IP Law Daily, COPYRIGHT—9th Cir.: A sharp circuit split emerges over discovery rule damages lookback, (Jul 15, 2022)

By Matthew Hersh, J.D.

The Ninth Circuit roundly rejects a Second Circuit rule limiting damages to the three years prior to the filing of a copyright infringement lawsuit.

The federal district court in Los Angeles correctly decided that a plaintiff who timely files a lawsuit after discovery of an alleged ongoing infringement is not limited to damages that accrue in the three years prior to the filing of the lawsuit, the U.S. Court of Appeals for the Ninth Circuit has held. The court’s decision, which squarely joins issue with a contrary ruling issued by the Second Circuit in 2020, sets up a clash between the nation’s two leading copyright circuits and is almost certain to lead to a petition for certiorari that asks the Supreme Court to referee the dispute (Starz Entertainment, LLC v. MGM Domestic Television Distribution, LLC, July 14, 2022, Bade, B.).

The decision arises out of two licensing agreement entered into by Starz Entertainment with a distribution entity affiliated with MGM. Together, the two agreements provided Starz with the exclusive right to exhibit 585 movies and 176 television series episodes in exchange for about $70 million. Six year later, a Starz employee discovered that one of the films covered by the licensing agreements, “Bill & Ted’s Excellent Adventure,” was available to stream on Amazon Prime Video during Starz’s exclusivity period. Starz decided to investigate further and, by the end of August, discovered that 22 additional movies covered by the exclusive licenses were available on Amazon Prime Video. All told, between Starz’s discovery and MGM’s acknowledgments, Starz claimed that there were over 300 titles that had been infringed by MGM’s alleged violation of the exclusive licenses.

Starz sued MGM in May 2020, asserting 340 claims of direct, contributory, and vicarious liability. MGM moved to dismiss, alleging that the claims were untimely and, even if not, could entitle Starz only for damages accruing during the three years prior to the filing of the lawsuit. The trial court ruled for Starz on both issues, leading to this appeal.

Discovery rule. The court of appeals first reaffirmed its prior holding that the statute of limitations in a copyright case begins to run upon the plaintiff’s discovery of the alleged violation, even if more than three years have passed since the time of the alleged infringement. Although this had been essentially the consensus of courts prior to 2014, MGM argued that the Supreme Court opinion in Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663 (2014) cast doubt on the rule.

The court of appeals—joining again with its counterparts in other circuits—disagreed. In Petrella, the court found that the common law doctrine had been subsumed within the Copyright Act’s statute of limitations, thus precluding the laches defense in any case where the statute of limitations was met. Dicta in the opinion noted that a copyright claim “accrues when an infringing act occurs,” which the Court labeled “the incident of injury rule.” But nothing in this language, the court of appeals found, could be read to uproot the discovery rule that had been widely recognized in the circuit courts, including the Ninth Circuit, prior to 2014. Indeed, the court of appeals noted, Justice Ginsburg’s opinion for the Court expressly acknowledged the discovery rule adopted in the circuits, and emphasized that the Court had not “passed on the question.” Thus, the court of appeals concluded, Petrella did not change settled circuit law.

Three-year lookback. The court also found, in this case parting company from the Second Circuit, that Starz was not limited to damages accruing during the three years prior to the filing of its lawsuit in 2020. Here again, language in Petrella was at issue, In Petrella, the Supreme Court noted, in its explanation as to why the laches doctrine did not apply in copyright cases, that the Copyright Act “itself takes account of delay” by limiting damages to the three years prior to when a suit is filed. Relying on this language, the Second Circuit, in Sohm v. Scholastic Inc., 959 F.3d 39 (2d Cir. 2020), found implicit in this language a rule that even where a lawsuit was timely filed after discovery, damages could not accrue beyond the three-year “lookback” period prior to the filing of the lawsuit. The Ninth Circuit disagreed.

The Second Circuit’s conclusion was wrong, the court of appeals reasoned, because Petrella arose in an entirely different context. In Petrella, the widow of an author discovered, in 1998, that the movie “Raging Bull” allegedly infringed the copyright in her late husband’s screenplay. Nonetheless, the widow waited to sue more than 10 years after she first discovered the infringement. In finding that laches did not bar the lawsuit, the Supreme Court underscored that under the Copyright Act’s three-year statute of limitation, she could only sue based on acts of infringement—continued distribution of the movie, that is—that occurred in the three-year period prior to the filing of the claim. Such a rule made sense in that context, the court of appeals noted, but had no relevance in the instant case, where Starz timely filed within three years after discovery of the infringement.

Moreover, the court of appeals reasoned, applying a separate damages bar based on a three-year “lookback period” that is dissociated from the Copyright Act’s statute of limitations “would eviscerate the discovery rule.” Indeed, the court noted, this case “provides a textbook example of the absurdity of such a rule.” The licensing agreements between Starz and MGM covered hundreds of titles under separate time periods, and some of the exclusivity periods ended as early as 2013. Under the approach urged by MGM and adopted in Sohm, damages may only be recovered for a 2013 infringement if the complaint is filed within three years of 2013, or by 2016. But here, Starz did not discover any infringement until August 2019, and Starz brought suit less than a year later. Thus, under the Sohm rule, “to the extent the discovery rule ‘saved’ the claims,” the court noted, “it was a pyrrhic victory.”

The Case is No. 21-55379.

Attorneys: J. Wesley Earnhardt (Cravath, Swaine & Moore LLP) for Starz Entertainment, LLC. Mark A. Perry (Gibson, Dunn & Crutcher LLP) for MGM Domestic Television Distribution LLC.

Companies: Starz Entertainment, LLC; MGM Domestic Television Distribution LLC

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