Rapper Jay-Z’s legal beef with record executive Damon Dash entangles old-school creativity and newfangled technology, providing lessons for performers, promoters, developers, and anyone else involved in the arts world. The disagreement between two-thirds of the founding braintrust behind Roc-A-Fella Records centers on the ownership and regulation of non-fungible tokens (NFTs) and is likely to open a flurry of issues related to NFTs. This post examines the legal issues which are likely to come up before the courts in this case, and its potential impact on emerging technologies companies, especially video game developers.
In 1996, Jay-Z teamed up with Damon Dash to sell CDs of his debut album Reasonable Doubt. In June 2021, Dash started an auction to sell this album as an NFT. Jay-Z’s record label Roc-A-Fella sued Dash in order to stop him from auctioning off the copyright to the album as an NFT. Roc-A-Fella’s contention was that the copyright in the album was held exclusively by Jay-Z and that Dash did not have the legal right to sell the album even though Dash held one-third stake in the record label. Dash on the other hand argued that he never intended to sell his interest in Reasonable Doubt and that he never minted an NFT to reflect his ownership stake either in the album or in Roc-A-Fella.
U.S. District Court Judge John Cronan issued a temporary restraining order prohibiting Dash from selling the album as an NFT. Since Dash and his lawyers did not turn up for the hearing, the suit is likely to continue and the court is likely to decide the surrounding legal issues related to NFTs. With the scene set, now we will delve into some of the potential legal issues which are likely to come up before the court and what they mean for emerging technologies companies.
These are some of the legal issues that we expect to come up before the court in Jay Z’s legal dispute with Damon Dash.
- Ownership – Roc-A-Fella Records has argued that while Dash holds a one-third stake in the company, it is the company that owns the album itself, and he has no legal right to sell the NFT. The primary issue which is likely to come before the court is who holds the right to convert the album into an NFT? Can only the copyright owner mint NFTs from existing works or can the right to mint NFTs for existing works be assigned to a third party? Presently, there is no clear-cut answer on these issues. In any case, this case is a reminder about the complex issues involved in determining who can mint NFTs from existing works. It also brings to fore the importance of copyright registration and the need for a solid license agreement before assigning or licensing copyright to a third party.
- Distribution – Usually, an NFT can be created, or “minted” legally only with the consent of the owner of the underlying work. In order to mint an NFT, the software that generates the NFT must make a copy of the content file. Doing so without the consent of the intellectual property owner amounts to copyright infringement. The fundamental question which is likely to come before the courts is if the NFT is made without the authorization of the copyright owner, does the resale of NFT also constitute copyright infringement? If such a sale is deemed to be akin to reselling a counterfeit book or a musical composition, there is no clarity on the legality surrounding the use and distribution of NFTs by third parties. This legal issue is significant for video game companies as they often provide players with digital collectibles and virtual in-game items. The issue extends beyond the Jay-Z Damon Dash beef. To ensure transparency, video game companies have started defining them as individual, ‘non-replaceable’ NFTs. Hence, video game companies, AR/VR firms; digital music producers, as well as record labels must ensure that they have the right to convert digital assets into NFTs.
- Right to Sell – Another key question likely to come up before the courts is “Who has the right to sell the NFTs?” Roc-a-Fella Records is likely to argue that, since it holds the copyright to Reasonable Doubt, Jay-Z’s debut album, it has the right to sell the NFT. The original auction on SuperFarm was cancelled, but Roc-a-Fella Records was concerned that Damon Dash would attempt to sell the NFT again even though Judge Cronan issued a temporary restraining order. This case is a reminder about taking timely advice on copyright issues. It is in particular a reminder that professional legal assistance should be sought for drafting the agreement on right to sell.
- Securities Regulation – The court also will have to decide whether NFTs are securities and therefore subject to regulation by the US Securities and Exchange Commission (SEC). According to broker-dealer Arkonis Capital LLC, NFTs have tremendous potential value but do not function as traditional securities and do not fit clearly under the existing legal framework. The SEC is likely to take an interest, however, when NFT minters make their tokens look like or act as securities. This may prove the case when NFTs are obtained through fractional ownership (like shares of stock) or distribute revenues from subsequent sales. Hence, it is likely that the court may touch upon the financial categorization of NFTs status and whether they can be considered as securities under the Securities and Exchange Act of 1934.
- Copyright assignment and license – Some commentators argue that the purchase of an NFT is simply a transfer of ownership from one person to another and that no copyright assignment or licensing takes place. Conversely, some contend that the purchase of NFTs is a form of copyright assignment. This view runs into trouble, as buying an NFT does not confer ownership on the underlying work to the purchaser unless explicitly provided by the owner of the underlying IP. However, since there is little case law on copyright infringement of digital art, there is no clarity surrounding copyright assignment and licenses related to NFTs. In any case, the purchase or sale of NFTs involves several gray areas especially with respect to contract drafting and interpretation. Given the complexities of copyright licensing, legal advice from a sufficiently qualified lawyer should be sought before buying or selling NFT.
The Jay-Z Damon Dash legal encounter brings to light 99 Problems and opens a pandora’s box of legal issues related to NFTs that until now have not been subjected to judicial review. Further litigation involving NFTs is expected as there are presently no clear rulings or directives on how to regulate NFTs. While the suit may ensure there Ain’t No Love lost between Jay-Z and Dash, it also serves as a warning to buyers and sellers of NFTs to make sure both sides know exactly what’s being sold. It also highlights the importance of expert legal advice at every stage leading to digital art being minted as an NFT.
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