Second Circuit Limits Copyright Damages To Three Years Preceding Suit
Kelley Drye Client Advisory
Introduction
While the Copyright Act has a three-year statute of limitations, most courts follow the “discovery rule,” pursuant to which “an infringement claim does not ‘accrue’ until the copyright holder discovers, or with due diligence should have discovered, the infringement.”[1] It is the defendant’s burden to prove whether the plaintiff knew or should have known about the alleged infringement more than three years before it filed suit. Therefore, it is often difficult to dismiss a copyright infringement claim on statute of limitations grounds prior to costly discovery. This has presented a significant advantage to a plaintiff who raises a claim for infringement more than three years after the allegedly-infringing behavior has ceased. On May 12, 2020, the Second Circuit issued a decision which more evenly balances the equities in late-filed copyright infringement claims.In Sohm v. Scholastic Inc., No. 18-2110, 2020 WL 2375056 (2d. Cir. May 12, 2020), the circuit court found, among other things, that monetary damages in a copyright infringement suit are limited to those incurred in the three years preceding the commencement of suit. The Sohm decision resolves a disagreement that had emerged within the Second Circuit since the U.S. Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663 (2014).
Petrella v. Metro-Goldwyn-Mayer, Inc.
In Petrella, the Supreme Court considered whether the equitable defense of laches was applicable to claims for copyright infringement under the U.S. Copyright Act given its three-year statute of limitations. The allegedly infringing work in that case was the motion picture Raging Bull, which was based on the life of boxing champion Jake LaMotta. LaMotta collaborated with his friend, Frank Petrella, to tell the story of LaMotta’s career via three copyrighted works, including a screenplay registered in 1963. Petrella and LaMotta assigned their rights in the works to a production company that, in turn, sold the motion picture rights to the screenplay to the defendant Metro-Goldwyn-Mayer (“MGM”). In 1980, MGM released the film Raging Bull, directed by Martin Scorcese and starring Robert De Niro. Since then, MGM has continuously marketed the film and converted it into multiple formats, including DVD and Blu-ray.Frank Petrella died during the initial term of copyright in the screenplay, after which his copyright renewal rights reverted to his heirs unburdened by the assignment he had previously made.[2] In 1991, his daughter, Paula Petrella (“Petrella”), renewed the copyright in the 1963 screenplay. In 1998, Petrella informed MGM that she owned the copyright to the screenplay and that exploitation of any derivative work, including the film Raging Bull, constituted infringement. More than ten years later, in January 2009, Petrella sued MGM for copyright infringement. Petrella sought damages only for acts of infringement occurring on or after January 6, 2006 – within three years prior to commencement of the lawsuit.
MGM moved for summary judgment on multiple grounds, including the equitable doctrine of laches based upon Petrella’s 18-year delay in filing suit. The district court granted MGM’s motion, finding that Petrella’s delay was unreasonable and prejudiced MGM, in part due to its significant investments in exploiting the film. The Ninth Circuit affirmed the district court’s dismissal, applying the laches doctrine based on evidence that Petrella delayed her suit because the film had not yet made money.
The Supreme Court reversed, holding that the equitable defense of laches cannot bar copyright infringement claims brought within the three-year statutory limitations period. The Court held that the language of the Copyright Act “itself takes account of delay,” noting 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.”[3] Thus, “a successful plaintiff can gain retrospective relief only three years back from the time of suit” and “[n]o recovery may be had for infringement in earlier years.”[4] The Court noted that MGM’s returns on its investment in years outside the three-year window remained MGM’s to keep.[5]
The Court rejected MGM’s argument that laches is necessary to prevent a copyright owner from waiting to see the outcome of an alleged infringer’s investment before filing suit. It reasoned that the statute of limitations, coupled with the separate-accrual rule – whereby the three year limitations period starts anew each time an infringing work is reproduced or distributed – permits copyright owners to wait to see whether an infringer’s exploitation causes harm that is worth the cost of litigation, without the need to challenge each and every actionable infringement.[6]
In the aftermath of the Petrella decision, a disagreement emerged among district courts regarding whether damages in a federal copyright infringement action were limited to those that accrued within three years prior to suit.[7]
Sohm v. Scholastic Inc.
The Second Circuit’s decision in Sohm resolved the split among district courts. In Sohm, professional photographer Joseph Sohm and one of his agencies sued Scholastic Inc. for, among other things, alleged copyright infringement of 89 photographs. The district court granted in part and denied in part the parties’ cross-motions for partial summary judgment. On appeal, Sohm and Scholastic each raised various challenges to the district court’s order.[8] Most significantly, Scholastic argued that the district court erred in: (1) applying the “discovery rule,” and not the “injury rule,”[9] to determine when the plaintiffs’ claims accrued under the statute of limitations; and (2) allowing damages that accrued more than three years prior to the date that plaintiffs filed suit.The district court applied the “discovery rule” and found the action was timely filed because Scholastic had failed to show any reason that Sohm should have discovered the infringing acts more than three years prior to the date it filed the complaint.[10] On appeal, Scholastic argued that two recent Supreme Court decisions, SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., LLC, 137 S. Ct. 954 (2017) and Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663 (2014), cast doubt on the applicability of the “discovery rule.” The Second Circuit rejected this argument and affirmed the district court ruling, noting that in both cases the Supreme Court specifically declined to rule on the applicability of the rule.
The Second Circuit reversed the district court’s decision regarding recovery of damages for infringement. It held that, regardless of whether the “discovery rule” or “injury rule” is used to determine when a claim accrues, the Supreme Court’s decision in Petrella clearly held that the Copyright Act limits a plaintiff’s recovery to damages incurred in the three years prior to filing suit.
The Second Circuit noted that “Petrella’s plain language explicitly dissociated the Copyright Act’s statute of limitations from its time limit on damages” by holding that “a successful plaintiff can gain retrospective relief only three years back from the time of suit” and that “[n]o recovery may be had for infringement in earlier years.”[11] It rejected the argument that the discussion of the limitation of damages in Petrella was mere dicta because it was foundational to the Supreme Court’s ultimate holding that laches is inapplicable to actions under the Copyright Act.
An Emerging Circuit Split?
Sohm will be well-received by defendants in the Second Circuit who are faced with tardy claims of copyright infringement, such as a fashion company that is faced with an infringement claim regarding a product it has not sold for many years.[12] However, since the Supreme Court’s ruling in Petrella, other circuits have not yet squarely addressed whether copyright infringement damages should be limited to those incurred in the three years preceding suit.The Fifth and Seventh Circuits have both acknowledged that after the Petrella decision, there may be a question as to whether a copyright plaintiff is entitled to damages accrued more than three years prior to the suit, but neither has decided the issue.[13]
Ten years before the Supreme Court issued its decision in Petrella, the Ninth Circuit’s decision in Polar Bear Products v. Timex Corp. held that the Copyright Act “permits damages occurring outside of the three-year window, so long as the copyright owner did not discover – and reasonably could not have discovered – the infringement before the commencement of the three-year limitation period.”[14] After Petrella, district courts in the Ninth Circuit continue to cite the Polar Bear decision in holding that the Copyright Act’s statute of limitations does not bar recovery beyond a three-year lookback so long as the plaintiff had no reason to know about the infringement prior to the three-year limitations period.[15]
In Menzel v. Scholastic, Inc., the District Court for the Central District of California considered the same arguments Scholastic made in the Sohm case, namely that Petrella: (1) established that the injury rule governs the accrual of claims; and (2) prohibits the recovery of damages outside the three years before plaintiff filed its complaint, even if the complaint was timely brought. The district court disagreed and concluded that Petrella did not overrule the Ninth Circuit’s Polar Bear decision because its discussion of damages was dicta. The parties in the Menzel case ultimately settled, preventing a definitive decision by the Ninth Circuit.