On 11 August 2021, the President of Ukraine signed Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine” No. 1667-IX (“Law”). Most of its provisions became effective on 14 August 2021, introducing Diia City, a special legal regime for IT companies, and bringing changes beyond the IT industry.
It is no secret that IT/tech is one of the fastest-growing industries in the Ukrainian economy. This tendency is likely to continue despite the existing global challenges. For example, in 2020, the export of IT services only increased amid trade declines that other industries faced. While the IT market is constantly developing, local companies have often raised concerns regarding the protections afforded by Ukrainian law to their key asset – IP. Some were related to contradictory provisions set out by local laws, while others addressed the ability to protect IP rights in Ukrainian courts. The Law is an attempt to resolve some of these issues and, therefore, further improve the conditions for IT companies.
Transfer of IP rights
Before the Law became effective, the Ukrainian IP laws set out the following default rule. A customer/employer and the relevant contractor/employee creating IP must own such IP jointly unless otherwise agreed in writing. Therefore, if a customer/employer failed to enter into a written agreement with its contractor or employee, as applicable, it could not (a) automatically secure its title to the relevant IP and (b) freely commercialise it.
Likewise, even in those cases where the parties entered into a written agreement, one could not exclude the risk that the relevant contractor/employee may challenge the customer/employer’s title to IP due to certain peculiarities of local laws. In particular, Ukrainian law requires “indicating” the transferred rights in the relevant agreement. As a rule, to comply with this requirement, parties have included a wide list of IP rights in their agreement, bearing in mind that simple reference to the assignment of all IP rights is unlikely to be enforceable.
The Law amended the above default rule in some instances. Now, an employer will solely hold IP rights to any software and databases created by its employee unless otherwise agreed in writing. Notably, the employer will be considered a holder of such IP from the moment of its creation. No additional formalities are required. In terms of the customer-contractor relationship, the Law provides even wider protection. The customer will own IP to any copyrighted works (in addition to software and databases) from the moment of their creation. The above provisions apply to the extent an employee/contractor created IP within the scope of employment/other engagement (the relevant employer or customer must have the necessary evidence to this end).
The amendments introduced by the Law will facilitate the transfer of IP rights under arrangements initiated following its entry into force. However, in those cases where IP was created before 14 August 2021, the prior default rule should apply – the transfer of IP rights in favour of an employer/customer must be expressly set out in a written agreement. Otherwise, the IP rights will be owned jointly by the parties. Also, the Law does not change the existing rules (a) governing the allocation of rights to any IP, other than copyrighted works mentioned above (including any inventions) and (b) prohibiting any assignment or waiver of moral IP rights (any such assignment or waiver will be deemed null and void).
Ukrainian law provides a mandatory requirement to pay the author’s remuneration for creating and using any “work for hire”. In the IT industry, this creates a significant burden as most IT specialists create IP on a daily basis. Therefore, local companies have often included such remuneration in the employee’s salary, making no separate payments to the relevant employee creating IP. While common, such practice was not entirely consistent with Ukrainian law. In particular, the Supreme Court of Ukraine held a view that payment of a salary may not be treated as payment of author’s remuneration, regardless of whether one’s job duties concerned the creation of IP only.
The Law provides some comfort to employers. While the author’s remuneration is still mandatory, employers may now include such remuneration in the respective employee’s salary provided that (a) this approach is applied to employees whose job duties primarily concern the creation of IP and (b) the parties set out such arrangement in the relevant agreement.
Additional Diia City benefits
In addition to the general novelties applicable to any company in Ukraine, most of the benefits – tax and legal – concern exclusively the IT companies joining Diia City – Diia City residents. In particular, the Law allows Diia City residents to formalise their relationship with IT specialists based on a new flexible instrument – gig contract. A gig contract combines the elements of private entrepreneurship (the preferable option for the IT industry) and employment (in particular, the relevant social security benefits). It allows the parties to benefit from the amended rules on the allocation of IP rights specified above. Diia City residents may also utilise the non-compete and non-solicitation instruments in relation to the IT specialists. To date, Ukrainian courts have generally regarded such instruments as null and void.
The Law is expected to create a more flexible legal regulation to attract capital, protect IP and facilitate innovative entrepreneurship. Its provisions will be specifically relevant to IT companies that will now be better positioned to secure their title to the commissioned IP and avoid any disputes with their employees/contractors in this regard.
By Anton Polikarpov, Counsel and Head of IP/TMT, and Oleksandr Kozhukhar, Associate, Avellum