SCOTUS to Test the Limit of Copyright Liability

Last week, the Supreme Court of the United States announced that they would be taking up a copyright case that examines when and how damages accrue in copyright infringement cases.

The plaintiff in this case is record label owner Sherman Nealy. According to the lawsuit, his label, Music Specialist, owns the rights to a 1984 Tony Butler song Jam the Box. Nealy alleges that, in 2008, the musician Flo Rida used elements of that song in his release In the Ayer. 

However, according to Nealy, he was unaware of the infringement at the time as he was serving a 20-year prison sentence. He instead alleges that he learned about it following his release in 2016, prompting the lawsuit.

He further alleges that any license they obtained is illegitimate, saying that his business partner did not have the right to grant such licenses in his absence. 

However, the issue before the Supreme Court is not whether the labels committed copyright infringement, but the damages that they may be liable for.

The labels argue that, since the statute of limitations on copyright infringement cases is three years, they should not be liable for any infringements going back more than three years before the case was filed.

Neatly, however, argues that unduly punishes him for not knowing about the infringement and is requesting damages going back all the way to 2008. The lower court previously sided with the labels, but that decision was overturned by the Eleventh Circuit Court of Appeals. That, in turn, set up the appeal to the Supreme Court.

All in all, this could be one of the most important copyright cases in a long time, making it well worth examining the issues at play.

Damages: The Discovery Rule vs. The Injury Rule

The issue of when a copyright infringement lawsuit can be filed is pretty straightforward: It must be filed within three years of the plaintiff either learning about the alleged infringement or should have learned about it. 

In short, if you are aware of an infringement (or reasonably should have been aware of it) and wait longer than three years to file a lawsuit, you are out of luck.

However, that creates a potential problem. Since an infringed party can learn about an infringement long after it begins, such as in this case, how should damages be calculated?

Right now, there are two separate schools of thought: The Discovery Rule and The Injury Rule:

• The Discovery Rule: Under the discovery rule, damages begin accruing for all infringements when the act of discovery takes place. This means that, as long as the lawsuit is filed within the three years, all infringements are considered for damages, regardless of when they began.
• The Injury Rule: With the injury rule, damages begin to accrue after the infringement takes place. As such, three years after an infringement happens, it rolls off from the perspective of damages. This means that, regardless of when the plaintiff learned about the infringement, damages can only go back three years from when the lawsuit was filed.

In Nealy’s case, it’s easy to see why this is a big deal. Under the discovery rule, he can collect damages going all the way back to 2008. Under the injury rule, it only goes back to 2015, three years before he filed the case.

In short, depending on how the Supreme Court rules, Nealy’s potential damages could more than halve or double versus the alternative, especially considering that the alleged infringing song was most popular after it was first released.

Right now, there is a circuit split on the issue, with the Ninth and the Eleventh both ruling in favor of the discovery rule but the Second Circuit favoring the injury rule. That, in turn, is the very issue the Supreme Court is looking to resolve.

Why this is the case requires examining the arguments in favor of both rules.

The Arguments for Each Rule

The discovery rule, in general, is popular with potential plaintiffs. It leads to higher damages in cases where a lawsuit comes well after the infringement began, and that means not only larger judgements, but also larger settlements.

The logic is straightforward. There are many times in which a copyright holder might not be aware of the infringement, and it seems unfair to reduce the damages they could win simply because they didn’t file a lawsuit over something they were unaware of.

Without the discovery rule, potential infringers have a perverse incentive to hide their infringing activity for as long as possible, or choose to infringe copyright holders who are less likely to learn of the infringement, such as someone serving time in prison.

However, potential defendants argue that this is unfair. They can’t control when or how a potential plaintiff learns about an infringement, and the discovery rule makes it so that they can have hidden copyright liabilities that go back decades.

For example, if a musician learns about an infringement in a song from the 1960s, should they be able to file a lawsuit in the 2020s and collect damages going back 60 years?

But, while that is an extreme example, Nealy’s case is real and involves a 15-year-old song. Is it fair to expect the record labels to cover damages, which they were unaware of the potential of, from the entire run of the song? On the other hand, is it fair to punish Nealy with reduced damages for not filing a lawsuit that he had no idea he needed to file?

This isn’t an issue with an easy answer, and that’s why there is a circuit split on the issue and why the Supreme Court agreed to take up this case. 

To that end, it could be a very important lawsuit, one that determines what cases are practical to file moving forward.

Bottom Line

Ultimately, this is a case about potential damages and whether Nealy can collect damages going back fifteen years from today or just the last eight. 

While this might seem academic as it doesn’t have any bearing on whether the infringement occurred or not, it’s of major importance when determining what cases are and are not practical to file. 

Simply put, in many cases, the potential damages are simply too low to justify filing a copyright infringement lawsuit. As we saw back in 2014, the Beastie Boys won $1.7 million verdict against Monster Energy over the use of one of their songs in an advertisement. Despite the large judgement, they nearly lost money on the case after they were denied most of their attorneys’ fees and costs.

In short, potential damages play a big role in determining which cases get filed. If there’s no hope of collecting enough damages to pay for the costs, a case will rarely make it to court. 

The Copyright Claims Board is a potentially useful tool for cases where damages can’t equal costs in federal court, but the process requires the respondent to not opt out and many potential respondents, especially large companies, have consistently opted out of the process.

Whichever rule the Supreme Court ultimately backs will have a significant impact on which cases can be and will be filed moving forward. If it opts for the discovery rule, older infringements that are recently discovered will be more viable for a copyright lawsuit. 

If it goes the other way, those cases will likely be shelved and impractical to file anywhere other than the Copyright Claims Board.

Ultimately, I find it easy to see both sides of this argument. Either way, someone is being punished for something they likely were unaware of. It’s just a matter of whether it is the defendant or the plaintiff that bears that burden.

Regardless of one’s feelings, this is going to be a case to watch, as the outcome will have a major impact on what copyright infringement cases make it to the courtroom and which are either moved to the CCB or skipped altogether.