New restrictions on IP deals involving foreign rightholders

It was already at the end of last year that the government started discussing the initiative of introducing quite broad restrictions on all deals with persons from “unfriendly states” involving the alienation of exclusive IP rights or the pledging of such exclusive rights. Our team analysed one of the drafts of the measures in our earlier legal update.

A new presidential decree was published and entered into force on 20 May 2024: Decree No. 430 of 20 May 2024. The decree, entitled “On the Temporary Procedure for Acquiring Exclusive Rights of Certain Rightholders and Delivering on Monetary Obligations towards Certain Foreign Creditors and their Controlled Persons” (“Decree”), largely amends the regulation and procedure of IP deals.

In our legal update of 22 May 2024 we briefly touched on the deals that fall within the scope of the Decree, the IP to which the Decree is applicable and the specifics of making payments under the corresponding deals. In this overview, we will address these and many other issues in more detail.

Pursuant to the Decree, deals between purchasers and rightholders involving the acquisition of exclusive rights to IP or means of individualisation require the consent of the Government Commission for Control over Foreign Investment in the Russian Federation (“Government Commission”).

1. Which deals fall within the scope of the new regulation?

The Decree addresses only one category of IP deals; more specifically, these involve the assignment, by rightholdersRightholders are persons from unfriendly foreign states that have transferred or are obliged to transfer their exclusive rights in IP or means of individualisation to purchasers under agreements providing for the alienation of such rights (para. 2(c) of the Decree).
Persons from unfriendly foreign states are foreign persons associated with foreign states which commit unfriendly acts against the Russian Federation, Russian legal entities and individuals (including if such foreign persons are citizens of such states, and if their place of registration, place of primary business or place where their primary profit from such activity is derived is such state), and persons controlled by such foreign persons, regardless of the place of their registration (including if their place of registration is the Russian Federation) or the place where they predominantly conduct their business (para. 2(b) of the Decree). who are persons from unfriendly foreign states, of exclusive rights to IP in favour of purchasersPurchasers are the Russian Federation, its regions, municipalities or residents (para. 2(a) of the Decree) who are residents , as well as the performance and security of obligations under such deals.

As the Decree contains quite a broad list of persons who may qualify as “rightholders” and “purchasers”, it includes not only deals between legal entities, but also deals between individuals (as a party to the deal or generally involved in the deal) that will come under the scope of the special procedure.

The Decree must not apply to the following deals:

licence and sublicence agreements (including those with exclusive licences);
commercial concession agreements (franchising agreements);
agreements involving the assignment of exclusive rights in IP by Russian rightholders in favour of foreign persons, including persons from unfriendly foreign states;
agreements on the assignment of exclusive rights in IP protected in Russia by rightholders who are “persons from unfriendly foreign states” in favour of foreign purchasers;
agreements on the assignment of exclusive rights in IP by foreign rightholders who are not “persons from unfriendly foreign states” in favour of Russian purchasers;
deals where the value of the purchaser’s (resident’s) obligations does not exceed RUB 15 million or the equivalent amount in a foreign currency; and
deals involving the acquisition of exclusive rights in IP that fall within the scope of exemptions provided for by the Decree (for more detail, please see point 2 below).

For the time being, it is not yet clear whether the pledging of exclusive rights falls within the remit of the Decree. As such, the transaction does not contemplate the acquisition of exclusive rights, but the foreclosure on the exclusive rights so pledged may qualify as the acquisition of rights and, therefore, require the clearance of the Government Commission.

2. What kinds of IP fall within the scope of the Decree?

According to the Decree, it is NOT applicable to the following IP:

scientific, literary and artistic works;
results of performing activities (performances);
phonograms; and
messages of on-air and cable broadcasting organisations.

It is not clear whether this exemption covers deals involving software. The Russian Civil Code provides that computer software is protected as literary works (art. 1259 (1) of the Russian Civil Code).

Further to this, there is no clarity as to whether this exemption applies to databases, which as software relate to copyright protected items, but as part of composite works.

In addition to this, the Decree does not apply to:

trade names, as an exclusive right to a trade name is non-alienable (art. 1474 (2) of the Russian Civil Code); and
geographical indications and names of the origin of goods where the exclusive rights to which are also non-alienable (art. 1519 (6) of the Russian Civil Code).

However, the Decree will in any case apply to the following items:

trademarks;
objects of patent rights (inventions, utility models and industrial designs);
know-how (trade secrets);
commercial designations where the exclusive right in which may be transferrable to another person only as part of the enterprise they relate to (art. 1538 (4) of the Russian Civil Code);
integrated circuit layouts; and
successful varieties.

3. Conditions the Government Commission may impose when issuing its clearance

According to the Decree, the clearance issued by the Government Commission may contain conditions for carrying out deals that incorporate an obligation to make payments to a rightholder who is “a person from an unfriendly foreign state” via O-type accountsThe procedure of making payments via an O-type account is established by Decree of the Russian President No. 322 of 27 May 2022 “On the Temporary Procedure for Performing Obligations towards Certain Rightholders” (para. 3(a) of Decree No. 430). The clearance may also contain other conditions as may be imposed by the Government Commission.

4. Is the Decree retrospective?

Yes, it is, but only in relation to deals where the monetary obligation has not been timely fulfilled (in whole or in part) as at the date the Decree entered into force (i.e. the deadlines for paying a fee for the alienation of exclusive rights under the corresponding agreements on the alienation of exclusive rights were missed).

5. Performing monetary obligations by transferring the funds to an O-type account

As mentioned above, when issuing clearance, the Government Commission may set a condition that, in pursuance of the deal, funds must be transferred to an O-type account.

The Decree however provides for cases when the funds must be transferred to O-type accounts irrespective of whether the Government Commission incorporates such a condition in its clearance. Such cases include: the performance of monetary obligations in relation to deals made before the entry into force of the Decree, which may have been not performed as at that date in whole or in part. This requirement applies to payments that, as of the entry into force of the Decree, were not made in violation of the time limits for performing obligations under such deals.

In addition, the following funds must also be transferred to an O-type account opened in the name of a foreign creditor or its controlled person:

funds that are transferred to the purchasers for the purpose of performing monetary obligations towards
foreign creditors and their controlled persons
Foreign creditors and their controlled persons are persons from unfriendly foreign states who are guarantors (counter-guarantors) under independent guarantees (counter-guarantees) or sureties if the beneficiaries under independent guarantees (ultimate beneficiaries under counter-guarantees) or creditors under principal obligations secured by suretyships are rightholders, and the principal obligations such guarantees (counter-guarantees) or suretyships secure are obligations arising out of:
- deals for which the Government Commission sets a condition to transfer funds to an O-type account; or
- deals that have not been performed by the date of the Decree.
under independent guarantees (counter- guarantees) and suretyships; and
funds that are transferred by guarantors (counter-guarantors), who are not foreign creditors or their controlled persons, for the purpose of performing monetary obligations towards foreign creditors and their controlled persons under independent guarantees (counter-guarantees).

We further note that even though the Decree is not applicable to a number of IP rights’ agreements as are set out in point 1 above, for some of such agreements there is separate restrictive regulation in place, including the need to transfer funds via the specified special account (for example, Decree No. 322 of 27 May 2022 for licence agreements).

6. Releasing funds from an O-type account

The decree in question does not contain a procedure similar to that of Decree No. 322 for “releasing” the funds credited to a special O-type account. More specifically, funds may be transferred from an O-type account to the account of a rightholder, who is a foreign creditor or its controlled person, only with the permission of the Government Commission and upon the request of such persons.

Without such permission, it is not allowed to withdraw the funds from the special account and transfer them in favour of a rightholder who is a foreign creditor or its controlled person.

7. Who can give clarifications on the Decree?

The Decree vests the right to give official clarifications in:

the Central Bank of the Russian Federation — on issues relating to the application of the special O-type account regime and the settlement of accounts with the use of a special O-type account; and
a federal executive body to be designated by the Government of the Russian Federation — on other issues relating to the application of the Decree. The Ministry of Economic Development of the Russian Federation is likely to be designated as such federal executive body.