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Copyright continues its hot streak at the Supreme Court. After the Unicolors v. Hennes & Mauritz case in 2021 and the Andy Warhol Foundation v. Goldsmith case last year, the Supreme Court just granted cert in Nealy v. Warner Chappell Music, a case that addresses whether and to what extent a copyright infringer is able to retain some or all of the profits from acts of infringement when the copyright holder files a case within the statute of limitations.
This grant will be much appreciated in the artist communities, particularly those folks in the Second Circuit who have been forced to grapple with the impact of the flawed Sohm v. Scholastic decision, which came down during the hazy, pajama-clad days of 2020.
Those reading this column back then are already well acquainted with the Sohm problem, but let me briefly reset the table to refresh our pandemic-addled memories.
A three-year statute of limitations applies to copyright claims and it runs from the time the claim “accrues,” as set forth in 17 U.S.C. § 507(b). Under what has been coined the “discovery rule,” a copyright claim “accrues” when the artist learns, or reasonably should have learned, that the infringer was violating her rights. This, of course, makes perfect sense given that infringement often goes on for a substantial time before an artist learns of the violation. The law in this area has been relatively consistent — so long as a copyright holder brings her infringement claims within three years of reasonable discovery, she can disgorge the entirety of the infringers’ profits, without temporal limitation.
Sohm changed all that, at least in the Second Circuit. There, the court interpreted the Supreme Court case, Petrella v. MGM, in which the daughter of the writer of the “Raging Bull’ screenplay brought an infringement case against the movie studio long after the “Raging Bull” film was released. In that case, it was undisputed that the plaintiff had been well aware of the “Raging Bull” claim for decades. It did not address a copyright claim brought within the statute and thus had no reason to delve into such a factual scenario. Indeed, the case did not address the statute of limitation at all but instead ventilated the viability of the laches defense in the copyright context. SCOTUS correctly concluded that in such a circumstance the laches defense was rather weak because, among other things, the impact of a delay in bringing suit is mitigated by the fact that “a successful plaintiff can gain retrospective relief only three years back from the time of suit.” This was quite clearly dicta given the case addressed laches and not the statute of limitations.
But, in Sohm, Judge Sullivan, citing not much but Papazian v. Sony Music Corp, his own decision from his district court tenure, and the Petrella dicta discussed above, found that Petrella bars all copyright holders from recovering damages beyond the three-year window that precedes the filing of their lawsuit. This reasoning ran contra to the “discovery rule” and, as Professor Nimmer put it in his treatise, “took a hundred-and-eighty degree turn” to create a rule that was inconsistent with the statute and case law. And the Supreme Court, for its part, in SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 580 U.S. 328, 137 S.Ct. 954, 197 L.Ed.2d 292 (2017), had already made clear that Petrella did not impact the “discovery rule.”
The Sohm decision, in finding otherwise, asserts that it was not eviscerating the “discovery rule” because claims could still be filed within three years of reasonable discovery. But, while such claims could be filed, they would be limited to three years of damages, which in many cases would be nothing. This left many plaintiffs with a right but not a remedy, something that courts strive to avoid.
The following fact pattern illustrates why the Sohm approach makes little sense: An infringer sells counterfeit copies of an author’s book from 2010 to 2019 and the artist discovers the counterfeiting in 2023. She can file suit at that time but will not be able to recover any of the proceeds from the infringement because those profits accrued more than three years before she filed suit. The infringer walks away with all of the ill-gotten profits.
Or consider the infringer that sells knock-off jewelry from 2010 to 2019 and the designer who discovers as much in 2019. Even if that designer had the funds and wherewithal to file the lawsuit that day, she is already precluded from seeking damages for 2010 to 2016. And she still has to find (and save up the funds to pay) an attorney. And then she has to register the designs with the Copyright Office (under a relatively recent Supreme Court case, an artist may not file a copyright infringement claim until she has her registration in-hand). The registration process can take more than a year (and even longer if there are issues with the application or deposit). Once the registration is obtained, a complaint and accompanying documents must be drafted and filed, which again costs time and money. This process, in total, can easily take three years, which is one reason why the Copyright Act provides a three-year statute of limitations. But, if the artist files her claim in 2022, which is timely under the statute, she would not be entitled to seek any damages related the infringement. The infringer again is rewarded with undeserved profits.
Most courts have already rejected the Sohm analysis. The Ninth Circuit, in Starz Ent., LLC v. MGM Domestic Television Distribution, LLC, 39 F.4th 1236 (9th Cir. 2022), wrote that adopting the Sohm damages bar would mean that “a copyright plaintiff who, through no fault of its own, discovers an act of infringement more than three years after the infringement occurred would be out of luck. Such a harsh rule would distort the tenor of the statute.” It went on to note that it “makes little sense to bar recovery of damages beyond the three-years before the suit was filed where the copyright holder did not delay, but acted in accordance with § 507(b) by filing his complaint within three years of discovery.”
The Eleventh Circuit agreed with the Ninth Circuit when deciding Nealy v. Warner Chappell Music, Inc., 60 F.4th 1325, 1331 (11th Cir. 2023), finding that if the claim is timely under the discovery rule the infringer may be required to disgorge all profits from the infringement. It based this conclusion on two grounds: first, that Petrella’s statements about the availability of relief are directed to the way the statute of limitations works when claims accrue under the injury rule, not the discovery rule; and, second, “the text of the Copyright Act does not place a time limit on remedies for an otherwise timely claim.” It is the Nealy decision that is now before the Supreme Court.
Aside from the Ninth and Eleventh circuits, and as the District of New Hampshire explained in D’Pergo Custom Guitars, Inc v. Sweetwater Sound, Inc., 516 F. Supp. 3d 121 (D.N.H. 2021), “most district courts to have considered the issue have held that the limitations on damages discussed in Petrella do not apply to claims that are timely pursuant to the discovery rule.”
Thus, Sohm stands just about alone, an outlier that awards windfalls in illicit profits to copyright infringers who are able to conceal their infringement for three years or more. Hopefully, when the Supreme Court decides the Nealy appeal it will bring clarity to this crucial issue and harmonize the circuit courts once more.
Scott Alan Burroughs, Esq. practices with Doniger / Burroughs, an art law firm based in Venice, California. He represents artists and content creators of all stripes and writes and speaks regularly on copyright issues. He can be reached at scott@copyrightLA.com, and you can follow his law firm on Instagram: @veniceartlaw.
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