People generally recognize that under our federal system, individual states may have differing laws in a particular area, such as criminal law. Sometimes differences in various states’ laws make national headlines. However, individuals and companies generally expect that the application of a federal statute will be the same whether a lawsuit is filed in a federal court in New York, California or any other state. One certainly doesn’t expect that there would be potentially vast discrepancies in the amount of money one could recover under the federal copyright laws depending upon whether you file in New York or California. Nor would one generally anticipate that one circuit would knowingly create a split of opinion in the application of a federal statute. However, a decision from the Ninth Circuit Court of Appeals last month, created a circuit split with respect to how much in damages some successful plaintiffs in a copyright infringement suit may recover.
The Copyright Act’s Statute of Limitations and the “Discovery Rule”
The Ninth Circuit’s July 14, 2022 opinion in Starz Entertainment, LLC v. MGM Domestic Entertainment Distribution, LLC deals with the application of the “discovery rule” with respect to statute of limitations provision of the Copyright Act. The Starz opinion directly contradicts the Second Circuit’s construction of the rule in its prior opinion in Sohm v Scholastic, Inc., 959 F3d 39 (2d Cir. 2020). Curiously, both the Starz court and the Sohm rely on the Supreme Court’s opinion in Petrella v. Metro-Goldwyn Mayer, Inc., 572 U.S. 663, 134 S.Ct. 1962 (2014) for their divergent views.
Copyright Act Section 512(b) is the statute of limitations for civil actions and reads as follows: “[n]o civil action shall be maintained under the provisions of this title unless it is commenced within three years after the claim accrued.” Generally, an infringement claim accrues when the infringement occurs and that event starts the clock ticking on the three-year statute of limitations. This is known as the “incident of injury rule.”
However, as the Starz court explains, there is an exception to this rule:
In our circuit, and every other circuit to have reached the question, an exception to that infringement rule has developed. Known as the “discovery rule,” a claim alternatively accrues when the copyright holder knows or reasonably should know that an infringement occurred.
The “discovery” rule usually will apply when a plaintiff would not reasonably be on notice that an infringement had occurred or where the infringing party takes actions to hide the infringement from the aggrieved party. It is in cases where the discovery rule applies that the Second and Ninth Circuits now differ in their approach regarding available damages.
In the Starz case, MGM entered into exclusive license agreements in 2013 and 2015 with Starz whereby for a period of time, which often differed for each licensed film or episode, Starz would have the exclusive right to exhibit the particular licensed films from the MGM library. There were several hundred films and TV episodes involved and the license terms ranged from mere months to several years. It wasn’t until August 2019 when a Starz employee discovered that one of the exclusively licensed films was also available on Amazon Prime.
Despite assurances from MGM regarding any further exclusivity violations, Starz continued investigating and found more than 100 additional exclusivity violations. Starz sued MGM for 340 counts of infringement in in May 2020. MGM moved to dismiss many of these claims, even though the lawsuit was timely filed within three years of the “discovery” of the infringements, under the theory that damages are still limited by the three-year look-back rule as stated in the Petrella decision. This means that Starz could only be compensated with respect to infringements that occurred within the three years prior to the filing of the complaint.
The Second Circuit Limits Damages Under the Discovery Rule
The Second Circuit’s ruling in Sohm supported MGM’s position in the Starz case. In Sohm, a professional photographer entered into agreements with several agencies to license his pictures for limited terms to various entities. One of the agencies entered into an agreement with Scholastic in 2004. The photographer would receive monthly invoices, but it wasn’t until many years later that he discovered that Scholastic was using his photographs beyond the expiration of the agency’s licenses. Sohm didn’t sue Scholastic until 2016.
The Second Circuit held that while Sohm was not on notice of any event that would have made him inquire as to potential infringements at the time they occurred and therefore the “discovery” rule applied, the Court ruled that damages would only be available for infringing acts that occurred within the three years prior to the filing of the complaint, citing Petrella:
In Petrella, the Supreme Court initiated its examination of the Copyright Act’s statute of limitations by explaining that “[u]nder the Act’s three-year provision, an infringement is actionable within three years, and only three years, of its occurrence” and that “the infringer is insulated from liability for earlier infringements of the same work.” It stated that “§ 507(b)’s limitations period … allows plaintiffs … to gain retrospective relief running only three years back from the date the complaint was filed….” Consequently… we must apply the discovery rule to determine when a copyright infringement claim accrues, but a three-year lookback period from the time a suit is filed to determine the extent of the relief available.
(Citations omitted). Accordingly, while a plaintiff filing within the Second Circuit may avail themselves of the “discovery” rule, they cannot recover damages for any infringements occurring prior more than three years prior to the filing of the complaint.
The Ninth Circuit Expands Availability to Recover Damages to All Infringing Activity
Sohm had pointed out that Petrella did not rule on the applicability of the discovery rule, holding only that where there is an actual statute of limitations, the equitable doctrine of laches (i.e., where a plaintiff unreasonably delays filing a lawsuit) does not apply. The Ninth Circuit agreed and further pointed out the contradictory nature of the Second Circuit’s position:
We disagree that such a limitation on recovery of damages is dictated by Petrella. We hold that the discovery rule for accrual allows copyright holders to recover damages for all infringing acts that occurred before they knew or reasonably should have known of the infringing incidents and that the three-year limitations period runs from the date the claim accrued, i.e., from the date when the copyright holder knew or should have known of the infringement. Applying a separate damages bar based on a three-year “lookback period” that is “explicitly dissociated” from the Copyright Act’s statute of limitations in § 507(b) would eviscerate the discovery rule. There is no reason for a discovery rule if damages for infringing acts of which the copyright owner reasonably becomes aware years later are unavailable. This case provides a textbook example of the absurdity of such a rule.
The Starz Court further noted that some of the contractual exclusivity periods ended as early as 2013 and Starz did not discover any infringement until 2019, meaning that adopting the Second Circuit’s position would mean would “render the ‘discovery rule’ functionally identical to the ‘incident of injury’ rule for continuing infringements. Consequently, a plaintiff could potentially recover significantly more in damages by filing in district courts within the Ninth Circuit than in those within the Second Circuit.
The Holding and Language of Petrella Led to The Circuit Split
While the Ninth Circuit’s position may make for a more rational approach to the application of the “discovery rule,” it’s hard to square its ruling with the language of the Petrella decision:
To the extent that an infringement suit seeks relief solely for conduct occurring within the limitations period, however, courts are not at liberty to jettison Congress’ judgment on the timeliness of suit. Laches, we hold, cannot be invoked to preclude adjudication of a claim for damages brought within the three-year window.
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If the rule were, as MGM urges, “sue soon, or forever hold your peace,” copyright owners would have to mount a federal case fast to stop seemingly innocuous infringements, lest those infringements eventually grow in magnitude. Section 507(b)’s three-year limitations period, however, coupled to the separate-accrual rule, avoids such litigation profusion. It allows a copyright owner to defer suit until she can estimate whether litigation is worth the candle. She will miss out on damages for periods prior to the three-year look-back, but her right to prospective injunctive relief should, in most cases, remain unaltered.
(emphasis added). While the Ninth Circuit is correct that the Petrella court did not involve the application of the “discovery rule” and therefore did not rule on whether the look-back period for damages extends beyond the three-year limitations period, the Second Circuit also appears to be correct in that the language of Petrella supports its decision to bar to compensation for infringements occurring prior to the three-year “look-back” period.
Conclusion
Unless the Supreme Court resolves this circuit split, there will undoubtedly be forum shopping by parties who seek application of the discovery rule in their favor. Until then, if you are considering filing an infringement suit or you believe that one may be filed against you, contact an experienced attorney to determine which venue may be best for your position.