NDA/NCA — is there a chance to protect the business? (Judicial practice)

During the development of any product in the IT sector, specialists, product owners, and developers are aware of the importance of confidentiality regarding information about the product being developed or about the internal business processes. Some have felt this firsthand, while others have closely watched the series "Silicon Valley" and experienced all of Hendricks' screw-ups alongside him on the other side of the screen.

An effective incentive to prevent the unlawful disclosure of confidential information and trade secrets, or to reduce employee migration to competitors, is considered to be the conclusion of non-disclosure agreements regarding confidential information and trade secrets and non-competition agreements between business owners and contractors/employees, and/or between partners/product owners, etc.

However, the mere fact of signing the aforementioned agreements does not always contribute to effective judicial resolution of conflicts. At the same time, the provisions of these agreements can be more effective and actionable when combined with the following measures:

• the use of internal company policies for handling confidential information;
• the conclusion of NDAs with employees/contractors/partners, etc.;
• the creation of a database of confidential information, its labeling, and control over access to it.

From previous publications by our team it is already known what NDA and NCA agreements represent; this article will reveal the prospects of litigation in Ukraine regarding cases arising from violations of NDA/NCA provisions.

NON-DISCLOSURE AGREEMENT or NDA (Ukrainian — agreement on non-disclosure of confidential information)

An agreement that can be concluded by an employer/client/partners (Disclosing party) to protect their own trade secrets and confidential information from unlawful use and disclosure to third parties during cooperation with another party (Recipient party). This agreement is a tool through which it is possible to hold accountable for disclosure and impose an obligation on the guilty party to compensate for damages to the affected party.

Since the legislative regulation of NDA remains imperfect, business owners must remember that the agreement is not a magic pill and will only be effective in conjunction with the aforementioned list of measures, which we will examine in more detail below.

Mandatory provisions of NDA:

1. A complete list of confidential information and trade secrets (databases, client information, source code, accounting information, marketing strategy of the company, business model, etc.);
2. The term of the agreement (usually NDA is valid during the cooperation of the parties and 2–5 years after the end of the cooperation);
3. Ways of unlawful disclosure of confidential information and trade secrets (for example, uploading such information to the internet, oral disclosure, etc.);
4. A list of information that is not commercial and whose disclosure does not constitute a breach of the agreement;
5. Liability for breach of the terms of the agreement. In Ukrainian practice, a fixed fine or compensation for all damages incurred by the other party in case of breach of the terms of the agreement is most often specified, or a comprehensive approach is used, indicating both a fine and compensation for damages;
6. Measures for the preservation of confidential information and trade secrets;
7. Methods of transferring confidential information and trade secrets to the receiving party.

Also, let’s not forget that using template agreements downloaded from the internet resembles a situation of "just to have it" rather than "I want to protect my business in every possible way".

In 2021, the Law of Ukraine "On Stimulating the Development of the Digital Economy of Ukraine" (hereinafter — the Law on Diya City) was adopted, within which the legislator established the possibility of concluding a non-disclosure agreement for Diya City residents with their employees/contractors/partners, etc., and also set substantial conditions for such an agreement, thus improving the situation with the limited enforcement of NDA in court.

The substantial conditions of NDA under the Law on Diya City are:

• the term during which the specialist or another person is obliged not to disclose information with limited access of the Diya City resident or regarding the Diya City resident;
• the definition of the information to which the obligation of non-disclosure applies.

The use of internal company policies for handling confidential information.

Imagine transitioning to a new company or recall entering university; everything around us needs to be mastered anew. In large and medium businesses, companies develop onboarding separately for each area of influence within the company for faster integration of employees into work.

It is in such a properly established "onboarding" that clear rules and restrictions for working with confidential information should be established, including:

• labeling indicated on documents containing confidential information;
• the place of its storage;
• the procedure for its disclosure, if such is provided for by the agreement or legislation, etc.

A database of confidential information, its labeling, and control over access to it.

Who better than IT specialists knows how to create a secure database? However, not every IT business owner decides to spend their employees' time on its creation and only remembers about such a measure of protecting confidential information during a court process when asked by the court: "How did you control the process of granting access to confidential information?"

More about the importance of applying comprehensive protection of confidential information in analyzing current judicial practice:

• In case No. 752/5775/16-c, the company filed a lawsuit against an employee on the grounds that she accessed the company's system, where information containing trade secrets was stored, using corporate email while on maternity leave. According to the Plaintiff, the employee was thus collecting and transmitting information to competitors, with whom she also entered into actual labor relations. However, the company did not prove that the information to which the employee had access belonged to trade secrets, nor the fact of unlawful dissemination. Moreover, the employee was not prohibited in any way from using her personal computer to access corporate email. In this regard, the Supreme Court concluded in its ruling of February 28, 2019, that the mere fact of the employee accessing the corporate system of the company cannot indicate unlawful use of trade secrets and any violations of the company's rights.

In this case, we can observe a lack of control over access to the database, as well as the absence of the ability to verify which specific confidential information was uploaded or viewed by the employee.

Therefore, based on the aforementioned ruling, to prove the fact of disclosure of confidential information and trade secrets, it is necessary to:

• have documentary evidence that confidential information was transferred to the receiving party (acceptance-transfer act);
• restrict access to confidential information by granting access to it only from corporate computers or by preventing the downloading of confidential information without the permission of an authorized person.

The importance of the evidentiary process is evidenced by the analysis of case No. 922/4148/19. In this case, the Plaintiff claims that while cooperating with an individual entrepreneur under a software development agreement, he provided him with information about his clients, developed projects, and other confidential information. However, after fulfilling his obligations under the agreement, the Defendant became a co-founder of another company that created an extremely similar website to the Plaintiff's website, which contained mentions of the Plaintiff's clients and projects. The Plaintiff believes that the Defendant used his confidential information for his own purposes and the purposes of the new company.

However, by the ruling of the Eastern Appeal Economic Court dated August 5, 2020, the plaintiff's claims were denied because the Plaintiff did not provide evidence to confirm the connection of the mentioned website with him, as well as that the Defendant had received confidential information from the Plaintiff at all.

In light of this ruling, for the effective implementation of the provisions of NDA, it is necessary to:

• provide a detailed description of the list of confidential information that may be transferred under the agreement;
• properly document the moment of transfer of such information to the receiving party;
• provide the court with all necessary evidence to support its arguments.

From the analysis of the above judicial practice, it can be concluded that sometimes it is better to pay too much attention to organizing the process of protecting confidential information at the beginning of business creation and the internal processes of the company than to later search for evidence of violations that do not exist, unlike the violation itself.

NON-COMPETE AGREEMENT or NCA (Ukrainian — agreement on non-competition)

An agreement whereby one party undertakes not to engage in competing activities with respect to the other party to the agreement and/or not to work for a company that engages in competing activities for a certain period of time. Such an agreement is usually concluded in employee-employer relationships, but in practice, the application of such a provision is also found in contractor-client relationships.

NCA is not regulated by the legislation of Ukraine, with the exception of the Law on Diya City, but more on that later.

First of all, it is necessary to note that in Ukraine, the constitutional right to work is guaranteed, which takes into account the free choice of profession, type of labor activity, and work (“Article 43 of the Constitution of Ukraine (hereinafter — CU). Everyone has the right to work, which includes the opportunity to earn a living through work that he freely chooses or to which he freely agrees”).

In turn, the Labor Code of Ukraine (LCU) stipulates that the terms of employment contracts that worsen the position of employees compared to the labor legislation of Ukraine are invalid (“Article 9. Invalidity of the terms of labor contracts that worsen the position of employees. The terms of labor contracts that worsen the position of employees compared to the labor legislation of Ukraine are invalid”). Under such conditions, including non-competition clauses in an employment contract is risky and may be regarded by the court as a restriction of the labor rights of the employee and a deterioration of their position. However, if the NCA is concluded as a separate civil law contract, the norms of the LCU will not apply to such an agreement.

If in the case of NDA a comprehensive approach plays a significant role in protecting confidential information, then in the case of NCA, more attention must be paid to the conditions that must be ensured for the employee/gig specialist so that the signed NCA complies with all legislative requirements, which will be discussed in more detail below.

NCA within Diya City. The contract under which a specialist undertakes to refrain from engaging in competitive actions against a Diya City resident is remunerative and must be executed in writing.

Mandatory provisions of NCA:

1. Material compensation that the specialist receives for refraining from competitive actions against a Diya City resident;
2. The term of the obligation shall not exceed 12 months after the specialist's dismissal;
3. The territory of such obligation;
4. An exhaustive list of types of activities that the specialist undertakes not to engage in under the agreement (cooperating with competitors, holding a stake in a competing company, entering the governing bodies of competing businesses, conducting their own entrepreneurial activities that compete with the resident, etc.);
5. An exhaustive list of persons, if any, with whom the specialist undertakes not to cooperate.

It is necessary to note that the NCA should not contain direct prohibitions. In particular, it is not advisable to specify prohibitions in the agreement such as "not allowed," "cannot," "prohibited," etc. It would be more appropriate to indicate the specialist's obligation to refrain from engaging in certain actions listed in the agreement.

Confirmation of guarantees of free will in the case of concluding an NCA.

The legislation provides for the protection of the interests of the employee/gig specialist in the event of refusal to sign an NCA and stipulates that refusal to sign an NCA cannot be a reason for termination of the employment contract (contract) or gig contract.

Therefore, to avoid any disputes, when making an offer to an employee/gig specialist, it is necessary to additionally remind them of the obligation to sign a non-competition agreement if business owners do not want to fall under the restrictions of legislation and sign an NCA and NDA before the employment contract (contract) or gig contract.

Thus, before going to court over a violation of the NCA by an employee/gig specialist, it is primarily necessary to pay attention to whether the legislative requirements mentioned earlier have been met and then review what is recognized as anti-competitive actions according to the legislation and may be useful during the court process:

• the conclusion of employment contracts/gig contracts or other agreements with persons engaged in competing activities;
• engaging in competing activities as an individual entrepreneur;
• holding a stake in a competing company directly or indirectly;
• holding a position in the governing bodies of competing businesses, etc.

The list is not exhaustive and may be adjusted directly by the provisions of the NCA.

Judicial practice.

Noting that within Ukrainian legislation, the NCA does not have sufficient regulation, not to mention the restrictions on the rights to free choice of work imposed by such agreements, which is directly prohibited by the CU, we can currently note certain positive trends.

• In case No. 761/15245/18, a person filed a lawsuit against the Defendants — the owners of the enterprise where the Plaintiff worked, with whom he had concluded a non-competition agreement. Under this agreement, he was not to engage in competing activities, including working for any competing company, and was not to hire employees or clients of the company, etc. If the terms of the agreement were fulfilled, the Defendants were to pay the Plaintiff an amount of 16,971 euros at the moment of voluntary dismissal; however, the payment was not made.

By the ruling of the Kyiv Appeal Court dated October 6, 2020, the employee's claims were satisfied, as the defendants, as independent individuals, undertook the obligation to pay a certain reward to the Plaintiff on the condition of not creating competition for the company in which they are owners.

Thus, in this case, we observe a clear violation of the right to material compensation for the specialist, which he receives for refraining from competitive actions.

• In the next court case, case No. 588/34/21, the plaintiff had been in an employment relationship with the company since January 5, 2000. Alongside her main job, the plaintiff worked part-time as the director of a branch of another company. On February 6, 2019, the plaintiff was offered to sign an agreement to terminate the employment relationship by mutual consent, which, in turn, contained provisions on non-competition. Considering the amended claim, the plaintiff specifically requested the court to recognize this provision as discriminatory and limiting her constitutional right to freely choose working conditions, which contradicts current legislation and, based on Article 9 of the LCU indicates the invalidity of such a condition.

Considering all the circumstances, the court rejected the plaintiff's arguments, as the disputed clause of the agreement was temporary and applied to the legal relations of the parties after the termination of the employment contract, which are civil law relations, and therefore, under the principle of freedom of contract provided for in Article 6, 627 of the Civil Code of Ukraine, such relations can be independently regulated by the parties.

It is also important to note that the plaintiff did not refer to specific factual circumstances that, under the obligations imposed on her by the disputed clause, placed too heavy a burden on her and deprived her of the opportunity, considering her profession and acquired practical skills, to realize herself in the chosen fields of activity.

This decision is an example of the court concluding that non-competition agreements are not discrimination by the Employer but are a manifestation of the necessity to promote competition and a guarantee to limit the use of the Employer's internal information by the Employee, and the conclusion of such an agreement is the right of the parties to regulate their relations in the contract.

Analyzing the aforementioned cases, one can conclude that the guarantee of successful protection of the rights of the company, as well as the employee in court, is a properly collected and documented evidence base.

Complaining about imperfect legislation can go on indefinitely, but such arguments will not hold in the courtroom when your business and its protection from competitors are at stake. Answering the question in the title of the article, protecting a business solely by concluding an NCA and NDA is very difficult and risky, as the court process will pay more attention to a comprehensive approach to protecting the company from the dissemination of confidential information and competitive actions.

If you have questions about your business or whether enough attention has been paid to protecting confidential information, we are pleased to inform you that the Digilaw team has experience in supporting businesses from developing internal documentation to protecting business interests in court.