Case Law in Non-Compete Disputes in IT Cases

When it comes to protecting confidential information, data, procedures, and company ideas, it is important to take all necessary precautions.

Before proceeding to direct cooperation with a future contractor, many clients require the signing of NDA and/or NCA agreements.

Not long ago, the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” (hereinafter, the “Law”) introduced the possibility of concluding agreements on refraining from competitive actions with respect to a Diia City resident.

An NCA (Non-Compete Agreement), or as it is also called, a non-compete agreement, provides for the establishment of certain provisions between the client and the contractor (or the employer and the employee), which determine how and when the contractor (employee) may carry out activities after the termination of cooperation.

This agreement can bring many advantages to the development of your software. The main idea is to prevent unfair competition by former employees of the company. This helps protect the rights and confidentiality of the business in order to avoid financial losses.

Do Non-Compete Agreements Work in IT? Case Law, Common Contract Mistakes, and the Impact of Digital Legislation

An NCA is compensated, meaning that a person must receive compensation for refraining from competition, and the agreement must also be concluded in writing.

According to the Law, the essential terms of an agreement on refraining by a specialist from competitive actions are:

• the term of the obligation, which must expire no later than 12 months from the date of termination of employment, civil-law, or commercial-law relations;
• the territory to which the obligation applies;
• an exhaustive list of types of activities considered competing activities and/or persons carrying out competing activities;
• the material benefits received by the specialist as compensation for the obligation to refrain from competitive actions.

An agreement on refraining by a specialist from competitive actions may provide that such specialist, during the period specified in the agreement, is obliged to refrain from all or part of the following competitive actions:

• concluding employment agreements (contracts), gig contracts, or other civil-law or commercial-law agreements with other persons carrying out activities similar to those of such Diia City resident (competing activities);
• carrying out competing activities as a sole proprietor;
• directly or indirectly owning a share in another legal entity carrying out competing activities;
• holding a position as a member of the management body of another legal entity carrying out competing activities;
• carrying out other competitive actions provided for by the agreement.

In general, the scope of a non-compete agreement, the rules, and the requirements imposed on the contractor will depend on the client and subsequently on the agreement of the parties. However, the agreement will be considered null and void if the requirements regarding written form and compensation are not met.

It is also important to note that refusal to enter into such an agreement cannot serve as grounds for termination of an employment agreement (contract) or a gig contract.

Analysis of Ukrainian Case Law in Non-Compete Disputes in IT Cases

Case law taking into account the provisions of the new Law has not yet been formed. Previously, courts predominantly opposed the acceptance of non-compete provisions in agreements, referring to the right to work, which includes the free choice of work, provided for by Article 43 of the Constitution of Ukraine.

Article 43 of the Constitution of Ukraine

Everyone has the right to work, which includes the opportunity to earn a living through work that they freely choose or freely agree to.

The state creates conditions for the full realization by citizens of the right to work, guarantees equal opportunities in the choice of profession and type of labor activity, and implements programs of vocational education, training, and retraining in accordance with public needs.

However, most often, the resolution of such disputes results in a fairly high rate of conflict resolution through pre-trial settlement or by concluding a settlement agreement.

Case law in non-compete disputes in Ukraine is not consistent and is subject to change. In addition, each case is unique and has separate factual circumstances that a particular court will take into account when considering the case. Currently, courts still do not have a unified approach to non-compete agreements. However, several decisions deserve attention.

Case No. 1

Resolution of the Higher Commercial Court of Ukraine dated May 24, 2016, in case No. 910/15796/15
(https://reyestr.court.gov.ua/Review/58128614)

The client (LLC), in its claim, relied on a clause of the Service Agreement according to which the parties agreed that if, during the term of the Agreement and within 2 years from the date of its termination, the contractor (sole proprietor) entered into a similar agreement with the client’s customer (or provided similar services and/or works), the contractor was obliged to pay compensation to the company.

The court held that this clause of the Agreement restricts the constitutional right of the defendant, in particular the right to work that he freely chooses or agrees to.

Also, pursuant to Article 228 of the Civil Code of Ukraine, an agreement is considered to violate public order if it is aimed at violating constitutional rights and freedoms of a person, and such an agreement is null and void.

The court concluded that the provisions of this clause of the Service Agreement violate the principle of freedom of contract because they predetermined adverse consequences in the event that the defendant entered into any agreement for the provision of services and/or performance of works related to information technologies.

In this case, the court also noted that the means of securing performance of an obligation must relate to the subject matter of the obligation itself and must be aimed at reducing the negative consequences arising from non-performance or improper performance of the principal obligation. The subject matter of the service agreement is the provision of specified services in the IT field. Therefore, securing the defendant’s performance of obligations under the specified agreement should relate to the proper provision of IT services by the defendant.

Case No. 2

Ruling of the Court of Appeal dated October 6, 2020, in case No. 761/15245/18
(https://reyestr.court.gov.ua/Review/92114789)

In this case, a non-compete agreement was concluded between an employee and the owners of an LLC, who undertook to pay him funds provided that he complied with the agreement. Ultimately, the employee was forced to file a claim for recovery of the payment. The employee substantiated his claims by stating that upon fulfillment of certain conditions, for example, not working for any competing company, the company was required to pay him funds.

While satisfying the claim, the court noted that in this case the NCA was signed by the owners of the enterprise as individuals, without indicating their positions and without affixing the company seal. The agreement contained no reservations that payment of the disputed amount had to be made by the employer – the legal entity. In view of this, the court established that payment of the disputed amount falls outside labor relations and constitutes a “bonus,” which is subject to recovery from the owners of the enterprise themselves.

Case No. 3

Decision of the District Court dated August 2, 2021, in case No. 588/34/21
(https://reyestr.court.gov.ua/Review/98950924)

When resolving this dispute, the court rejected the employee’s arguments regarding the invalidity of the agreement due to the restriction imposed by clause 5.2 of the Agreement on her constitutional right to work and its alleged inconsistency with legislative requirements.

Thus, according to clause 5.2 of Article 5 of the Agreement, for 12 months from the date of conclusion of this Agreement, the Employee is not entitled, whether for remuneration or free of charge, to engage in any activity that competes with the Employer’s commercial activity (competitive activity): enter into employment agreements, contracts for work, service agreements, and other agreements with enterprises and persons carrying out competitive activities; perform any actions on behalf of or in the interests of enterprises and persons carrying out competitive activities, and so on.

The disputed clause of the Agreement is temporary and applies to the legal relations of the parties after termination of the employment agreement, which are civil-law relations. Therefore, by virtue of the principle of freedom of contract provided for by Articles 6 and 627 of the Civil Code of Ukraine, such relations may be independently regulated by the parties.

The employee did not refer to specific factual circumstances which, given the obligations imposed on her by clause 5.2 of the Agreement, imposed an excessively burdensome restriction and deprived her of the opportunity, taking into account her profession and acquired practical skills, to realize herself in her chosen fields of activity.

Taking the above into account, the court concluded that there were no grounds for declaring the disputed Agreement invalid.

Conclusion

Most non-compete provisions are aimed at protecting information that is protected or confidential. Such provisions may also focus on ensuring a person’s cooperation with only one company over the long term.

A typical non-compete agreement prohibits working in a competing business and defines the period of time and the geographical area within which a person must refrain from certain actions after the termination of cooperation.

In practice, in the event of disputes regarding non-compete provisions, given the high costs associated with litigation, most companies and employees actually prefer an effective compromise rather than court proceedings.

Moreover, in order to establish damages, the person applying to the court must prove that such consequences were caused precisely as a result of the other party’s violation of the terms of the agreement and must provide the court with appropriate evidence.

At present, case law in non-compete cases specifically in IT matters that contains references to the provisions of the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” has not yet been formed.

Before the adoption of the Law, the positions of Ukrainian courts differed somewhat due to the absence of regulatory provisions governing NCAs.

Some judges nevertheless proceeded from the view that such provisions restrict the constitutional right to work. As a result, such non-compete provisions in agreements or separate NCAs were considered invalid.

Others were inclined toward the position that non-compete agreements do not constitute discrimination by the client or employer, but rather are a manifestation of the need to promote fair competition and serve as a guarantee limiting the use by an employee of the company’s internal information, while the conclusion of such an agreement is the parties’ right to regulate their relations contractually.