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Copyright Damages and the Discovery Rule: Warner Chappell v Nealy


warner v nealy supreme court case

Following the Supreme Court’s 2014 decision in Petrella v MGM, a split developed in the federal courts regarding how far back in time a copyright plaintiff who was unaware of an infringement could recover damages.  Some courts held that damages could only be recovered for infringing activity that took place within the 3-year period prior to the lawsuit.  Other courts held that there was no such limitation.  In early May, the Supreme Court held that there is no time limit on the period for recovery of copyright damages in a timely filed copyright case.  Read on for an overview of the case and its impact.


When does a copyright claim accrue?


The Copyright Act provides that “[n]o civil action shall be maintained … unless it is commenced within three years after the claim accrued.” 17 U.S.C. §507(b).  This means a plaintiff must file a lawsuit within three years from when the claim accrues.

 

Ordinarily, a claim accrues at the time the injury takes place (the “injury rule”).  However, in certain situations, courts consider the injury as having occurred when the plaintiff discovers, or with due diligence should have discovered, the injury (the “discovery rule”).


Nealy’s Road to the Supreme Court

 

In 1983, plaintiff Nealy co-founded a music company with Tony Butler.  Without Nealy’s knowledge and while Nealy was in prison, Butler licensed the music to defendant Warner Chappell Music Inc.  Nealy was released in 2015 and sued Warner in 2018 seeking damages for infringing activity going back a decade before he filed suit.

 

Warner accepted Nealy’s position that his suit was timely under the discovery rule.  Instead, it argued that Nealy could only recover damages for Warner’s activity during the three-year period prior to the lawsuit.  The Florida federal district court agreed, relying on the Second Circuit’s decision in Sohm v Scholastic, which held that under Petrella, damages in a discovery rule case are limited to the three-year period before a suit is filed.  The Eleventh Circuit reversed, agreeing with the Ninth Circuit’s ruling in Starz v MGM that there is no such limitation.

 

Warner petitioned the Supreme Court for cert in May 2023, asking “whether the Copyright Act’s statute of limitations for civil actions, 17 U.S.C. 507(b), precludes retrospective relief for acts that occurred more than three years before the filing of a lawsuit.”  In granting cert, the Supreme Court reframed the question presented to assume that the discovery rule applied. 


A split decision


The majority of the Supreme Court answered the question the Court had agreed to hear, holding that, assuming the discovery rule applies, there is no limitation on how far back Nealy can recover.  The majority opinion, written by Justice Kagan, explained that the Copyright Act specifies when a suit must be filed, but has no limitation on how far back a copyright owner can recover damages.  The majority further disagreed with the Second Circuit’s reliance on Petrella, explaining that the language in Petrella was taken out of context and did not address the issue.

 

A three-member dissent, led by Justice Gorsuch, disagreed with the majority’s approach.  The dissent concluded that the discovery rule does not apply in copyright cases.  Noting that the parties did not challenge the discovery rule itself, the dissent asserted the Court should not have decided the case because it would have been better to “answer a question that does matter rather than one that almost certainly does not.”


Other perspectives


Several prominent intellectual property-related organizations submitted amicus briefs in this case including, the American Intellectual Property Law Association (AIPLA), the Recording Industry Association of America (RIAA), the Association of American Publishers, and the Electronic Frontier Foundation (EFF).  While the AIPLA’s brief was consistent with the majority opinion, other groups argued for adoption of the injury rule, urged the Supreme Court to address the application of equitable tolling, and cautioned that copyright trolls may abuse the discovery rule.


Takeaways


As a result of the Supreme Court’s decision, it is now clear that, when the discovery rule applies, there is no time limit on how far back a plaintiff can recover damages. 

 

The question of when and whether the discovery rule should apply in copyright cases remains unresolved.  Relying on the dissent, defendants will undoubtedly challenge applicability of the discovery rule in its entirety, in addition to seeking to limit it to cases involving fraud or concealment.

 

Since the Supreme Court recently denied cert in Hearst Newspapers LLC v. Antonio Martinelli, we will have to wait for another case applying the discovery rule to emerge and capture the attention of the Court.

 

If you have questions or would like to discuss these issues further, please feel free to contact us.


nancy mertzel - partner of mertzel law pllc

Nancy J. Mertzel

Mertzel Law PLLC

1204 Broadway, 4th Floor, New York, NY, 10001

25 Pompton Avenue, Suite 101, Verona, NJ 07044

(646) 965-6900

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