinitely could open doors wide for flimsy suits from copyright “trolls” that could be difficult to dismiss because of lost evidence or deceased witnesses and the difficulty of proving someone knew—or should have known—of infringement earlier.

Amicus briefs, meanwhile, offered a variety of qualifications and limitations to find a middle ground between the two extremes. Examples include allowing the reach-back only in ownership disputes and not cases of simple infringement, and establishing court mechanisms to limit abuse.

The justices, for their part, changed the framing of the question Warner presented to them in a way that appears to assume the existence of the discovery rule, which the Supreme Court hasn’t directly ruled on before.

The label posed the question to the justices as whether the copyright statute of limitations precludes relief for acts that occurred outside of its timeframe. But the court agreed to assess “whether, under the discovery accrual rule applied by the circuit courts” and the statute of limitations, a copyright plaintiff can recover damages for acts that occurred more than three years before the suit was filed.

Warner’s brief acknowledged that framing, but said the court should limit the discovery rule’s application outside of “traditionally recognized contexts of the discovery rule” such as fraud and concealment, which aren’t applicable to Nealy’s suit. It said there’s “no valid basis to treat claims” for relief as “accruing” upon discovery, but even if there is, the court “should enforce a three year limitation on retrospective relief as an equitable exception to the equitable discovery rule.”

But Nealy’s brief said the justices’ framing confirmed that the Copyright Act has a discovery rule, and said that by suggesting the rule didn’t apply, the “petitioners improperly attempt to rewrite the question presented.”

Nealy also said an equitable exception to an equitable rule makes little sense because that would amount to a court-made exception to a statutory interpretation.

Nealy’s and the Eleventh Circuit’s position received the full endorsement of the US Justice Department. In its brief, the US Solicitor General said nothing in the Copyright Act imposes any damages limit on timely suits.

In addition to Nealy and Warner, the Solicitor General’s office will present on Wednesday.

Differing Interpretations

Nealy formed Music Specialist in the 1980s with the disc jockey Tony Butler, who authored an album and a number of singles at issue in the case. Nealy halted business operations after 1989 to serve a prison sentence, and Butler formed another company in 2008 and transferred the musical rights of Music Specialist’s catalog to Warner, Atlantic Recording Corp., and Artist Publishing Group LLC.

Nealy had been in and out of prison since the 1980s, and he said he didn’t know about Warner’s deal with Butler until January 2016. He and Music Specialist sued in Florida federal court in December 2018, seeking damages from alleged infringement that occurred as early as 2008. The court granted Warner limited summary judgment on ownership of some works and said others required trial. It said Nealy couldn’t obtain damages for infringement more than three years before the suit had been filed.

The Eleventh Circuit overturned the damages ruling, finding the discovery rule applied to the Copyright Act’s definition of when Nealy’s claim “accrued,” potentially making pre-2015 damages available.

Some of the amicus briefs the high court case has attracted said the law speaks only to the timeliness of claims, not to damages.

The American Intellectual Property Law Association wrote that nothing in the law implies the rule limits damages in a timely suit under the discovery rule. To rule otherwise would put “individual artists and small businesses, who may lack the resources to engage in continuous monitoring, at an unfair disadvantage,” it said.

A brief from a group of entities led by the Electronic Frontier Foundation argued against that approach, cautioning that it “encourages copyright trolling” by rightsholders because it “expands the opportunities to seek nuisance-value settlements against numerous internet users.” The Association of American Publishers echoed that concern and argued against a discovery rule because it creates an “ironic and untenable situation” that “rewards the indolent or indifferent plaintiff” while “limiting a diligent copyright holder.”

AIPLA warned that courts need to “be active and energetic early in the proceedings” and use every tool available to identify and discard abusive cases early in discovery, as well as award fees to discourage nuissance litigation. AIPLA also said the discovery rule should apply only to ownership disputes—including Nealy’s—but not to ordinary infringement. Leaving all infringement to be “actionable in perpetuity” would “frustrate the legislative purpose” of the statute of limitations, the group wrote.

But a brief by copyright law professor Tyler Ochoa of Santa Clara University said there’s no justification to treat ownership and infringement disputes differently. He argued that damages simply aren’t constrained when the discovery rule does apply. He said the Second Circuit opinion that upheld the discovery rule but barred damages from three years prior—splitting from circuits like the Eleventh and Ninth—"effectively eliminates the discovery rule rule while purporting to preserve it.”

The Recording Industry Association of America, meanwhile, backed its member Warner’s bid for a narrow discovery rule, if there is one at all. But while warning of the “zombie” lawsuits it would face under a broad rule, its brief also argued that the court should leave space for the doctrine of equitable tolling—distinct from the discovery rule—to address undetectable “black box” infringement, such as copying of a work by a generative artificial intelligence system.

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