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.

Background

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.

Legal Issues

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.

Conclusion

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.