Is the "Discovery Rule" Dead?

A prospective client tells you he invented a new technology and entered into a licensing agreement with a company that wished to commercially exploit the technology. Shortly after signing the licensing agreement, the licensee set up a foreign company that immediately started manufacturing and selling products using your prospective client’s proprietary technology in violation of the licensing agreement. All of this took place more than 6 years ago. The distressed inventor claims he didn’t discover the improper use of his technology or the loss of licensing revenues until a few months ago. He also claims to have sustained millions in damages and asks you to take his case on a contingency basis.
With the potential for a large fee, you are sorely tempted to take the case. However, you have a nagging feeling that the statutes of limitations would bar the potential claims for breach of the licensing agreement and violation of the Michigan Uniform Trade Secrets Act (“MUTSA”), since the wrongful acts took place more than 6 years ago. Hoping to find cases holding that your potential client’s claims did not accrue until he discovered the wrongful acts and his damages, you research Michigan law on accrual of contract and MUTSA claims.
Your research leads to the recent Michigan Court of Appeals opinion in Polytorx, L.L.C. v. University of Michigan Regents, No. 318151, 2015 Mich. App 939 (May 7, 2015). Polytorx, on which our hypothetical is loosely based, involved claims for breach of a licensing agreement and violation for MUTSA relating to a new type of production technology invented by the plaintiff.
Because the primary defendant was a state government entity, the case was filed in the Court of Claims. This meant that a special statute of limitations applied, which required that notice of a tort-based or a contract-based claim be given to the State within one year of when the claim accrued and the claim itself must be filed within three years of when the claim accrued. 2015 Mich. App. LEXIS 939 at *12. Since the plaintiff gave notice to the University of Michigan on May 13, 2013 by filing the case in the Court of Claims, the Court found that the licensing agreement breach on which the plaintiff’s claim was based had to have accrued no later than May 13, 2012. Id. at *12-13.
Defendants moved for summary disposition, arguing that the contract claim was time-barred because the alleged breach occurred in 2007. The plaintiff countered that it did not discover the breach until late 2012 and, accordingly, relied on the “discovery rule.” The Supreme Court enunciated the “discovery rule” in Moll v. Abbott Laboratories, 444 Mich. 1, 15-16 (1993), where it held that a statute of limitations begins to run when the plaintiff discovered, or through reasonable diligence, should have discovered, an injury and the causal connection between the plaintiff’s injury and the defendant’s breach.
One might think the plaintiff’s argument would be sufficient to create a question of material fact on the statute of limitations issue. However, as the Court of Appeals noted, the “discovery rule now applies only if the Legislature provides for the discovery rule in a statute.” 2015 Mich. App. LEXIS 939 at *14, citing Trentadue v. MFO Mortgage Co., 479 Mich. 378, 388-392 (2007). The Court observed that MCL 600.5807(8), the contract statute of limitations, “does not provide for tolling on the basis of discovery.” 2015 Mich. App. LEXIS 939 at *14-15. The Court further noted that a host of Michigan cases, including Dewey v. Tabor, 226 Mich. App. 189, 193 (1997), rejected the proposition that the “discovery rule” operated to toll accrual of breach of contract claims. Since the plaintiff’s claim accrued on the date of the breach, not when the plaintiff discovered it, the Court upheld the trial court’s grant of summary disposition on the breach of contract claim.
However, the Court found a statutory basis for the “discovery rule” in MUTSA. It focused on MCL 445.1907, which provides that “an action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” (Emphasis added.) Thus, the critical issue was when the plaintiff should have discovered the misappropriation. Based on letters the plaintiff sent to University of Michigan in 2007, the Court found the misappropriation of trade secrets claim accrued, and the plaintiff should have known of its potential claim, more than 3 years before the complaint was filed. As such, the Court found that the MUTSA claim was also time-barred. 2015 Mich. App. LEXIS 939 at *17-18.
Getting back to your potential client, it is clear that his potential claim for breach of the licensing agreement is time-barred, as it accrued more than 6 years ago and the “discovery rule” cannot be used to defeat a statute of limitations defense. However, there is room to argue that an issue of fact exists as to when he knew or reasonably should have known of the misappropriation. If the evidence supports a finding that he only recently discovered the misappropriation, and there was no reason he “should have discovered” it earlier, the case would appear to be worth taking.
As an aside, in Trentadue v. MFO Mortgage Co., 479 Mich. 378 (2007), which the Polytorx Court relied on, the Michigan Supreme Court identified various statutes which allow for application of the “discovery rule”, including the following: MCL 600.5838(2)(professional malpractice); MCL 600.5838a(2)(medical malpractice); MCL 600.5839(1)(injuries from unsafe property arising from gross negligence of architect, engineer, contractor or surveyor); and MCL 600.5855 (fraudulent concealment of claim or identify of person liable). Undoubtedly, there are others (such as MUTSA). Keep this in mind next time the “discovery rule” comes into play in your practice.
For more information about the “discovery rule,” please contact Leif Anderson at [email protected].