Case Law in Non-Competition Disputes in IT Cases

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

Before proceeding to direct cooperation with a prospective 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 entering into agreements on refraining from competitive actions with respect to a Diia City resident.

An NCA (Non-Compete Agreement) — also referred to as a non-competition agreement — provides for the establishment of certain provisions between a client and a contractor (or an employer and an employee) that define how and when the contractor (employee) may carry out activities after the end of the cooperation.

This agreement can bring many benefits to the development of your software. The core idea is to prevent unfair competition from former employees of the company. It helps protect the rights and confidentiality of the business in order to avoid financial harm.

An NCA is compensatory — meaning the person must receive compensation for refraining from competition — and the agreement must be concluded in written form.

Pursuant to the Law, the essential terms of an agreement on a specialist’s refraining from competitive actions are:

• the duration of the obligation, which terminates no later than the expiry of 12 months from the date of termination of the employment, civil law, or commercial law relationship;
• the territory to which the obligation applies;
• an exhaustive list of types of activity considered to be competing activity and/or persons carrying out competing activity;
• the material benefits that the specialist receives in exchange for the obligation to refrain from competitive actions.

An agreement on a specialist’s refraining from competitive actions may provide that, during the period defined by the agreement, the specialist is obliged to refrain from all or some of the following competitive actions:

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

In general, the scope of the non-compete agreement, as well as the rules and requirements for the contractor, will depend on the client and thereafter on the agreement of the parties. However, the agreement will be considered void if the requirements regarding written form and compensatory nature are not met.

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

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

Case law taking into account the provisions of the new Law has not yet been formed. Previously, courts predominantly took the position of rejecting non-competition provisions in agreements, referring to the right to work — which includes the free choice of such work — as provided for in 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 one’s living by work that one freely chooses or to which one freely agrees. The state creates conditions for the full exercise by citizens of the right to work, guarantees equal opportunities in the choice of profession and type of employment activity, and implements programs of vocational and technical training, preparation, and retraining of personnel in accordance with social needs.

However, most often, the resolution of such disputes results in a fairly high level of pre-trial settlement or resolution by way of a settlement agreement.

Case law in non-competition disputes in Ukraine is not consistent and is subject to change. Furthermore, each case is unique and has its own specific factual circumstances that a particular court will take into account when considering the case. To this day, courts still have no unified approach to non-compete agreements. However, several decisions are worth noting.

Case No. 1

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

The client (an LLC) relied in its claim on a clause of the Service Agreement under which the parties had agreed that if, during the term of the Agreement and within 2 years from the date of its termination, the contractor (a sole proprietor) entered into an analogous agreement with a client of the client company (or provided analogous services and/or work), the contractor would be obliged to pay compensation to the company.

The court found that this clause of the Agreement restricted the defendant’s constitutional right, in particular, to work that one freely chooses or to which one freely agrees.

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

The court held that the provisions of the relevant clause of the Service Agreement violated the principle of freedom of contract, as they had predetermined unfavorable consequences in the event that the defendant entered into any agreement for the provision of services and/or performance of work related to information technologies.

In this case, the court also noted that the type of security for the 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 primary obligation. The subject matter of the service agreement is the provision of defined IT services. That is, the security for the defendant’s performance of its obligation under the said agreement must relate to the defendant’s proper provision of IT services.

Case No. 2

Resolution 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 on the condition that the agreement was performed. Ultimately, the employee was compelled to bring a claim for recovery of the payment. The employee substantiated his claims by arguing that, upon fulfillment of certain conditions by him — such as not working for any competing company — the company was obliged to pay him the funds.

In granting the claims, the court noted that in the present case the NCA had been signed by the owners of the enterprise as individuals, without indicating their positions and without affixing the enterprise’s seal. The agreement contained no stipulations to the effect that payment of the disputed amount was to be made by the employer as a legal entity. In view of this, the court found that payment of the disputed amount falls outside the scope of the employment relationship and constitutes a “bonus,” which is recoverable specifically from the owners of the enterprise.

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).

In resolving this dispute, the court rejected the employee’s arguments concerning the invalidity of the agreement on the grounds that clause 5.2 of the Agreement restricted their constitutional right to work and was therefore inconsistent with the requirements of the law.

Specifically, pursuant to clause 5.2 of Article 5 of the Agreement, for a period of 12 months from the date of conclusion of the Agreement, the Employee is not entitled to carry out — whether for remuneration or free of charge — any activity that competes with the commercial activity of the Employer (competing activity): entering into employment agreements, contractor agreements, service agreements, and others with other enterprises and persons carrying out competing activity; performing any actions on behalf of or in the interests of enterprises and persons carrying out competing activity; and so forth.

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

The employee did not cite specific factual circumstances that, given the obligations imposed on them by clause 5.2 of the Agreement, would have placed an excessively heavy burden on them and deprived them of the ability — taking into account their qualifications and the practical skills acquired — to realize their potential in their chosen fields of activity.

In view of the foregoing, the court concluded that there were no grounds for declaring the disputed Agreement invalid.

Conclusion

Most non-competition provisions are aimed at protecting information that is proprietary or confidential. Such provisions may also focus on ensuring that a person cooperates exclusively with one company on a long-term basis.

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

In practice, when disputes arise regarding non-competition provisions, given the high costs associated with going to court, most companies and employees actually prefer an effective compromise over litigation.

Moreover, in order to establish the damages suffered, the person bringing the claim before the court will need to prove that such consequences were caused specifically by the other party’s breach of the terms of the agreement, and to provide the court with relevant evidence.

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

Prior to the adoption of the Law, the positions of Ukrainian courts varied somewhat due to the absence of normative regulation of NCAs.

Some judges proceeded from the premise that there are limitations on the constitutional right to work, with the result that such non-competition provisions in agreements or standalone NCAs were considered invalid.

Others leaned toward the position that non-compete agreements do not constitute discrimination on the part of the client or employer, but are rather a manifestation of the need to promote compliance with competition rules and a guarantee against the employee’s use of the company’s internal information — and that the conclusion of such an agreement is the parties’ right to regulate their relationship by contract.