SCOTUS dodges discovery rule issue in Warner Chappell but lifts damages time bar

Critical copyright case looking at when damages can be awarded in disputes results in dissenting opinions | Polarising decision welcomed as “victory for copyright owners” and also decried as a “dead letter” that “sidesteps” key question on discovery rule | Reaction from victorious Nealy counsel and more...

The US Supreme Court has weighed in on a closely-watched dispute between Warner Chappell Music and rapper Sherman Nealy, ruling that a rights owner can obtain relief for any infringement claim—no matter when the infringement itself occurred.

The US’ highest court delivered a splintered 6-3 decision yesterday, May 9, in a case viewed as critical for determining when damages can be awarded in copyright litigation.

The court endorsed open-ended recovery of damages for copyright infringement, paving the way for Nealy to pursue more than a decade’s worth of damages for an unlicensed sample of his work by Flo Rida in his 2008 tune “In the Ayer”.

Cravath partner Wes Earnhardt, who argued the case on behalf of Nealy, told WIPR that the decision finally offers some much needed clarity for US courts.

“We are pleased with the Supreme Court’s decision to rule in Nealy’s favour. By holding that damages are available for all timely filed infringement claims, regardless of when the infringements occurred, the court’s decision provides clarity on an important issue that had divided the Circuit courts,” he said.

Discovery rule confusion

While the Copyright Act’s statute of limitations stipulates that a copyright owner must bring an infringement claim within three years of its accrual, it has been previously unclear whether copyright claims are put in motion when an infringing act occurs or upon discovery of that infringement.

This has prompted division in the circuit courts regarding the interpretation of Petrella v MGM (2014), in which SCOTUS barred recovery of damages for infringement that occurred more than three years before the filing of a copyright action.

In this particular case, Nealy and a business partner, Tony Butler, recorded music in 1983 that Butler later licensed to third parties—including Warner Chappell Music—while Nealy was imprisoned for drug-related offences.

Nealy sued for infringement within three years of discovering the licence, but a federal court dismissed his claims because the alleged infringing activity dated back more than a decade.

However, the Eleventh Circuit went on to reverse this finding, prompting Warner Chappell Music’s appeal to SCOTUS asking it to determine “whether, under the discovery accrual rule applied by the circuit courts,” a copyright plaintiff “can recover damages for acts that allegedly occurred more than three years before the filing of a lawsuit”.

Copyright act ‘doesn’t tolerate discovery rule’

In her opinion, Justice Elena Kagan wrote that “no such [time] limit on damages exists” and that the Copyright Act entitles a copyright owner “to recover damages for any timely claim”.

Kagan was backed by Chief Justice John Roberts as well as Justices Sonia Sotomayor, Brett Kavanaugh, Amy Coney Barrett, and Ketanji Brown Jackson.

However, Justice Neil Gorsuch filed a dissenting opinion, which Justices Clarence Thomas and Samuel Alito joined.

Gorsuch wrote: “The court discusses how a discovery rule of accrual should operate under the Copyright Act. But in doing so it sidesteps the logically antecedent question whether the Act has room for such a rule.

He argued that “rather than address that question, the court takes care to emphasise that its resolution must await a future case”.

The trouble is that the Act almost certainly “does not tolerate a discovery rule”, added Gorsuch.

“And that fact promises soon enough to make anything we might say today about the rule’s operational details, a dead letter.”

A victory for rights owners?

Jeff Van Hoosear, partner at Knobbe Martens, welcomed the ruling as a victory for copyright owners—in particular individuals and small entities that own copyrights.

“These plaintiffs, like Sherman Nealy, often rely on the ‘discovery rule’ for remedies. As the Ninth Circuit held in Starz Entertainment v MGM, the discovery rule would be eviscerated if the plaintiff was restricted to only damages from three years prior to the institution of the infringement action.”

But not all were pleased.

“The decision was surprising,” according to Fried Frank litigation partner Paul Schoenhard.

“Despite the formulation of the question presented, many in the copyright bar had hoped that this case would put to rest whether the discovery rule applies to copyright infringement claims,” he explained.

He went on to say that it was notable that, “of the six justices who formed the majority in Petrella, only two joined the majority here”.

Schoenhard continued: “In Petrella, the court concluded that the Copyright Act allows plaintiffs ‘to gain retrospective relief running only three years back from the date the complaint was filed’.

Today, the majority asserts that the court’s unqualified statement in Petrella was limited by context.”

Further, he argued that the decision potentially conflicts with another case, SCA Hygiene v First Quality Baby Products (2017), in which SCOTUS “relied on its treatment of the Copyright Act’s statute of limitations as ‘a three-year look-back limitations period’ to support its application of Petrella to patent law”.

Discovery rule ‘ripe for challenge’

Jennifer Mauri, partner at Michelman & Robinson believed that a key take-away from the decision is that the discovery rule is still alive in copyright cases—but cautioned that it now appears to be “ripe for a future challenge”.

“The majority relies on an assumption that the discovery rule is valid but holds off on opining as to its actual validity,” she said.

“In contrast, the three-justice dissent focused on opining that the discovery rule is invalid and should be struck down. In other words, three justices have telegraphed that they would reject the discovery rule, while the remaining six are yet to give their opinion.”

This means, she concluded, that plaintiffs relying on the discovery rule should be aware that it is at risk—and a swift resolution of their case may help insulate them from a future change in the law.

“On the other hand,” she added, “Defendants should consider strategies for delaying the resolution of the case to give the Supreme Court time to potentially invalidate the rule.”

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