Parallel Jurisprudence
Artem Afian and Dmytro Gadomsky
UJBL: What does the Ukrainian IT sector look like?
Artem Afian: Outlining specific areas of the IT industry is as difficult as distinguishing IT itself from other areas of life today. The IT factor is relevant for everything, from agriculture to medicine. Hardly any business is now not concerned with the development of its own IT infrastructure (not to mention trivial purchasing of software). Thus, our specialization is both narrow and wide.
Internally, weunderstandthat theITpracticeisdifferentfromtelecom (but they do overlap partially).
We believe that the Ukrainian IT industry consists of 5 main areas:
— IT outsourcing (business process outsourcing or offshore programming). This area is represented by companies like Ciklum, Miratech, Global Logic, etc. This part of the IT business is the largest and amounts to approx. USD 2-3 billion in turnover. For those who do not know, Indian lawyers are often subcontracted by first-class UK law firms — just pause and imagine this. The same emotions apply to Ukrainian outsourcing of business processes.
— Product companies. This area of the Ukrainian IT industry is represented by a relatively small number of companies like Jelastic, Terrasoft, Invisible CRM, TopTechPhoto etc. These guys grew into a global business within the last 5-6 years and are still growing.
— Internet projects like PromUA, Rozetka, ModnaKasta, Jooble, EX.UA, etc.
— Venture funds. This is the youngest area and is represented by such players as AVentures, BVU Group, WannaBiz etc., and also by thousands of start-ups like pics.io, PetCube, Gdgetarium, Clikky, TennisTerin, etc.
— Software integrators: Incom, BMS Consulting, Inline Group, etc. The oldest sector of the Ukrainian IT industry.
It should also be said that for the purposes of this discussion we do not consider the resale and distribution of software as part of the IT industry.
Very few Ukrainian law firms identify IT as a separate industry and operate in all 5 mentioned sub-industries. Law firms usually identify Telecom or Media as a service line, which involves some IT-related engagements.
Dmytro Gadomsky: If you look at the US or Israeli tech industry, you will see that inventors and investors are not the only parts of the technological eco-system. There are also start-up banks, various governmental programs, financial consultants, universities and, of course, start-up law firms.
What is crucial here is that IT law firms have good expertise in IT and, at the same time, their pricing policy is loyal enough for start-ups to be able to afford their services. Otherwise start-ups will have no reason to seek legal services. Large and expensive, or cheap and unskilled law firms — both will rather harm than help innovative business.
UJBL: It is widely said that Ukraine could be a very favorable jurisdiction for IT start-ups and related IT businesses. What are the main legal constraints at the moment?
D.G.: There are two Ukraines: the one we dream about and the one we live in. In the first Ukraine, we convert the traditionally strong tech education into a powerful oasis of technological creativity, innovation and new business models.
The second Ukraine, however, is the reality. In this Ukraine your office can be searched by the police at any time without sufficient legal grounds; all of your equipment can be seized and your company can be charged with additional tax obligations because tax legislation is so complex and vague that neither the businessmen nor the tax authorities understand it clearly. E-government means spending USD 100K for a one-page website for a local state administration. Intellectual property protection means obtaining patents for the design of the tablet PC and prohibiting world-class vendors from importing the same into Ukraine. Some of us may have become accustomed to this but it is just not an option for foreign investors and customers.
Innovation in this second Ukraine relies on soviet-style governance and investors with a background from the 1990s (times of wild capitalism with a criminal flavor). This does not necessarily mean that these people are not smart enough to regulate anything. This means that they are not young enough to understand that innovation cannot not be regulated at all.
A.A.: Ukraine as a state does not have its own global vision for the next decade or a couple of decades. To build another Silicon Valley we must choose an innovative route for development. This means the protection of our own intellectual property inside the country (instead of constant dawn raids on Ukrainian businesses to protect the intellectual property of foreign businesses, which do not even have a representative office in Ukraine and do not pay Ukrainian taxes), a loyal tax regime for innovative companies and IP-related businesses (this means really innovative businesses like electric vehicles or artificial intelligence, not another open-door market for selling and buying second-hand jeans).
Once most government officials stop trying to help companies run their business in a 19th-century fashion and take their hands off the economy, then new innovative businesses will start growing by themselves, while ineffective businesses will become extinct.
UJBL: What types of services are the most relevant for IT start-ups?
A.A.: Tech start-ups as clients are very special: these guys are smart and can at any time consult with our main competitor and most well-known lawyer — Google. There are two kinds of start-up founders. The first kind wants us to review every document they sign while the second kind use a sample 2-page contract for years. The first kind will get any MVP patented, while the second do not believe in patents and will develop more and more features so that nobody can mimic their product easily. Ironically, the second kind of Ukrainian founder is more successful in business.
But, things are radically different when you have an international transaction. If your documents are poorly drafted expect no mercy from your foreign partner who will necessarily benefit from this failure, because it is normal for foreign business to have attorneys.
D.G.: Right now tech start-ups are very tricky clients — they do not need legal memos 300 pages thick. They just don’t have the budgets for that. These guys require short and concise consultation written in normal human (non-legal) language.
Founders of tech start-ups are very young entrepreneurs. Therefore, they need a lawyer to rely on instead of a lawyer who is good at hiding his negligence or lack of expertise behind thousands of fancy words and hundreds of e-mails. If founders meet a potential investor, they need to understand very quickly where to incorporate and how to manage the development of the new product. And this is what we provide.
UJBL: A very small percentage of IT start-ups receive good funding. How do you manage to get your legal services paid?
A.A.: When we started our company we did not want to make just another law firm. We believe that the world is already full of suits, ties and legal texts. Therefore, we try not to be lawyers for our clients, we try to be their best friends and explain complicated issues in a plain and casual manner, like a person would explain something to a friend at a cafe or a bar.
We are a very young law firm. Although our partners and key associates brought conservative legal traditions from top-tier law firms and the Big4, we have managed to become unique on the legal market. At some point we understood that the higher the firm’s ranking, the more its clients have to pay for the firm’s fancy office with industry-grade coffee machines and endless corporate training sessions. Thousands of euros spent on worthless 10-people meetings and 30-page legal memos with the first 15 pages devoted to advertising the law firm are history. Most of the great and famous lawyers of yesterday are like that dusty 1st generation Blackberry that will no longer fit into your pocket.
You should be more open and look for lawyers that are like a new generation of Android devices: affordable yet flexible, reliable, offer all the essential functionality plus are highly customizable.
D.G.: The legal profession is a special case in the sense that lawyers are victims of their own beliefs in and perpetuation of silly lawyer stereotypes and myths. Because the infamous “billable hour” system — where clients pay hundreds of dollars per hour regardless of the outcome — remains ill-suited to cash-strapped start-ups, we offer alternative payment options including capped, deferred and discounted fees.
We are sometimes ready to go as far as to provide ambitious start-ups which we personally like with a package of services free-of-charge up to a certain amount, or ask for a small amount of shares in the client’s business instead of payment. We are hoping that these start-ups become big, stay loyal and won’t let us down when they require advice regarding high-cost legal transactions like series A financing, M&A, or intellectual property litigation. But many of these clients go out of business before they can pay off. That’s why you have to be agile enough to work like that. And that is why there are no top-tier Ukrainian law firms operating in this specific market.
UJBL: Do you believe legal services will change?
D.G.: Yes, the approach to legal services will change dramatically. A new trend in the legal profession is coming. Being outside the global tech economy, we did not notice the number of legal start-ups in 2013 and 2014. There are many interesting ones. For example, Clerky provides sample documents for incorporations, convertible notes and employee agreements along with document-generator and progress-tracking tools. Rocket Lawyer provides subscribers with documents and attendant instructions plus the ability to consult remotely with a real lawyer. There are also a number of Ukrainian start-ups in the legal field, and one of them — Juscutum Legal Alarm — is our own product.
The use of new technologies in the legal business is also worth mentioning. Sometimes, reading about the new software releases makes me regret not becoming a programmer myself. In 2013 Symantec issued Clearwell eDiscovery Platform which promises to “reduce the time of attorney document review and cut costs by up to 98% with Transparent Predictive Coding”. Prior to Symantec it was IBM who taught law to its super-computer Watson.
Another trend is the drafting of legal documents online. Many law firms do not even brand the documents they make public. These companies expect to receive profit from the legal support of the transaction, not the documents themselves.
An interesting theory was developed by a bright Czech philosopher called Vaclav Benda. He believed that parallel institutions must be built as alternatives to all existing state institutions: parallel science, parallel culture, parallel press, etc. After becoming familiar with this theory we had no other option than to call this new trend in legal business parallel jurisprudence: services are provided online, legal research is done by machine-learning technologies, contracts are entered into electronically, loans are pledged by domain names or objects of copyright and legal fees are paid in Bitcoins.
UJBL: How would you evaluate the enforcement of IP rights in Ukraine? As we know, global IT leaders treat Ukraine with some distrust because of inefficient copyright protection and enforcement.
A.A.: Ukrainian litigation is very specific. When you stand before a court in a small court room with tons of papers on the tables and the judges sitting on the bench and reading their Facebook newsfeeds, you never know what the decision will be. Even when there are hundreds of court decisions supporting your position, you can easily lose the case in a court. As a confirmation of your defeat you will get a short document with sloppy miss-aligned text, usually containing no logical explanation of the court’s decision. Thus, it is reasonable that major software distributors are afraid of Ukraine (but the same applies to almost every business in Ukraine, regardless of the industry).
Contrary to popular belief, IP rights violations are not the main reason for the migration of IT business. The much larger factor is the fault of the tax and regulatory system. The IT business is global and it is now apparent that states must compete to become a home for new start-ups. We can see the examples of Ireland and Cyprus, which were not bothering themselves much with the protection of intellectual property rights, yet still attracted IT giants. We are trying to implement this idea at the highest level, but there is still less progress than we would like to see.
UJBL: What are the main areas of legislative simplification/de-regulation? Could you please prioritize them from the perspective of facilitating investments?
D.G: The less the government that is involved in private business the better. This is especially true for the IT business. The government must deal with the army and print money. Business will do the rest. Unfortunately, Ukraine is currently far from this situation.
While drafting legislation in various working groups, we stood for the deregulation of everything. The best start will be to get rid of the ridiculous obstacles to investing abroad: individual licensing from the National Bank of Ukraine (NBU) and permits of the Ministry of Economy. The second problem is the employment of foreign specialists: this procedure is full of unnecessary bureaucracy and must be simplified to the submission of a one-page application.
Can you imagine that in Ukraine any contract can be entered into electronically? I can. We have a very global idea to allow the electronic form of contracts and basic documents for accounting. The only thing needed is to amend tons of legislation. The draft law on electronic commerce is the first step here. Let’s hope it will successfully pass the second reading in our Parliament.
A.A.: Also, Ukraine is outside of global financial trends. Most developed countries use crypto-currencies like Bitcoins or electronic money like WebMoney. Ukraine is a unique country: last year the Ukrainian office of WebMoney, and its direct competitor — GlobalMoney — were brutally searched by police. Recently, the NBU announced its official position on Bitcoin: it is unlawful. Thus, another step in deregulation should be to cancel criminal liability for electronic and crypto-currency emission.
UJBL: Both of you are known for your active involvement in various legislative initiatives. Please tell us a little bit more about recent achievements and activities.
A.A.: One of our strategic objectives — to move the Ukraine of today closer to the Ukraine we dream of. It sounds a bit strange for a law firm, but when we started working in the IT sector we saw that there was practically no government regulation (which has largely determined the success of Ukrainian IT business), and we were involved in large-scale processes of government reforms. Nowadays, a big part of our work is drafting laws and other work with relevant authorities. Many laws already have norms that we took part in drafting. We as lawyers are now in a unique situation — we are drafting laws that in the near future will become the subject of our legal consultations for our clients. This is a huge responsibility and a big stroke of luck at the same time.
Our last successful initiative was prohibiting police seizure of computers and servers unless this is specifically sanctioned by a court ruling. Nowadays any criminal investigator can seize equipment “temporarily”, while in reality this means months or even years.
As a part of the “deregulation” initiatives made by the EasyBusiness team at the Presidential Administration, our draft has survived nine circles of hell and at the end of the day was included in another draft act, which has recently passed the first reading in Parliament and is now being prepared for the second.
UJBL: Despite remarkable prospects for growth, police raids are quite common for IT companies. What are the main reasons for such raids? What do you usually recommend your clients in such cases?
D.G.: My father had always dreamt that I become a tax inspector or at least a police officer. I’m grateful for all the obstacles which stopped me from doing this.
The police believe that they are a part of the economy and even more — that they are entitled to dividends (they call it “royalties”) from business. Once the person or a company finds itself in Forbes, it also finds the police in the office, counting their “share”.
There were hundreds of dawn raids last year, and many IT companies suffered as a result. If someone in the police or tax inspection believes that such dawn raids will add value to our economy and attract investors, then I am going to surprise them.
A.A.: You cannot live in a society and be completely independent from it. The Ukrainian police, conducting their searches and inspections, are communicating this saying of Lenin to the public. The IT business is feeling all the shortcomings of an unreformed police force in our country.
We help our clients to prepare for such situations: prepare and review all the required documents, identify areas of risk, instruct employees on their actions in such situations. Then the task of every business is to survive the search. Basically, if you’re a business in Ukraine, and you’ve never been the subject of a criminal investigation, you haven’t been successful enough. But our experience shows that you can successfully fight this lawlessness. All you need is moral strength and good lawyers.
UJBL: What are your forecasts for developments in the Ukrainian IT sector?
A.A.:Any forecast can be either optimistic or pessimistic. However, for us the scenario is already set — we’ve placed our bets on the IT industry, because it is the future not only for Ukraine but for the whole world. Ukraine, in its turn, has the necessary potential to be at the forefront of the global IT market. Our task is to help business make it all the way to the top.
I think Ukraine should expect a gradual increase in the number of IT professionals working in outsourcing. This area is the soil from which a number of IT companies that will determine the future face of IT in our country will grow. We’re not in a position to predict whether it will be a product company, like Apple, or a company in the field of robotics. Our task is to make sure they have the best legal advice.
Juscutum
Key facts:
- Year of establishment 2008
- Number of lawyers/partners 46/6
- Core practice areas
- IT&Media
- White-collar crime
- Corporate law
- Dispute resolution
