The Second Circuit ruled that “[t]here is no ‘sophisticated plaintiff’ exception to the discovery rule, or to a defendant’s burden to plead and prove a statute-of-limitations defense.” 

Earlier this year, in Warner Chappell Music, Inc. v. Nealy, 601 U.S. 366 (2024), the Supreme Court of the United States confirmed that the Copyright Act’s three-year statute of limitations does not bar claims for damages dating back more than three years if an infringement claim was timely under the “discovery rule.” In so deciding, the Supreme Court rejected the three-year damages cap applied by the Second Circuit to limit the available recovery for copyright infringement claims brought pursuant to the discovery rule. Although certain justices had suggested in Warner Chappell that the Court should have considered whether the discovery rule was properly applied to copyright infringement cases in the first place before reaching a decision on damages, the Supreme Court subsequently declined to grant certiorari on this question in Hearst v. Martinelli, No. 23-474 (U.S. May 20, 2024), leaving the rule in place for lower courts to grapple with its proper application. As discussed in recent Alerts, a claim accrues under the discovery rule when a plaintiff discovers, or with due diligence should have discovered, the injury that forms the basis for that claim.

On August 16, 2024, the Second Circuit had occasion to consider the discovery rule’s application in Michael Grecco Productions, Inc. v. RADesign, Inc., where it addressed whether an admittedly “sophisticated plaintiff” (i.e., a plaintiff well-versed in policing for infringing use of its copyright-protected works and enforcing its rights under the Copyright Act) may, as a matter of law, be precluded from relying on the discovery rule. The Second Circuit ruled that “[t]here is no ‘sophisticated plaintiff’ exception to the discovery rule, or to a defendant’s burden to plead and prove a statute-of-limitations defense.” Michael Grecco Prods., Inc. v. RADesign, Inc., No. 23-1078 (2d Cir. Aug. 16, 2024). In so ruling, the Court of Appeals rejected a line of district court decisions within the Second Circuit finding that a sophisticated plaintiff’s general ability to detect and litigate copyright infringement may preclude, as a matter of law, application of the discovery rule to determine when their claim accrued for statute of limitations purposes. Although the Grecco decision might have provided an opportunity for the Second Circuit to evaluate the discovery rule’s application and scope in reaction to the Supreme Court’s recent ruling, the Second Circuit was careful to expressly limit its holding to this threshold question, leaving “for another day” the question of whether and to what extent a plaintiff’s sophistication may be relevant to the discovery rule’s “fact-intensive diligence inquiry” as applied to a given claim.

The claim at issue in Grecco arose from the alleged unauthorized use of photographs, taken by Michael Grecco, in connection with the defendants’ shoe business. Plaintiff alleged that it discovered the infringement more than four years after it occurred and, relying on the discovery rule, filed suit within a year after alleged discovery of the infringement. Defendants moved to dismiss the complaint on the grounds that it was time-barred. In considering the discovery rule, the district court applied the rationale of other district courts in the Second Circuit, which had “look[ed] to the relative sophistication of the parties to determine whether the copyright holder should have, with the exercise of due diligence, discovered [the] alleged infringement.” Michael Grecco Prods., Inc. v. RADesign, Inc., 678 F. Supp. 3d 405, 408 (S.D.N.Y. 2023). In particular, the court relied on allegations on the face of the complaint regarding the plaintiff’s work as a “prominent celebrity photographer,” as well as his “extensive experience with copyright law and practice,” including that he led workshops, released an educational video to assist artists in protecting their intellectual property, and “spends time and money to actively search for hard-to-detect infringements,” and took judicial notice of the fact that the plaintiff had filed over 100 lawsuits for copyright infringement between 2010 and early 2022. Id. at 407-09. Although the district court acknowledged that other district courts in the Second Circuit rejected this approach, and that the Second Circuit had not weighed in on the issue, it concluded, as a matter of law, that the plaintiff’s sophistication made his “late discovery” of the infringement unreasonable, and the discovery rule therefore did not apply to make his otherwise time-barred claim timely. Id. at 409-10.

In reversing the district court’s dismissal, the Second Circuit clarified that “the discovery rule determines when an infringement claim accrues under the Copyright Act, regardless of a copyright holder’s ‘sophistication’ in detecting and litigating infringements,” and that “a copyright holder’s general diligence or allegations of diligence in seeking out and litigating infringements, alone, are insufficient to make it clear that the holder’s particular claims in any given case should have been discovered more than three years before the action’s commencement.” Michael Grecco Prods., No. 23-1078, at 3-4. As clarified in the Second Circuit’s decision, the discovery rule is a “rule of accrual” rather than an “equitable tolling or estoppel doctrine,” meaning that it determines the date on which the three-year limitations period begins to run, rather than extending the limitations period from the date of injury. Id. at 12. Looking to Warner Chappell’s holding that “the Copyright Act contains no separate time-based limit on monetary recovery,” the Second Circuit confirmed that the Copyright Act “employs” the discovery rule, not the injury rule, as the “one rule of accrual,” noting that the “Supreme Court has made clear that the Act’s ‘clock is a singular one.’” Id. at 15.

The Second Circuit further noted that because the statute of limitations must be raised as an affirmative defense that a defendant must prove, a plaintiff need not affirmatively plead facts in support of timeliness—but once the plaintiff did so, the district court “was correct to consider whether they rendered it clear from the face of the complaint that the claims were time barred.” Id. at 20. Thus, despite the complaint’s allegations regarding the plaintiff’s “general diligence,” the Second Circuit concluded that the issue of timeliness could not be resolved at the pleadings stage because the allegations did not on their face address, for example, whether the plaintiff failed to exercise due diligence in the years before the alleged discovery, or why the plaintiff should have discovered the alleged infringement sooner. Id. at 17-18.

As noted above, the Second Circuit previously limited the recoverable damages under the discovery rule to a three-year “lookback period” before the Supreme Court rejected this interpretation in Warner Chappell. See Sohm v. Scholastic Inc., 959 F.3d 39, 52 (2d Cir. 2020). Although the Second Circuit’s decision in Grecco looked (albeit briefly) to Warner Chappell in clarifying the discovery rule as a rule of accrual, it still remains to be seen how courts in the Second Circuit will apply the discovery rule following the Grecco decision―such as, for example, in considering the circumstances under which a sophisticated plaintiff should be on inquiry notice of a possible infringement. Indeed, the Second Circuit expressly limited its plaintiff-friendly decision in Grecco to correct the “misunderstanding of the discovery rule and … wrong presumption that, as a matter of law, every ‘sophisticated’ plaintiff should discover all infringements within three years of occurrence.” Michael Grecco Prods., No. 23-1078, at 21, n.8. Because the district court’s decision on the defendants’ motion to dismiss was limited to the complaint, the circuit court did not address the question of whether and to what extent courts “may properly consider the copyright holder’s level of so-called ‘sophistication’” in making the “fact-intensive” determination of when the plaintiff, with reasonable diligence, should have discovered the infringement under the discovery rule. Id. Thus, at least for the time being, the practical impact of the Grecco decision may be to merely push consideration of the “sophisticated plaintiff” past the pleadings stage where reasonable diligence with respect to the particular infringement at issue cannot be determined on the face of the complaint.

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