Actual knowledge vs constructive notice

(June 22, 2022) - Jesse Jenike-Godshalk and Melanie Lazor of Thompson Hine LLP discuss the U.S. Supreme Court's interpretation of legislation that can only be violated by someone with "knowledge."

The word "knowledge" frequently appears in statutes across many different areas of the law. On its face, this term may not seem particularly complex. "Knowledge" simply means "the fact or condition of being aware of something." 1

But knowledge is not nearly so simple. It can either be actual (i.e., aware of) or constructive (should have been aware of). Whether knowledge is interpreted to include constructive knowledge can make the difference between no liability and millions or billions of dollars of liability in a particular case.

In two recent cases, the U.S. Supreme Court interpreted "knowledge" in construing two different statutes. In both cases, the court construed knowledge to mean only actual, not constructive, knowledge.

The first case, Intel Corp. Investment Policy Committee v. Sulyma, 2 concerned the Employee Retirement Income Security Act of 1974 (ERISA). 3 The court found that an ERISA participant must have actually read disclosures to trigger ERISA's three-year statute of limitations that begins to run after the participant obtains "actual knowledge" of a breach.

The holding in Sulyma hinged on the fact that ERISA expressly precludes constructive knowledge because the statute includes the word "actual" in the phrase "actual knowledge."

Then, earlier this year, the court decided a second case, Unicolors, Inc. v. H&M Hennes & Mauritz, L.P., 4 which interpreted a safe harbor in the U.S. Copyright Act. 5 The Copyright Act states that inaccurate information in a copyright registration does not render the registration invalid unless the registrant included inaccurate information "with knowledge that it was inaccurate." 6

The Copyright Act does not use the word "actual" or otherwise expressly state whether actual knowledge or constructive knowledge is required, but the court still interpreted the term "knowledge" to mean only actual knowledge.

Read together, these cases suggest that the U.S. Supreme Court — and, by extension, the lower courts as well — may be moving in the direction of interpreting "knowledge" in statutes to mean only actual knowledge even where the statutory text itself does not expressly state this.

Thus, legal practitioners should be wary not to assume, as they may have in the past, that the word "knowledge" in a statute includes both actual and constructive knowledge.

Instead, if practitioners want the word "knowledge" to be read broadly, they may need to come to court armed with arguments for why constructive knowledge is within the scope of a particular statute.

In Intel, Christopher Sulyma, a former Intel employee who participated in Intel's retirement plan, claimed that plan fiduciaries breached their fiduciary duties by investing in underperforming alternative investments. ERISA claims are generally subject to a six-year statute of limitations.

But the statute further states that if a plaintiff acquires "actual knowledge" of an alleged fiduciary breach, the plaintiff must file suit within three years of gaining that knowledge.

Sulyma had waited to file suit until more than three years after receiving disclosures about the plan's investments. Intel presented evidence not only that these disclosures were provided, but also that Sulyma had visited the intranet site containing these disclosures repeatedly throughout his employment.

Sulyma claimed, however, that he did not remember reviewing these disclosures and did not know his account was invested in alternative investments.

In evaluating whether ERISA's three-year statute of limitations applied to Sulyma's claims, the court determined that the "actual knowledge" required by the statute means just that — the person actually knows the underlying information.

Thus, a plaintiff does not necessarily have "actual knowledge" under ERISA of the information contained in disclosures that they received but did not read or cannot recall reading.

The court acknowledged that a term like "actual knowledge" may seem redundant on its face, but in reality, "actual knowledge" makes clear that other types of knowledge, such as imputed or constructive knowledge, are excluded.

After all, "the law will sometimes impute knowledge — often called 'constructive' knowledge — to a person who fails to learn something that a reasonably diligent person would have learned." 7

The addition of "actual" in ERISA "signals that the plaintiff's knowledge must be more than 'potential, possible, virtual, conceivable, theoretical, hypothetical, or nominal.'" 8

In other words, while "knowledge" standing by itself can mean both actual and constructive knowledge, ERISA's use of the word "actual" clarifies the type of knowledge required for the statute of limitations to apply.

Thus, it was not the word "knowledge" but instead the word "actual" that did the heavy lifting for the court to conclude that, because Sulyma did not recall reading the disclosures, he did not have actual knowledge of the alternative investments needed for ERISA's three-year statute of limitations to apply.

The dispute in Unicolors began when Unicolors, which owns copyrights in certain fabric designs, sued H&M for copyright infringement. In response, H&M argued that Unicolors' copyright registration was invalid because it included inaccurate information. In particular, it covered multiple works and, unbeknownst to Unicolors, did not meet certain legal requirements necessary for a single registration covering multiple works.

The litigation ultimately turned on whether the Copyright Act's safe harbor applied. Did Unicolors include the inaccurate information "with knowledge that it was inaccurate"? Unlike the statutory language at issue in Intel, the Copyright Act provision here does not include the word "actual."

In interpreting this language, the court focused on whether "with knowledge that it was inaccurate" applies only to an applicant's lack of knowledge regarding the facts, as opposed to lack of knowledge of the law, as Unicolor's mistake was one of law.

The court ultimately concluded that it applies to both mistakes of law and fact. Where the registrant is ignorant of, or mistaken about, the law, the registrant does not actually know that the information in the registration does not satisfy the Copyright Act's requirements.

In reaching this decision, the court interpreted "knowledge" in the safe harbor to mean only actual, rather than constructive, knowledge, stating, "in this context, the word 'knowledge' means actual, subjective awareness of both the facts and the law." 9

If "knowledge" encompassed constructive knowledge, then a mistake of law would never suffice because parties are generally imputed with constructive knowledge of the law.

The court reasoned that, "if Congress had intended to impose a scienter standard other than actual knowledge, it would have said so explicitly." 10

Thus, the court seemed to presume that the word "knowledge" standing alone means actual knowledge unless the language of the statute otherwise expressly encompasses constructive knowledge.

On their face, the decisions in Intel and Unicolors appear consistent. In both cases, the court reached the same conclusion across two different statutes — i.e., that the word "knowledge" means only actual knowledge. And in both cases, the court found that the party whose knowledge was at issue did not possess the requisite actual knowledge.

But there is a tension between the two cases that only emerges when one more carefully examines the reasoning in each case. In Intel, the court seemed to begin with the presumption that "knowledge" standing by itself may mean either actual knowledge or constructive knowledge. In determining that "knowledge" means only actual knowledge in the ERISA context, the court focused on the word "actual" in the statutory text.

In contrast, in Unicolors, the court seemed to begin with an entirely different presumption — i.e., that the word "knowledge" by itself means only actual knowledge. Thus, unlike in Intel, the court did not focus on whether the word "actual" appears in the statute. The only question was whether the statute included a clear indication that "knowledge" should also be interpreted to include constructive knowledge, and having found no such indication, the court interpreted "knowledge" to mean only actual knowledge.

Ultimately, the Intel and Unicolors cases suggest two different methods of interpreting the word "knowledge" for purposes of statutory construction, and these are difficult to square. When called upon to interpret the word "knowledge" in future cases involving statutory construction, it is not clear whether courts will follow the approach from Intel, the approach from Unicolors, or something in between that combines these two approaches.

Because the Unicolors case is more recent than the Intel case, it may indicate that courts will increasingly interpret "knowledge" to mean only actual knowledge even where the statutory text itself does not include the word "actual." In any event, practitioners should not assume that the word "knowledge" standing alone in a statute includes both actual and constructive knowledge.

Instead, if practitioners want the word "knowledge" to be read broadly to include constructive knowledge, they should be ready with arguments based on the statutory text or legislative history to support this conclusion.

Further, while the Intel and Unicolors cases are in tension, the Unicolors case did not purport to overrule Intel. Thus, some courts may still be willing to follow the analytical framework from that earlier case — at least in certain contexts.

Finally, clever practitioners may find a middle ground between Intel and Unicolors. If so, a new third approach could emerge. Only the future can tell.