In the IT sphere, in addition to the usual agreements governing relations for the creation, improvement or support of software, as well as the provision of other services, so-called «technical» agreements are also extensively used. They do not directly affect the process of providing services, but almost no cooperation between the developer and the customer can do without them. In this article we will analyze three «technical» agreements, define essential terms, and also destroy some myths regarding their application not only in Ukraine, but throughout the world.
Interesting? Let’s start …
NON-DISCLOSURE AGREEMENT (NDA)
Why conclude an NDA? In the sphere of IT, information security comes first, so there is a need to conclude a confidentiality agreement. The parties are usually the customer and contractor or two business partners who agree not to disclose confidential information, trade secrets that became known in the process of their cooperation. Thus, guarantees are established against unfair competition on the part of the counterparty, who can potentially use the information received for his commercial purposes.
A separate contract or clause in a general contract? The NDA can exist not only as a separate document, but also as part of a general agreement governing relations between the parties (for example, a software development agreement).
What should be provided for in the NDA? The NDA must necessarily determine the following:
- what information is considered confidential (program codes, databases, technologies, design, business ideas, content of agreements, customers, partners, etc.). The list should be complete, specific and unambiguous;
- methods of transmitting confidential information;
- what is the unlawful disclosure of confidential information, that is, possible ways of its distribution (in writing, orally, by sending emails , downloading to the cloud, etc.);
- permissible disclosures;
- measures to protect the data that need to be taken (to store information in a certain way, not to use certain resources);
- agreement duration (usually 2, 5, 10 years, and the obligation not to disclose confidential information exists both during the validity of the main contract and for some time after its expiration);
- responsibility for disclosure (as a rule, a fine, reimbursement of the cost of lost information, lost profit). To avoid the need to prove the amount of damage, sanctions should be provided in a fixed amount.
Does the NDA work in Ukraine? The NDA is an uncommon agreement for the Ukrainian legal system and it is often not recognized by national courts. Despite this, in Ukraine the NDA acts as a «psychological» impact and, thanks to large fines, makes the employee or contractor think twice before revealing certain information.
If your counterparties are non-residents, the NDA will become a prerequisite for your cooperation and, subject to specifying a foreign law as governing, – an effective legal tool.
To understand how important the protection of confidential information and trade secrets is, just recall the dispute between ZeniMax (owner of Bethesda, id Software, Arcane Studios) and Oculus VR, which is owned by Facebook. In 2014, ZeniMax sued Oculus VR. According to the plaintiff, the technologies developed in the ZeniMax laboratory with the participation of game designer John Carmack, who worked at id Software Studio and then switched to Oculus VR, were used to develop the Oculus Rift virtual reality headset. That is, the main issue was the unlawful use of intellectual property – trade secrets, computer code and know-how, which Carmack had access to.
The case was pending in the US District Court for the Northern District of Texas. It was found that the founder of ZeniMax, Palmer Luckey, violated the non-disclosure agreement he signed in 2012 during a collaboration with ZeniMax and direct communication with Carmack regarding the Oculus Rift prototype. The court sentenced $ 500 million in favor of ZeniMax, but subsequently this amount was reduced to $ 250 million. In December 2018, the companies entered into a settlement agreement, the amount of which was not disclosed.
In Ukraine, the latest judicial practice shows that it is rather difficult to prove the fact of disclosure of confidential information and trade secrets. In a decision of the Civil Court of Cassation, which is a part of the Supreme Court of February 28, 2019 in case No. № 752/5775/16-ц the fact of disclosure of confidential information and trade secrets was recognized as unproved due to the lack of documentary evidence, as well as indications of specific information that was disclosed. Based on the case materials, the employee made access to the Redmine corporate system, which contains trade secrets, while she was on parental leave. The results of an internal investigation revealed that the employee collected and transmitted information containing trade secrets and confidential information to a competing company. However, in court it was not possible to prove the aforementioned due to inadequate evidence.
NON-COMPETE AGREEMENT (NCA)
Why conclude an NCA? The non-competition agreement usually performs several functions: 1) protects the customer/employer from possible competition from the contractor/employee, who, after completion of cooperation, decides to create a business in the same field or in the same territory, work for a direct competitor; 2) prevents the leakage of unique knowledge, skills, ideas, technologies of the customer/employer, customer contacts, business practices; 3) helps the customer/employer to retain qualified specialists; 4) carries out a «psychological» impact on the employee/contractor).
Can the NCA be concluded under Ukrainian law? In Ukraine, the NCA does not have sufficient legal regulation. Especially a lot of questions arise in the case of the conclusion of this agreement between the employee and the employer. In the event of a dispute, the national courts, as a rule, recognize such contracts as invalid, considering them as a restriction on the right to free choice of labor guaranteed by Art. 43 of the Constitution of Ukraine, the deterioration of the position of the employee in comparison with what is guaranteed by law, and as a violation of the right to entrepreneurship, when it comes to creating of business by a former employee.
However, in this context we can talk about certain positive tendencies. Ukrainian courts are beginning to consider cases of reimbursement for failure to comply with the terms of non-competition agreements, even concluded between the employer and the employee. A striking example is the decision of the Shevchenkivskiy District Court in Kyiv of February 3, 2020 in case No. 761/15245/18. The court partially satisfied the requirements of the employee, who asked to recover from former employers the amount of compensation for restriction of competition, and awarded in his favor more than € 8 000 from each employer. This court decision has not entered into legal force, since an appeal was filed.
If the NCA does not work in Ukraine, is it worth it to conclude? Conclusion the NCA is one of the prerequisites for cooperation between non-resident customers with Ukrainian IT companies or individual developers and it is normal practice for many countries in Europe (Germany, the Netherlands, France, etc.) and the USA (except for some states). In this case, the NCA is subject to the law of a foreign state it protects, first of all, the interests of the customer.
What should be provided for in the NCA? In order to make the NCA valid, the following should be determined:
- the most detailed scope of the prohibitions of competition (for example, software development for specific business, work for direct competitors);
- reasonable restriction on the territory to which the prohibition to compete applies (it is necessary to take into account the specifics of the business to determine this territory);
- reasonable duration of the non-competition clause;
- sufficient compensation for the employee/contractor for the relevant restrictions (single payment, bonuses to payments under the main contract, compensation for lost profits). This aspect is vital, because without mutual benefit the NCA can be recognized as such, which puts the parties in an unequal position. In particular, in the USA, Germany, and Italy, the condition for the validity of the agreement is its mutual utility.
- responsibility for violation of the NCA.
Also, when concluding the NCA, it is necessary to take into account the particularities of the governing law and judicial practice. For example, in the United States, NCAs are recognized in most states, but they are not legally valid in Silicon Valley.
NON- SOLICITATION AGREEMENT (NSA)
Why conclude an NSA? In the IT sphere, competitors very often «steal» the best developers from each other, and former employees of IT companies «take» customers with whom they have already established cooperation. The NSA is a contract or a separate clause in another document and it obliges to refrain from poaching specialists and/or customers. It is important to understand that customers and IT specialists have the right to choose the company they want to deal with, and the NSA is unlikely to be able to influence this. However, the NSA protects in cases when former employees use the accumulated customer base to create their own business or in another company, and competitors send job offers to your employees. The NSA will help, firstly, to prevent such cases, and, secondly, it will be the basis for claiming damages and/or payment of the penalty.
Should the NSA be made with all employees? As a rule, it is necessary to conclude this agreement with the most qualified specialists who occupy high positions or directly contact customers.
What should be provided for in the NSA? The NSA should determine the following:
- a clear list of actions that make up the poaching (employment, conclusion of a contract / for the provision of services, offers to employees to change their place of work, and clients to choose another partner);
- the category of employees who cannot be poached;
- the provision that employees are not limited to break off relations with the company, or customers – choose other counterparties;
- duration of the contract (as a rule, for employees it is valid for two years after dismissal);
- the territory covered by the restriction (depending on the scale of the business);
- the amount of compensation for non-poaching, commensurate with the restriction itself;
- responsibility for breach of contract (damages, payment of forfeit);
- a provision on the possibility of «buying out» the right to further cooperate with customers if it is impossible to avoid losing customers due to a break in relations with an employee.
Where is the NSA recognized and applied? In most states of the United States with the exception of California, in Canada (distribution area, duration and list of restrictions should be clearly defined), the UK and other European countries. Note that states may set specific conditions for the application and validity of NSA. Of course, in common law jurisdictions, judicial practice will play an important role, and needs to be analyzed.
Particularly relevant is dispute between technology giant Apple and its former chip architect, Gerard Williams III, who has been with the company for ten years and is the author of more than 60 Apple’s patents. In March 2019, he left the company and began to develop his startup Nuvia, allegedly created before his dismissal. In August 2019, Apple filed a lawsuit, accusing Gerard of violating non-compete agreement, using intellectual property, and poaching employees. The developer, in turn, indicated that the company illegally interfered in his personal correspondence. The California Supreme Court commenced court proceeding, although non-compete agreements are illegal under the law of this state, found Gerard’s allegations baseless, and noted that the law of California doesn’t permit an employee «to plan and prepare to create a competitive enterprise prior to termination if the employee does so on their employer’s time and with the employer’s resources».
To sum up
Conclusion of the NDA, NCA and NSA requires not only attention to the essential terms of these contracts, but also to the specifics of the governing law. In fact, there are a lot of pitfalls, and in order to avoid unjustified risks and negative consequences in the future, use the services of qualified lawyers. The VigoLex team is highly experienced in developing IT contracts, and therefore will help you in this matter.