How can you protect Intellectual Property when working with Team Extension?
In this article we consider legal responses to four possible problem scenarios US-based startups could encounter when working with software engineers based in Ukraine.
There are various issues you could encounter when working with foreign software engineers. Here are four possible scenarios that require a legal response. What follows is not official legal guidance (though we did consult with our lawyer). The purpose of this article is to recognize the threats that startups face and to highlight possible resolutions in case of necessary legal action.
Let’s take a look at these four scenarios:
1. A Ukrainian Private Entrepreneur develops source code for a US Client. The Private Entrepreneur then goes and works for a competitor of the US Client, in violation of a non-compete agreement.
First, we should note that non-compete agreements should be carefully drafted so as to be enforceable. This means ensuring that the content of the agreement reflects applicable laws. While non-compete agreements are enforceable throughout the US, specific laws vary from state to state.
Non-compete agreements should specify the territory on which they apply, specify in which industries competition is prohibited, and specify a list of competitors with whom the Private Entrepreneur may not work. Sometimes, depending on applicable laws, it is necessary to compensate for the time during which a Private Entrepreneur refrains from working in a competitive industry.
IF a non-compete agreement is violated, we could pursue the following course of action:
IF the jurisdiction of a US court has been chosen (according to the non-compete agreement), then a claim should be prepared and filed at the specified US court.
Next, the court at which the claim was filed should deliver its decision. This decision should relate to the the paying of fines or other damages as stipulated in the non-compete agreement.
The US court decision should then be submitted to the Ukrainian national court.
The national court in Ukraine should then enforce the US court decision and issue its own resolution stating that the US court decision should be enforced.
Note: The decision of a US court should be recognised in Ukraine according to international treaties of mutual recognition and enforcement of foreign judgments.
Next, the decision of the US court, together with the resolution of the Ukrainian national court, should be filed with the State Executive Service of Ukraine. This is the agency in Ukraine that enforces court resolutions.
The State Executive Service can then pursue fines or damages owed by the Private Entrepreneur. They can arrest all money in a Private Entrepreneur’s bank accounts. If bank funds are insufficient, they may confiscate a Private Entrepreneur’s property and sell it according to a special procedure.
2. A Ukrainian Private Entrepreneur violates a non-disclosure agreement. The Private Entrepreneur either:
- reveals source code, requirements specifications, and/or other artifacts,
- OR accidentally publishes source code, requirements, and/or other artifacts online.
The response to this situation depends on the specifics of the non-disclosure agreement and on applicable laws. As a general rule, the following steps should be taken:
A legal claim should be prepared and filed at a court as per jurisdiction agreed upon in the Contract. This legal claim should specify that a breach of contract took place.
Note: The non-disclosure agreement should enumerate what information is confidential, and specify sanctions for the illegal disclosure of this information. Sanctions may include fines. For example, each unfair disclosure could result in a fine of $5,000 (or €5,000) in damages if it can be established that the Disclosing party (the party who disclosed confidential information to the Private Entrepreneur) sustained loss.
Next, the court at which the claim was filed should assess the evidence contained in the legal action and deliver its decision.
If the court’s decision is in favor of the client (known as the Disclosing party), then the client may arrest the property of the Private Entrepreneur (known as the Receiving party). In short, this means that the client can collect fines or damages from the Private Entrepreneur.
Fines/ damages are collected, generally with the assistance of a relevant enforcement agency (as noted in the previous scenario). The collection of fines/ damages may involve freezing of a Private Entrepreneur’s bank accounts, along with movable and immovable property.
3.Source code for software developed for a US Client is re-used by a Ukrainian Company or Private Entrepreneur.
According to The Berne Convention (1886), copyright is protected from the moment of publication. In legal terms, this means that source code and object code is copyrighted.
If a US company can show that they developed the software in question (including source/ object code), and are the owner of this code, then the US company may file a claim in Ukraine to hold liable the person who used this software (source/ object code) without authorization. A Ukrainian court may then hold a Private Entrepreneur or Company liable to compensate for losses, and if such a breach were to occur a second time, the court may hold the infringing party liable up to criminal liability.
4.A Ukrainian Private Entrepreneur leaves a Company before work with a Client is completed, violating terms of Contract.
Personnel are the most valuable assets for any IT company. This is why the question of retaining personnel is critical. From the legal perspective, there are several ways to obligate personnel to remain with a company:
- Hold 30-40% of total payment until services are rendered in full (this is the most effective method).
- Specify agreed fines (liquidated damages) within the Agreement in the event that a Private Entrepreneur terminates their Contract prior to the expiration of the Agreement.
- Sign a non-compete agreement and specify US laws as applicable.
- Sign a non-discolsure agreement.
IF a Private Entrepreneur has left a company before completing client work, the following steps could be taken:
On account of breach of Contract, retain the 30-40% of total payment that was previously withheld.
IF fines (liquidated damages) have been established within the Agreement, then a legal claim should be filed with a court in Ukraine to arrest all of a Private Entrepreneur’s funds and/or property until fines are paid in full.
IF applicable, follow the procedure described in item 1 for breach of non-compete agreement.
IF applicable, follow the procedure described in item 2 for breach of non-disclosure agreement.
We hope that you’ll never face any of these scenarios. But it’s important to consider potential risks up-front, and to understand that there are adequate responses in place to protect your valuable intellectual property and enforce business contracts.