The Ninth Circuit Reaffirms the Discovery Rule for the Copyright Act’s Statute of Limitations — Starz v. MGM (Guest Blog Post)
By Guest Blogger Tyler Ochoa
Eleven days ago, the Ninth Circuit reaffirmed that: (1) the discovery rule of accrual applies to the Copyright Act’s three-year statute of limitations; and (2) when the discovery rule applies, the copyright owner is not limited to damages for acts occurring within three years before the date of filing the lawsuit. Instead, it may recover damages for acts occurring earlier, as long as it files suit within three years of the date it reasonably discovered those earlier acts. Starz Entertainment, LLC v. MGM Domestic Television Distribution, LLC, No. 21-55379 (9th Cir. July 14, 2022). In so holding, the Ninth Circuit created (or widened) a circuit split with the Second Circuit, which previously held that even under the discovery rule, damages for copyright infringement are limited to “a three-year lookback period from the time a suit is filed.” Sohm v. Scholastic, Inc., 959 F.3d 39, 52 (2d Cir. 2020).
In a previous blog post, I criticized the Second Circuit’s ruling as inherently self-contradictory. I also filed an amicus brief in the Starz v. MGM case on behalf of the plaintiff-copyright owner. I am therefore pleased that the Ninth Circuit ruled correctly, and that it cited my amicus brief in rejecting the Second Circuit’s bizarre holding.
Background: The Copyright Act’s Statute of Limitations
My previous blog post contains detailed information about the Copyright Act’s three-year statute of limitations [17 U.S.C. § 507(b)] and how it has been interpreted. If you are new to the issue, you may want to read my prior post first. The following is only a brief summary.
In Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663, 134 S. Ct. 1962 (2014), the U.S. Supreme Court held that laches could not bar an action for damages that was filed within the three-year statute of limitations. It explained how the period is calculated:
It is widely recognized that the separate-accrual rule attends the copyright statute of limitations. Under that rule, when a defendant commits successive violations, the statute of limitations runs separately from each violation….
… Thus, when a defendant has engaged (or is alleged to have engaged) in a series of discrete infringing acts, the copyright holder’s suit ordinarily will be timely under § 507(b) with respect to more recent acts of infringement (i.e., acts within the three-year window), but untimely with respect to prior acts of the same or similar kind.
Petrella, 572 U.S. at 671-72 (internal citations and quotes omitted).
In a footnote, however, the Court also acknowledged the existence of a possible exception to the injury rule of accrual: the “discovery rule.” Under the “discovery rule,” the limitations period begins to run when “the plaintiff discovers, or with due diligence should have discovered, the injury that forms the basis for the claim.” Petrella, 572 U.S. at 670 n.4. The rule could not be applied in Petrella, because everyone agreed that the plaintiff knew of the existence of her cause of action at the time that it accrued. (Indeed, because her claim involved the renewal term of her copyright, she had knowledge of the existence of a potential cause of action even before the renewal term commenced.) Accordingly, the Supreme Court did not rule on the validity of the discovery rule, leaving the question for another day.
Every Court of Appeals to have addressed the issue, however, has held that the discovery rule of accrual applies when the plaintiff reasonably could not have discovered the infringement at the time that it occurred. See Psihoyos v. John Wiley & Sons, Inc., 748 F.3d 120, 124 n.3 (2d Cir. 2014) (collecting cases).
In Sohm v. Scholastic, Inc., 959 F.3d 39 (2d Cir. 2020), the Second Circuit purported to reaffirm that “the discovery rule applies for statute of limitations purposes in determining when a copyright infringement claim accrues under the Copyright Act.” 959 F.3d at 50. Nonetheless, it held that in Petrella, “the Supreme Court explicitly delimited damages to the three years prior to the commencement of a copyright infringement action.” Id. at 51. Combining these two holdings, it concluded: “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.” Id. at 52.
As I explained in my previous blog post, this dual conclusion is inherently self-contradictory and makes no sense. Under Petrella, any damages resulting from infringements that occurred within three years of filing can already be recovered under the three-year statute of limitations, even if the plaintiff had long been aware that the defendant was infringing, without any need to resort to the discovery rule. (Indeed, that is what happened in Petrella itself.) The discovery rule is only needed or useful to recover damages for infringements that occurred more than three years before filing, in those cases in which a plaintiff was blamelessly ignorant that older infringements had occurred. By limiting damages to three years from the date suit was filed, the Sohm court in effect was adopting an injury rule of accrual, even though it claimed it was using the discovery rule of accrual. Sohm effectively eliminates the discovery rule while purporting to preserve it.
(If you understand that summary, you’re ready to read on. If it’s still unclear, go back and read my previous blog post on Sohm for a more detailed explanation.)
Starz v. MGM is an unusual case in which an exclusive licensee is suing its own licensor for copyright infringement. MGM was the original copyright owner of 585 movies and 176 television series episodes. In 2013 and 2015, it granted exclusive licenses to stream those works to Starz, a premium subscription channel. The time periods for each license were separate, and some licenses were renewed multiple times, resulting in more than 1,000 separate license periods. MGM also promised Starz that it would not license the same work(s) to anyone else during each of those periods.
In August 2019, a Starz employee discovered that one of the movies it had licensed (Bill and Ted’s Excellent Adventure) was also available on Amazon Prime. This triggered a complaint to MGM and an investigation, which resulted in MGM admitting that it had licensed 136 movies and 108 television episodes to other streaming services during the license periods, violating its promise to Starz of exclusivity. Starz also discovered that almost 100 additional titles were licensed to others during the periods that it held an “exclusive” license. Starz filed suit in May 2020 (within nine months of discovery), asserting 340 separate infringements.
OK, that’s a clear breach of contract, but how is it copyright infringement? It’s copyright infringement because an exclusive license is a transfer of copyright ownership. Copyrights comprise five exclusive rights (including the right of public performance); but those rights can be subdivided in any way the copyright owner wishes, and each subdivided right can be transferred and owned separately. 17 U.S.C. § 201(d)(2). And the Copyright Act specifically defines a “transfer of copyright ownership” to include an “exclusive license … whether or not it is limited in time or place of effect.” 17 U.S.C. §101. (Note, however, that the statutory definition specifically excludes a “nonexclusive license.” That’s important, because in order to be valid, a “transfer of copyright ownership” must be made in a signed writing. 17 U.S.C. §204(a)).
In other words, if the copyright owner simply gives someone permission to use a work, without any promise of exclusivity, that’s merely a nonexclusive license. (A nonexclusive license can be granted orally, or implied from conduct; but obviously, it’s better practice to put it in writing.) But if the copyright owner gives someone an exclusive license, even for a limited period of time, it is actually transferring ownership of that piece of the copyright (one stick in the proverbial “bundle of sticks”) to the licensee. Provided the exclusive license is made in a signed writing, the licensee becomes a copyright owner (i.e., the owner of that stick) with the right to exclude others, including the right to exclude the licensor (the former owner), during the period of the exclusive license.
MGM moved to dismiss the copyright claims where the violation had occurred more than three years before the date the complaint was filed. (Because the parties had entered into a tolling agreement, the relevant date was March 24, 2020, rather than when the complaint was filed in May.) The district court denied the motion, holding that under the discovery rule, Starz could recover damages for all of the violations, since it filed suit within three years of discovering them. But, recognizing that the Second Circuit had held otherwise, the district court certified its decision for interlocutory appeal.
The Ninth Circuit Precedents
The Ninth Circuit’s opinion was pretty much dictated by two precedents. In Roley v. New World Pictures, 19 F.3d 479 (9th Cir. 1994), the plaintiff gave a copy of his screenplay to a film producer in 1985. Two years later, in 1987, he attended a screening of the producer’s new movie and formed the belief that the movie infringed his screenplay. But Roley didn’t file suit until 1991, more than three years later. He tried to argue that since the infringement was ongoing, he could recover all of his damages, including those that had occurred in 1987. The Ninth Circuit rejected this argument, but it did adopt the separate accrual rule: “In a case of continuing copyright infringements, an action may be brought for all acts that accrued within the three years preceding the filing of the suit.” 19 F.3d at 481. (20 years later, the Supreme Court agreed, adopting the separate accrual rule in Petrella.)
In Polar Bear Productions, Inc. v. Timex Corp., 384 F.3d 700 (9th Cir. 2004), the plaintiff gave Timex an exclusive license to use its film footage for a one-year period; but Timex continued to use the footage after the one-year period expired. Specifically, Timex used the footage in a promotional video shown at 12 different trade shows between 1995 and 1998. Polar Bear discovered the infringement when an employee attended one of the trade shows on August 9, 1997; and it filed a lawsuit on August 3, 2000. The Ninth Circuit held that the discovery rule applied. Since Polar Bear had filed suit within three years of reasonably discovering the infringements, it could recover all of its damages, including those that had occurred more than three years before it filed suit (i.e., those that occurred before August 3, 1997).
In Starz, the plaintiff alleged that it had discovered the violations in August 2019, and it filed the lawsuit within nine months after that. Yes, some of the violations had occurred up to four years earlier (beginning in 2015); and in theory those violations could have been discovered earlier, if someone at Starz had happened to see one of the movies on a competing service and was aware of the period of exclusivity. But the list of titles to which Starz held an exclusive license changed monthly; there were over 1,000 license periods just with MGM alone. The district court rejected MGM’s argument that Starz had a duty to monitor all of its competitors continuously to make sure that MGM didn’t violate its promise of exclusivity. Starz Entertainment v. MGM Domestic Television Distr., 510 F. Supp. 3d 878, 888-89 (C.D. Cal. 2021). As the district court observed, “[a]lthough a copyright holder has a ‘duty of diligence’ to investigate potential infringements, ‘inquiry notice must be triggered by some event or series of events that comes to the attention of the aggrieved party.’ … The duty of diligence does not create a duty to continuously monitor a licensor to ensure compliance with its obligations, absent any reason to otherwise suspect a breach.” 510 F. Supp. 3d at 888. The district court held that on the facts as alleged, it wasn’t until August 2019 that Starz was placed on “inquiry notice” by its first discovery of a violation.
Under Polar Bear, it was clear that Starz could recover all of its damages, including those that had occurred more than three years before it filed suit, as long as it filed suit within three years of reasonably discovering the infringements. And because of the procedural posture (an interlocutory appeal on a motion to dismiss), MGM did not appeal the factual allegation that Starz reasonably discovered the alleged infringements in August 2019. So, the only question before the Ninth Circuit was whether the Supreme Court’s opinion in Petrella, and the Second Circuit’s aberrant “interpretation” of that opinion in Sohm, cast doubt on Polar Bear’s application of the discovery rule of accrual.
The Ninth Circuit’s Opinion
On appeal, MGM argued that under Sohm’s interpretation of Petrella, even if the discovery rule applied, damages were limited to those violations that occurred within three years of the date the lawsuit was filed. The Ninth Circuit rejected the argument.
First, nothing in Petrella purported to disapprove of the discovery rule. In Petrella, it was undisputed that Paula Petrella was aware of the existence of her potential cause of action when she registered her copyright in the renewal term of her father’s screenplay in 1991. (In fact, her cause of action did not “accrue” until January 1, 1992, when that renewal term commenced.) The Supreme Court noted that nine Courts of Appeals had adopted the discovery rule, and that it had not addressed the issue. But it said nothing more about the discovery rule, because it had no application to the facts in Petrella. Moreover, the Supreme Court repeatedly qualified its opinion with language indicating that the three-year period is subject to exceptions. Petrella, 572 U.S. at 670 (“A claim ordinarily accrues …” and “the limitation period generally begins to run …”) (emphasis added); id. at 672 (“when a defendant has engaged (or is alleged to have engaged) in a series of discrete infringing acts, the copyright holder’s suit ordinarily will be timely under § 507(b) [only] with respect to more recent acts of infringement (i.e., acts within the three-year window), but untimely with respect to prior acts of the same or similar kind.”) (emphasis added).
As for the main question, “whether Petrella imposed a damages bar separate from the statute of limitations,” the Ninth Circuit acknowledged that the Second Circuit was the only appellate court to have addressed the question. Slip op. at 14. But the Ninth Circuit expressly disagreed with the Second Circuit’s holding in Sohm. It said:
Applying a separate damages bar based on a three-year “lookback period” … 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. (Slip op. at 17)
In this case, for example, if a breach occurred in 2015, Starz needed to sue MGM by 2018 in order for damages to fall within the three-year “lookback period.” But Starz did not discover any of the alleged violations until August 2019. Under Sohm, Starz’s cause of action for violations occurring in 2015 would be barred before they “accrued” under the discovery rule. That makes a three-year lookback period functionally identical to the “incident of injury” rule. Slip op. at 18 (citing my amicus brief). “By purporting to apply the discovery rule but imposing a three-year damages bar, Sohm is inherently self-contradictory.” (Slip op. at 18). The court also cited “nearly thirty [district court] cases that have explicitly or implicitly rejected the notion that Petrella, a non-discovery rule case, created a damages bar in cases where the discovery rule applies.” (Slip op. at 18-19 n.4)
Attempting to justify its decision, the Second Circuit in Sohm had stated “that Petrella’s plain language explicitly dissociated the Copyright Act’s statute of limitations from its time limit on damages.” Sohm, 959 F.3d at 52. That assertion is simply incorrect. Petrella’s three-year “time limit on damages” was expressly based on the Copyright Act’s three-year statute of limitations. See Petrella, 572 U.S. at 670 (describing 17 U.S.C. § 507(b) as “a three-year look-back limitations period”); id. at 672 (“the copyright holder’s suit ordinarily will be timely under § 507(b) [only] with respect to more recent acts of infringement (i.e., acts within the three-year window)”) (emphasis added); id. at 672 (“§ 507(b)’s limitations period … allows plaintiffs during [the copyright] term to gain retrospective relief running only three years back from the date the complaint was filed.”). As the Ninth Circuit observed in Starz, “[p]lainly the Court’s look-back language was simply a shorthand for the statute of limitations laid out in § 507(b) in incident of injury cases—where infringement and accrual occur simultaneously.” (Slip op. at 20-21)
Nothing in 17 U.S.C. §504(b), the statute governing recovery of damages and profits, says anything about a three-year “lookback” period. And adopting a three-year lookback period 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.” (Slip op. at 21, quoting Polar Bear, 384 F.3d at 706)
Summarizing its holding, the Ninth Circuit said:
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. (Slip op. at 17)
Obviously, I am of the opinion that the Ninth Circuit made the correct decision in Starz. Without a discovery rule, a copyright owner that has no reason to suspect that infringement is occurring is simply out of luck. Granted, the discovery rule gives defendants very little repose, because many years could elapse between an infringement and a lawsuit. But that is primarily a consequence of the Supreme Court’s ruling in Petrella, rejecting the application of the equitable doctrine of laches. Petrella is the reason we see lawsuits concerning infringements that began decades ago, such as the infringement lawsuit against Led Zeppelin claiming that the first few measures of Stairway to Heaven infringed an earlier song by the band Spirit, filed 17 years after Randy Wolfe, the composer of the earlier song, had died. See Skidmore v. Led Zeppelin, 952 F.3d 1051 (9th Cir. 2021) (en banc). That suit was eventually resolved in Led Zeppelin’s favor; but having to defend it decades after the fact is the result of Petrella’s holding disapproving laches, rather than the discovery rule.
In this case, Starz undoubtedly paid extra money in exchange for an exclusive license. MGM then breached its promise of exclusivity, earning even more money from other streaming services from its violations. MGM profited from its infringement for years; but under Sohm, it would only be liable for the final three years of that infringement. The holding in Sohm incentivizes infringers to go ahead and infringe, in the hope that their infringement will go undiscovered for more than three years. The profits an infringer makes in the early years of its infringement could easily outweigh the damages it will have to pay for the final three years of infringements. And if the infringement ceases and remains undiscovered for three years, the infringer will have profited from its infringement with complete impunity. Starz means that MGM and other infringers will have to pay full damages for their infringing conduct.
The fact that there is now a definite circuit split makes it somewhat more likely that there will be a petition for certiorari. It also makes it considerably more likely that the Supreme Court will eventually grant a petition (in this case or a later one) and render a definitive decision regarding the discovery rule. If and when it does so, the Supreme Court should recognize that the discovery rule is justified as an exception in those cases where the plaintiff is blamelessly ignorant of its cause of action. Petrella already leaves defendants open to lawsuits from infringement that occur long ago. Starz simply helps to ensure that those who reasonably did not discover the infringements until long after they occurred can recover full damages in those lawsuits. Those that knew about the infringements and waited (like the plaintiffs in Petrella and Skidmore) would still be limited to three years of damages.
In the long run, perhaps Congress should revisit the Copyright Act’s three-year statute of limitations. If it does so, it should expressly recognize the discovery rule; and it should either expressly reinstate an affirmative defense of laches, or else it should enact a statute of repose, barring recovery for acts that occurred more than 10 or 20 years earlier. (If the infringements remain undiscovered after two decades, it is likely that they did not cause any real harm, or at least that the parties have accepted the fact and moved on.) But unless and until Congress does so, the courts have to do the best with the statute as written.
In my previous blog post, I wrote:
The Second Circuit panel’s holding in Sohm v. Scholastic that “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,” is inherently contradictory and makes no sense. In effect, the panel applied a “wrongful act” rule of accrual, while simultaneously claiming that it was applying a “discovery rule” of accrual …. [One hopes] that this self-contradictory opinion will be modified or overruled at the earliest opportunity.
Although the Second Circuit did not grant a petition for rehearing, the Ninth Circuit’s opinion in Starz v. MGM is a well-reasoned step in the right direction and a welcome corrective to the Second Circuit’s blunder. It should be adopted by lower courts and by the other circuits, unless and until either the Second Circuit or the Supreme Court sees the light and buries Sohm forever.
* * *
It’s hard to be sympathetic to MGM, but it’s also hard to be sympathetic to Starz. Starz could have set up alerts to notify them if their exclusively-licensed works were appearing in other services’ databases, or they could have outsourced the monitoring to a third-party firm (as many copyright owners already do to identify infringements). At minimum, I hope the courts will rigorously interpret the “should have known” part of the discovery rule.
I’m also a little unsympathetic because this case shows how hard it can be for everyone, including the owners, to determine and manage copyright ownership/licenses. Here, two major industry players built their businesses around copyrights, yet neither of them could properly manage their copyright portfolios. If they can’t do, what chance do smaller players have? This is a shoutout to anyone who ever mockably claims that diligencing copyright ownership is easy ¯\_(ツ)_/¯.
Regardless of the statutory interpretation, the Ninth Circuit’s conclusion is a bad policy outcome. The conclusion permits copyright owners to sandbag licensees/infringers (again, depending on how rigorously the courts define the “should have known” standard). It also undermines a key point of the reasons why we have statutes of limitation–to provide certainty to the parties. Instead, allowing infringement damages back infinitely in time creates mismatches between cash-in and cash-out with many potential unintended/unwanted consequences.
Regarding the possible statutory solutions Tyler mentions, I would add another: Congress should adopt a single publication rule like we have in defamation and related torts. For example, it’s insane to me that we are still litigating copyright ownership disputes over songs from the 1970s and 1980s, and the single publication rule would eliminate that genre of litigation. For more on this, see my post on the APL v. US case.
Related posts on the copyright statute of limitation: