Court Opinion

ID: 2745043
Source: CourtListenerOpinion
Date Created: 2014-10-23 15:03:11.935667+00
Date Added: 2024-06-11T12:11:59.731251
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
No. 12-3037

CHICAGO BUILDING DESIGN, P.C.,
and JEREMIAH JOHNSON,
                                                 Plaintiffs-Appellants,

                                   v.

MONGOLIAN HOUSE, INC.,
RYAN GOLDEN, MARK PERRES,
and JOHN A. WILSON,
                                                Defendants-Appellees.

            Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 12 C 1010 — Elaine E. Bucklo, Judge.

  ARGUED FEBRUARY 13, 2013 — DECIDED OCTOBER 23, 2014

   Before BAUER, SYKES, and HAMILTON, Circuit Judges.
    SYKES, Circuit Judge. This case involves claims of copyright
infringement arising out of a failed business relationship
between a Chicago architectural firm and its client. Chicago
Building Design, P.C. (“CBD”), specializes in the design and
construction of restaurants. Its client, Mongolian House, Inc.,
2                                                     No. 12-3037

wanted to renovate an upscale restaurant in Chicago known as
“Plan B.” CBD designed the interior of the restaurant and in
June 2006 filed blueprints with the City of Chicago to obtain a
“repair and replace” building permit for the project. Mongo-
lian House retained CBD to do the construction work, and the
firm completed the renovations in 2007.
    Sometime in 2008 a CBD employee visited the City’s offices
on other business and chanced upon a set of blueprints for Plan
B that appeared to be copies of the firm’s designs but were
labeled with another architect’s name. CBD asked the City for
a copy of the blueprints to determine if they were in fact copies
of its own. The City denied the request, saying the blueprints
were exempt from disclosure. In the meantime, Mongolian
House defaulted on payments due CBD for the 2006–2007
work. On May 8, 2009, the City issued a new building permit
for Plan B based on the 2008 blueprints. On February 13,
2012—not quite three years later—CBD sued Mongolian
House, its owners, and its architect alleging copyright infringe-
ment and assorted state-law claims.
   The defendants moved to dismiss the federal claims as
time-barred under the Copyright Act’s three-year statute of
limitations. See 17 U.S.C. § 507(b). The district court granted the
motion, holding that CBD was on “inquiry notice” of a possible
copyright violation when its employee happened upon the
2008 blueprints at the City’s offices, which occurred not later
than December 31, 2008. The limitations clock started to run on
that date, the court held, even though CBD was unable to
discover whether the 2008 blueprints infringed its copyright.
The court also rejected CBD’s alternative argument under the
No. 12-3037                                                    3

“continuing violation” doctrine, holding that CBD failed to
allege acts of infringement within the limitations period. The
court relinquished jurisdiction over the state-law claims, and
CBD appealed.
    We reverse. The Supreme Court recently clarified that the
Copyright Act’s statute of limitations establishes a “separate
accrual rule” so that “each infringing act starts a new limita-
tions period.” Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct.
1962, 1969 (2014). CBD’s complaint alleges potentially infring-
ing acts that occurred within the three-year look-back period
from the date of suit, so the case should not have been dis-
missed. To the extent that CBD seeks recovery for earlier
infringing acts, the issue may have to be revisited on remand
in light of Petrella.

                        I. Background
    The plaintiffs are Chicago Building Design, P.C., an
architectural and construction firm, and Jeremiah Johnson, its
president. We refer to them collectively as “CBD” unless the
context requires otherwise. The defendants are Mongolian
House, Inc., a restaurant company; Ryan Golden and Mark
Perres, its owners; and John A. Wilson, its outside architect. We
refer to the defendants collectively as “Mongolian House”
unless it’s necessary to distinguish between them. The case was
dismissed for failure to state a claim under Rule 12(b)(6) of the
Federal Rules of Civil Procedure, so we take the following facts
from the latest iteration of the complaint, accept them as true,
and draw reasonable inferences in CBD’s favor. Larson v.
United Healthcare Ins., Inc., 723 F.3d 905, 908 (7th Cir. 2011).
4                                                  No. 12-3037

   In 2006 Mongolian House retained CBD to design Plan B,
an upscale restaurant in Chicago that it sought to renovate.
Mongolian House promised to pay CBD $15,000 for architec-
tural services. After receiving CBD’s design, Mongolian House
awarded the firm the corresponding construction work. Under
the construction contract, Mongolian House promised to
compensate CBD in two ways: a cash payment of $259,100,
plus 15% of the profits earned by Plan B.
   In June 2006 CBD filed blueprints for the Plan B renovation
with the City in order to obtain a “repair and replace” building
permit for the project. The City issued the permit authorizing
the work to begin, and CBD completed the renovation in
March 2007. CBD registered its copyright in the blueprints on
May 1, 2009.
   The complaint alleges that sometime in 2008, Golden and
Perres, Mongolian House’s owners, copied CBD’s blueprints
and distributed them to Wilson, who placed his name on the
copies and filed them with the City with the intention of
passing the blueprints off as his own. The purpose was to
obtain a “full” building permit for Plan B. In contrast to a
“repair and replace” permit, a “full” permit authorizes certain
additional interior alterations and an increase in occupancy on
the premises. On May 8, 2009, the City issued the full permit,
and in accordance with customary practice, distributed two
copies of the approved 2008 blueprints to Mongolian House.
To comply with the City’s regulations, Mongolian House was
required keep the blueprints on the premises. Golden, Perres,
and Wilson thereafter used the infringing blueprints to pass an
No. 12-3037                                                    5

inspection on or about July 27, 2009, and used them again in
other periodic inspections through January 2012.
    Sometime in 2008, a CBD employee visited the City’s offices
on unrelated zoning business and happened to see documents
that looked like the firm’s blueprints but bore Wilson’s name.
At this point CBD “did not know … whether the Blueprints
were the ones Plaintiffs filed with the City of Chicago to secure
a repair and replace permit for the Premises, some modified
version of the Blueprints submitted for other purposes, or a
wholly different non-infringing set of blueprints copyrighted
by Wilson.” To get more information, CBD filed a complaint
with the Illinois Department of Financial and Professional
Regulation, which responded by letter explaining that it may
open an investigation. CBD next asked the City’s Buildings
Department for a copy of the 2008 blueprints under the Illinois
Freedom of Information Act. The Department responded that
the blueprints were exempt from disclosure. Finally, CBD
periodically consulted Chicago’s Building Data Warehouse
Report, in which the City announces the issuance of building
permits. CBD reviewed the May 8, 2009 report and learned that
the City issued a building permit that day based on the 2008
blueprints Wilson had submitted.
   Meanwhile, Mongolian House defaulted on payments due
CBD under the parties’ contracts. To date, Mongolian House
has paid CBD $11,000 on the design contract and just $45,000
on the construction contract.
    On February 13, 2012, CBD sued Mongolian House,
Golden, Perres, and Wilson alleging various forms of copyright
infringement under the Copyright Act. See 17 U.S.C. §§ 101
6                                                   No. 12-3037

et seq. The infringement allegations cluster into the following
categories: (1) when Golden and Perres copied the original
blueprints without authorization, they violated CBD’s exclu-
sive right to copy, see id. § 106(1); (2) when they gave the
blueprints to Wilson, they violated CBD’s exclusive right to
distribute, see id. § 106(3); (3) when Wilson put his name on the
blueprints to pass them off as his own, he violated CBD’s
exclusive right to create derivative works, see id. § 106(2); and
(4) when the defendants used the infringing blueprints to pass
periodic city inspections, they again violated CBD’s exclusive
right to distribute, see id. § 106(3). The complaint also alleged
state-law claims based on Mongolian House’s failure to pay
what it owed CBD for design and construction work.
     The defendants moved to dismiss the copyright claims
under Rule 12(b)(6), invoking the Copyright Act’s three-year
statute of limitations. See § 507(b). The district court granted
the motion, holding that CBD was on “inquiry notice” of a
possible violation of its rights when its employee visited the
City’s offices on other business and “saw the blueprints, which
happened no later than Dec. 31, 2008.” The limitations period
began to run on that date, the judge concluded, and this was so
even though CBD “could not at that time verify that infringe-
ment had occurred.” Starting the limitations clock on that date
meant that CBD’s suit—filed on February 13, 2012— was about
six weeks too late.
   CBD argued in the alternative that the infringing acts
constituted a “continuing violation” that extended into the
three-year limitations period. The judge rejected this argument
as well, holding that the “post-2008 acts” did not amount to
No. 12-3037                                                       7

infringement because distributing an architectural work to a
building inspector is a “limited publication” not covered by the
Copyright Act.
    Having dismissed the copyright claims, the court relin-
quished jurisdiction over the state-law claims. See 28 U.S.C.
§ 1367(c)(3). The court entered final judgment, and this appeal
followed.

                          II. Discussion
     When a defendant charges noncompliance with the statute
of limitations, “[d]ismissal under Rule 12(b)(6) [is] irregular, for
the statute of limitations is an affirmative defense.” United
States v. N. Trust Co., 372 F.3d 886, 888 (7th Cir. 2004). Because
“complaints need not anticipate and attempt to plead around
defenses,” id., a motion to dismiss based on failure to comply
with the statute of limitations should be granted only where
“the allegations of the complaint itself set forth everything
necessary to satisfy the affirmative defense.” United States v.
Lewis, 411 F.3d 838, 842 (7th Cir. 2005). In other words, the
plaintiff must affirmatively plead himself out of court; the
complaint must “plainly reveal[] that [the] action is untimely
under the governing statute of limitations.” Id. We review de
novo a district court’s decision to dismiss a complaint on
statute-of-limitations grounds. Indep. Trust Corp. v. Stewart Info.
Servs. Corp., 665 F.3d 930, 934 (7th Cir. 2012).
   The Copyright Act provides that “[n]o civil action shall be
maintained under the provisions of this title unless it is
commenced within three years after the claim accrued.”
8                                                     No. 12-3037

§ 507(b). Our circuit recognizes a discovery rule in copyright
cases: “[T]he copyright statute of limitations starts to run when
the plaintiff learns, or should as a reasonable person have
learned, that the defendant was violating his rights.” Gaiman v.
McFarlane, 360 F.3d 644, 653 (7th Cir. 2004); see also Taylor v.
Meirick, 712 F.2d 1112, 1117 (7th Cir. 1983). As this case
originally came to us, the parties’ dispute centered on the
proper application of the discovery rule to the facts alleged in
CBD’s complaint. But the Supreme Court’s recent decision in
Petrella casts the limitations question in quite a different light.
   The issue in Petrella was “whether the equitable defense of
laches … may bar relief on a copyright infringement claim
brought within § 507(b)’s three-year limitations period.”
134 S. Ct. at 1967. To answer that question, the Court first
examined “how the Copyright Act’s limitations period works”
and “when a copyright infringement claim accrues.” Id. at 1969.
This part of Petrella affects the analysis here.
    The Court began its opinion in Petrella by noting the
generally applicable rule of accrual in limitations law: A cause
of action accrues, and the limitations period begins to run,
“when [a] plaintiff has a complete and present cause of action.”
Id. (quoting Bay Area Laundry & Dry Cleaning Pension Trust
Fund v. Ferber Corp. of Cal., 522 U.S. 192, 201 (1997) (alteration
in original)). For copyright cases in particular, the Court
explained that an infringement claim accrues “when an
infringing act occurs.” Id. More specifically, the Court held that
the Copyright Act’s statute of limitations establishes a “sepa-
rate accrual rule” for each violation:
No. 12-3037                                                        9

       Under that rule, when a defendant commits
       successive violations, the statute of limitations
       runs separately from each violation. Each time
       an infringing work is reproduced or distributed,
       the infringer commits a new wrong. Each wrong
       gives rise to a discrete “claim” that “accrue[s]” at
       the time the wrong occurs. In short, each infring-
       ing act starts a new limitations period.
Id. (footnote & citation omitted). Put more succinctly, § 507(b)
prescribes “a three-year look-back limitations period for all
civil claims arising under the Copyright Act.” Id. at 1968.
    In an important footnote with potential implications for this
case, the Court noted that although copyright claims generally
accrue when the infringing act occurs, most circuits “have
adopted, as an alternative to the incident of injury rule, a
‘discovery rule,’ which starts the limitations period when ‘the
plaintiff discovers, or with due diligence should have discov-
ered, the injury that forms the basis for his claim.’” Id. at 1969
n.4 (quoting William A. Graham Co. v. Haughey, 568 F.3d 425,
433 (3d Cir. 2009)). The Court did not comment further on the
subject, but simply observed that it had not yet had an oppor-
tunity to “pass[] on the question” of discovery accrual in
copyright cases. Id.
   The Court did, however, specifically distinguish the
separate-accrual rule established in § 507(b) from the “continu-
ing violation” doctrine: “Separately accruing harm should not
be confused with harm from past violations that are continu-
ing.” Id. at 1969 n.6; see also Nat’l R.R. Passenger Corp. v. Morgan,
536 U.S. 101, 114–121 (202) (distinguishing between discrete
10                                                    No. 12-3037

acts of employment discrimination, each of which is individu-
ally actionable, and conduct that is continuing and “cumulative
in effect,” like a claim of hostile work environment). We take
the Court’s statement to mean that the continuing-violation
doctrine does not apply in this context.
    That understanding is confirmed by the Court’s summary
of this part of its opinion:
           Under the [Copyright] Act’s three-year
       provision, an infringement is actionable within
       three years, and only three years, of its occur-
       rence. And the infringer is insulated from liabil-
       ity for earlier infringements of the same work.
       See 3 M. Nimmer & D. Nimmer, Copyright
       § 12.05[B][1][b], p. 12–150.4 (2013) (“If infringe-
       ment occurred within three years prior to filing,
       the action will not be barred even if prior in-
       fringements by the same party as to the same
       work are barred because they occurred more
       than three years previously”). 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, 134 S. Ct. at 1969–70 (footnote omitted).
   Petrella significantly changes the focus of analysis in this
case. As the parties framed the issue, the dispute hinges on the
No. 12-3037                                                      11

start date for the statute of limitations—more particularly, the
date on which CBD either actually or “constructively” discov-
ered the copyright infringement. Actual discovery is just what
it sounds like; “constructive” discovery refers to the date on
which CBD as a reasonably diligent plaintiff should have
discovered that the defendants were violating its rights. See
Gaiman, 360 F.3d at 653. The district court held that the statute
of limitations began to run when CBD had “inquiry notice,”
i.e., knowledge that would have led a reasonable person to
start investigating the possibility that his rights had been
violated.
    But “inquiry notice” is not the same as actual or construc-
tive discovery. In another context, the Supreme Court has
explained that when a limitations period is keyed to the
plaintiff’s discovery of his injury, “inquiry notice” does not
start the limitations clock. See Merck & Co., Inc. v. Reynolds,
559 U.S. 633, 651–53 (2010). In Merck the Court was asked to
interpret the statute of limitations for securities fraud, 28 U.S.C.
§ 1658(b)(1), which provides in relevant part that an action for
securities fraud must be brought “not later than … 2 years after
the discovery of the facts constituting the violation.” Some
circuits had equated “discovery” with “inquiry notice,” i.e.,
“the point at which a plaintiff possesses a quantum of informa-
tion sufficiently suggestive of wrongdoing that he should
conduct a further inquiry” Merck, 559 U.S. at 650 (internal
quotation marks omitted). The Court firmly rejected that
understanding of “discovery”:
          We conclude that the limitations period in
       § 1658(b)(1) begins to run once the plaintiff did
12                                                    No. 12-3037

       discover or a reasonably diligent plaintiff would
       have “discover[ed] the facts constituting the
       violation”—whichever comes first. In determin-
       ing the time at which “discovery” of those
       “facts” occurred, terms such as “inquiry notice”
       and “storm warnings” may be useful to the
       extent that they identify a time when the facts
       would have prompted a reasonably diligent
       plaintiff to begin investigating. But the limita-
       tions period does not begin to run until the
       plaintiff thereafter discovers or a reasonably
       diligent plaintiff would have discovered “the
       facts constituting the violation” … irrespective of
       whether the actual plaintiff undertook a reason-
       ably diligent investigation.
Id. at 653.
    Merck involved a statutory discovery rule; in copyright
cases the discovery rule is a common-law gloss. Still, Merck
clarified that “inquiry notice” is not a substitute for actual or
constructive discovery, and that clarification is instructive here.
The concept of inquiry notice may help to identify the time at
which a reasonable plaintiff can be expected to start investigat-
ing a possible violation of his rights, but it does not itself
trigger the statute of limitations. Accordingly, the district court
should not have used inquiry notice as the starting date for the
statute of limitations.
   More fundamentally, however, in light of Petrella, we now
know that the right question to ask in copyright cases is
whether the complaint contains allegations of infringing acts
No. 12-3037                                                    13

that occurred within the three-year look-back period from the
date on which the suit was filed. Here, the answer to that
question is plainly “yes.” The complaint alleges that Perres,
Golden, and Wilson distributed the infringing blueprints to
building inspectors during inspections in July 2009 and
periodically thereafter, through January 2012. These acts fall
within the three-year limitations period from the date of suit
(February 13, 2012).
    Mongolian House argues that these “post-2008 acts” do not
constitute copyright infringement because distributing an
architectural work to building inspectors is a “limited
publication” that falls outside the Copyright Act. Mongolian
House advances this argument in response to CBD’s fallback
position that the infringement alleged here should be con-
strued as a continuous violation that stretched into the limita-
tions period. As we have explained, however, the “continuing
violation” doctrine is incompatible with the separate-accrual
rule of § 507(b), so CBD’s alternative argument is no longer in
the picture.
   To the extent that the “limited publication” argument is
addressed to the merits rather than the statute of limitations, it
was misapplied here. The “limited publication” concept was
developed under the copyright regime that existed between
1909 and 1978, when copyright was governed by both the
federal Copyright Act of 1909 and state common law. See
JANE C. GINSBURG & ROBERT A. GORMAN, COPYRIGHT LAW
108–09 (2012). At common law and under the 1909 Act, an
author’s ability to enforce his rights in a work depended in part
on whether the work was published, whether it was marked
14                                                    No. 12-3037

with a copyright notice, and whether the copyright was
registered. Id. The Copyright Act of 1976 abolished state
copyright law and changed the rules governing the effect of
registration and publication on the author’s rights and reme-
dies under the Act. Id. at 114–15.
    Because the way in which an author published his work
affected his rights and remedies under both the old and new
copyright regimes, some courts developed the concept of
“limited publication” to mitigate some of the harsher effects of
these rules. Id. at 109; see also 2 MELVILLE B. NIMMER & DAVID
NIMMER, NIMMER ON COPYRIGHT § 8.11[C][1] (2014). The basic
idea is that an author doesn’t surrender rights in a work simply
by sharing it with a small group of people for limited purposes.
See GINSBURG & GORMAN, supra, at 109. The cases Mongolian
House cites for the limited-publication principle are of this
type; they hold that an author’s publication of his work to a
limited group for a limited purpose (for example, “publishing”
an architectural work to building inspectors) does not forfeit
his rights. See, e.g., Data Cash Sys., Inc. v. JS&A Grp., Inc.,
628 F.2d 1038 (7th Cir. 1980); McIntosh v. N. Cal. Universal
Enters. Co., 670 F. Supp. 2d 1069 (E.D. Cal. 2009); Kunycia v.
Melville Realty Co., 755 F. Supp. 566 (S.D.N.Y. 1990); Intown
Enters., Inc. v. Barnes, 721 F. Supp. 1263 (N.D. Ga. 1989); Aitken,
Hazen, Hoffman, Miller, P.C. v. Empire Const. Co., 542 F. Supp.
252 (D. Neb. 1982); Kisling v. Rothschild, 388 So. 2d 1310
(Fla. Dist. Ct. App. 1980).
    So the limited-publication principle protects authors against
a forfeiture of their rights. But it’s not at all clear what bearing
it has on the question of infringement. Mongolian House has
No. 12-3037                                                   15

not explained how the principle applies to its own conduct as
an accused infringer or provides a defense to copyright
liability.
    The Copyright Act provides that “[a]nyone who violates
any of the exclusive rights of the copyright owner … is an
infringer.” 17 U.S.C. § 501(a). As relevant here, the exclusive
rights of the copyright owner include the following:
       (1) to reproduce the copyrighted work in copies
       or phonorecords;
       (2) to prepare derivative works based on the
       copyrighted work; [and]
       (3) to distribute copies or phonorecords of the
       copyrighted work to the public by sale or other
       transfer of ownership, or by rental, lease, or
       lending[.]
Id. § 106.
    The complaint alleges that Golden, Perres, and Wilson
distributed the infringing blueprints to city building inspectors
at periodic inspections from July 2009 through January 2012, in
violation of CBD’s rights under § 106(3). These acts occurred
within the three-year look-back period from the date of suit
and are at least potentially actionable. Mongolian House has
not developed a substantive argument that these post-2008 acts
do not qualify as acts of infringement based on the text of the
statute, though we can certainly envision one. A copyright
owner has the exclusive right to distribute his work “to the
public by sale or other transfer of ownership, or by rental,
lease, or lending.” Id. § 106(3). It’s an open question whether
16                                                            No. 12-3037

distributing an unlawfully copied architectural work to a
building inspector qualifies as a violation of the author’s
exclusive right to distribute his work “to the public by sale or
other transfer of ownership, or by rental, lease, or lending.”
    As far as we can tell, this is a question of first impression in
this circuit and apparently in other circuits as well. As a more
general matter, the scope of the exclusive right to distribute
under § 106(3) is a difficult issue on which courts have dis-
agreed.1 See generally 2 NIMMER & NIMMER, supra, § 8.11[C][1].
Mongolian House’s argument on this point is at best underde-
veloped. The proper scope of § 106(3)’s exclusive right to
distribute has implications far beyond this case; it would be
imprudent for us to venture an opinion based on inadequate
briefing. See Judge v. Quinn, 612 F.3d 537, 557 (7th Cir. 2010)
(“Perfunctory and undeveloped arguments … are waived.”
(internal quotation marks omitted)).
   The most we can say at this juncture is that the case should
not have been dismissed on the pleadings based on the statute

1
  “Distribute” is not a defined term in the Copyright Act, but the language
of 17 U.S.C. § 106(3) is almost identical to the Act’s definition of “publica-
tion.” See 17 U.S.C. § 101. There is support both for and against reading the
two terms as coextensive. See generally 2 MELVILLE B. NIMMER & DAVID
NIMMER, NIMMER ON COPYRIGHT § 8.11[C][1] (2014) (collecting legislative
history and cases). The district court stated that “[t]he Seventh Circuit has
held that [the] right of distribution in the Copyright Act is synonymous
with the right of publication.” That was a mistake. The court cited Kennedy
v. National Juvenile Detention Ass’n, 187 F.3d 690, 697 (7th Cir. 1999), as
support for this proposition, but the cited passage actually appears in a
partial dissent. As we’ve noted, the merits question here is one of first
impression in this circuit.
No. 12-3037                                                                  17

of limitations. CBD’s complaint alleges that the defendants
committed infringing acts within the three-year look-back
period before suit. The limited-publication principle does not
take these acts outside the Act as a categorical matter. The case
can move forward, though much remains for further develop-
ment, both legally and factually.
    A final word on the statute-of-limitations: If on remand
CBD continues to claim a right to recover for infringing acts
that occurred in 2008, outside the three-year look-back period,
the parties will need to address whether Petrella abrogates the
discovery rule in copyright cases. We express no opinion on
that question today. The parties have not briefed it,2 and it may
not arise on remand. We note that CBD seeks statutory
damages in lieu of actual damages; an award of statutory
damages is cumulative in nature, covering “all infringements
involved in the action, with respect to any one work.” 17 U.S.C.
§ 504(c)(1). So Petrella’s effect on the discovery rule may not
need to be decided in this case. We leave that matter to be
sorted out on remand.
    For the foregoing reasons, we REVERSE and REMAND for
further proceedings consistent with this opinion.

2
 Neither side filed a Rule 28(j) letter regarding the effect of Petrella on this
case. See FED. R. APP. P. 28(j).