LawFlash

Update: New Russian Decree Restricts Ability of Foreign Rightsholders to Collect License Payments

May 31, 2022

Russian President Vladimir Putin signed Decree No. 322 “On Temporary Regime For Performance of Obligations Towards Certain Rightsholders” on May 27, prohibiting Russian residents from making license payments to foreign bank accounts of rightsholders residing in “unfriendly states” or otherwise supporting sanctions against Russia.

WHO IS AFFECTED?

Decree No. 322 (Decree 322) affects six categories of rightsholders that license intellectual property (IP) to Russian residents, either legal entities or individuals, as detailed below.

Category A consists of companies connected with “unfriendly states,” including companies whose place of residence is in an “unfriendly state” and those that are controlled by companies from “unfriendly states.” Unfriendly states include the United States, EU members, the United Kingdom, Canada, Switzerland, Japan, and others. Refer to Morgan Lewis’s previous LawFlashes from March 2, March 7, and May 9 for further information on the concept of persons connected with “unfriendly states.”

There are some exemptions from Category A rightsholders:

  • rightsholders “controlled” by a Russian company or a Russian citizen, provided the information about such control (e.g., about the Russian ultimate beneficial owner) has been disclosed to Russian tax authorities;
  • rightsholders whose IP is used in connection with the import of drugs, medical devices, manufacturing and agricultural products, or food; telecommunication services; or development and use of software, databases, information systems, and data centers. Notably, this exemption is contract-based—the mere fact of IP being used in an exempted sector (e.g., the telecommunications market) would not exempt the entire product (e.g., it will fall under the regulation, if used in a non-exempted sector (e.g., logistics); and
  • rightsholders who continue to duly perform their obligations under the relevant contracts.

Importantly, as drafted, the above exemptions apply only to the rightsholders in Category A and do not apply to the rest of the rightsholders in the remaining categories, listed below:

  • Category B: rightsholders that have publicly supported or called for sanctions against Russia
  • Category C: rightsholders that have prohibited use of their IP to some or all of Russian residents after February 23, 2022, in order to comply with sanctions or for other so-called “non-economic” reasons
  • Category D: rightsholders that have stopped, suspended, or significantly restricted supply of goods and services after February 23, 2022, in order to comply with sanctions or for other “non-economic” reasons
  • Category E: rightsholders that have publicly discredited the actions of the Russian army and/or State or have published “fake news” (as defined under Russian law) about the actions of the Russian army or the state
  • Category F: rightsholders that have disseminated information in an indecent form, insulting dignity or morality or showing obvious disrespect for society, the state, state symbols, the Russian constitution, or state authorities

Payments to the rightsholders listed under Categories A through F made by individuals in connection with licenses purchased for personal purposes are exempt, provided that the payments under these licenses do not exceed 100,000 rubles (approximately $1,500).

WHAT CONTRACTS ARE AFFECTED?

License agreements, sublicense agreements, IP rights management agreements, and other agreements that include payments for the use of or “in connection with” the use of IP rights. This may, potentially, be interpreted broadly to include SaaS-type arrangements and other services contracts (e.g., maintenance agreements, playout, and delivery services, etc.).

WHAT WILL HAPPEN?

Starting from May 27, Russian residents cannot make payments to the rightsholders falling under Categories A through F, other than to special type “O” ruble accounts in an authorized bank.

As drafted, Decree 322 may apply even if the licensee (payor) is unaware of the relevant circumstances that trigger its application. For example, the licensee (payor) is deemed to be aware of the triggers if relevant information about the rightsholder is reported in mass media or by the Russian state authorities (e.g., information about the particular rightsholder supporting sanctions or suspending business in Russia due to sanctions or other reasons).

This appears to push the burden of proof to the licensee (payor) and it is expected that Russian banks may refuse to process payments to any account other than special type “O” accounts, unless the licensee (payor) confirms that the rightsholder (and/or recipient of the funds) does not fall under the restrictions of Decree 322. It remains to be seen whether the Russian government will adopt any procedure or establish a register identifying the rightsholders falling under the scope of Decree 322 to avoid discretionary application of the respective restrictions.

Under Decree 322, the licensee (payor) is allowed to withhold payments until the rightsholder gives its express written consent to make payments to type “O” account, and in such case, the licensee (payor) shall not be deemed in breach of the relevant contract. However, even if the rightsholder does not consent, the licensee (payor) can still make payments to a type “O” account, and such payment will be deemed to validly discharge its obligations under the relevant contract. If the payments under the relevant contract are denominated in currency other than Russian rubles, the licensee (payor) shall make the payment in rubles using the exchange rate established by the Central Bank of Russia as of the date of the payment.

Decree 322 further provides that as long as the licensee (payor) complies with the procedure established by the Decree, “its rights to use the relevant IP on the previously applicable terms shall continue.” This seems to suggest that notwithstanding any further actions by the rightsholder—including, potentially, unilateral termination due to non-payment or on other grounds—the license will continue in full force.

RULES APPLICABLE TO TYPE ‘O’ ACCOUNTS

Type “O” accounts will be opened at the request of the licensee (payor) in an authorized bank. The list of authorized banks shall be determined by the Russian government by June 6. Only one account can be opened for one rightsholder, so allegedly the authorized banks will share the information on type “O” accounts opened for the rightsholders. The rightsholder must provide licensees (payors) with the details of its type “O” bank account upon request.

Authorized banks will have the right to open type “O” bank accounts without the presence of the rightsholder and will perform the usual know-your-client procedures based on available documents. An authorized bank will notify the rightsholder on the opening of a type “O” bank account, if the bank has obtained contact details of the rightsholder “from a reliable source.”

As a general rule, rightsholders are not allowed to withdraw money from a type “O” account other than based on a prior clearance by the Government Commission on Control over Foreign Investments (headed by the Russian prime minister). The government shall determine the respective clearance procedure by June 6.

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