Category: Hungary

New technologies, spearheaded by artificial intelligence, are shaping the legal dialogue surrounding innovation, consumer protection, and the integrity of market competition within Hungary and the European Union as a whole according to KCG Partners Founding Partner Rita Parkanyi.

“The sheer pace at which new technologies are entering the market fascinates me,” Parkanyi begins. “As consumers, we’re on the frontline, witnessing the speed of this evolution; yet, from a legal perspective, it’s equally intriguing to observe how EU regulation adapts to these changes.” As Parkanyi puts it, there is a need to balance innovation with consumer protection and market fairness in this dynamic field.

In the EU, “the AI Act is nearing its final stages and aims to set a precedent by introducing global standards for AI use,” Parkanyi continues. “This monumental effort is akin to the introduction of the General Data Protection Regulation, focusing on a risk-based approach to ensure security, respect human rights, and foster innovation. It’s a significant legal undertaking, shaping the future of AI regulation,” she stresses.

Moreover, Parkanyi reports that “the Hungarian Competition Authority has initiated a market analysis to assess the impact of AI technologies. This research is crucial as it explores the dual aspects affecting both consumers and market players,” she says. One of the concerns is the potential threat to competition in the digital sector, “especially since AI technologies require extensive data sets, which only a few tech giants possess,” Parkanyi explains. “This concentration of resources could lead to market monopolization. Furthermore, the authority is investigating advertising practices that may exploit consumers through AI tools, elevating the need for vigilance and informed consumer choices.”

Parkanyi says that she anticipates this analysis will wrap up by the summer of 2024. “The process, expected to take about six months, involves engaging with market players, analyzing the practices of Hungarian companies, and reaching out to major tech firms. The aim is to understand the broader implications of AI on competition and consumer protection, guiding potential regulatory responses,” she explains.

“The investigation into Microsoft’s Bing is fascinating as it exemplifies the scrutiny AI services undergo,” Parkanyi says. “The focus is on whether the information provided to users is sufficiently detailed, emphasizing the importance of transparency and the quality of information customers receive. This inquiry reflects broader concerns about how AI technologies are deployed and communicated, highlighting the need for clear, accessible information to empower users,” Parkanyi concludes.

Deloitte Legal has advised IPCOM on the acquisition of Hungary’s Dualinvest.

Belgium-headquartered IPCOM is a group of European companies specializing in the distribution and conversion of solutions for thermal insulation, high-temperature insulation, passive fire protection, and acoustic insulation.

Dualinvest is a Hungarian manufacturer specializing in refractory and high-temperature insulation.

Deloitte Legal did not respond to our inquiry on the matter.

Today, more and more companies are trying to convince consumers with the pretence of a sustainable future and environmental awareness. However, in many cases, there is no real responsibility behind such marketing activities, which are simply intended as an effective advertising ploy to make green claims.

The Hungarian Competition Authority (“GVH”) has analysed the impact of green marketing claims on consumers’ purchasing behaviour in several studies. The market analysis has shown that consumers’ behaviour is strongly influenced by green claims on the packaging, which have an impact on purchase intentions, despite the fact that consumers are often unaware of the exact meaning of the green claims. Businesses should be vigilant about the materials they use to promote sustainability, as misleading advertising or information can easily be considered unlawful. In response to this problem, the GVH has issued recommendations to businesses to ensure that green washing is discouraged and that consumers receive truthful information about a product or service.

Information on products and services

According to the GVH, a common problem with product labelling is that consumers do not understand why a product is considered environmentally friendly. Generalised, vague claims are common, such as “environmentally friendly product”, “renewable packaging” or “environmentally responsible choice”. Such claims do not make it clear to the consumer what criteria or characteristics qualify a product as “green”.

The GVH advises businesses to be clear and specific. It must be clear which aspect of the product the claim refers to, whether it is about the product itself, the packaging or perhaps its manufacture or the delivery. Clarity also means that the language used must be understandable to the average consumer, because without clear information the consumer cannot make an informed decision. Nor should a business use claims that hide the real impact of a product or service on the environment by highlighting a single characteristic. It is a common practice for companies to highlight the positive environmental impact of the product packaging without mentioning that it is negligible in relation to the environmental damage caused by the production and processing of the materials.

A business should only make claims that are true, accurate and easy to verify. Practices where information is not available to consumers in Hungarian are highly objectionable, as is the practice where the information can only be found after significant research and multiple click troughs. 

It is considered bad practice for a company to emphasise legal compliance as a distinguishing advantage over identical or similar products of other companies, when it is required for all products by manufacturers in the sector. Marketing materials that highlight environmental performance relative to the company’s past performance can also be misleading, because if a company has not paid attention to this, achieving a significant improvement is not a real challenge for the company.

Comparative advertising

In the field of comparative advertising, the GVH considers it fundamental that the claims are objective, relevant and verifiable. Vague and intangible statements should be avoided, and clear, concrete and quantified claims should be made; for example, it is worth expressing in percentage how much less harmful substances a company uses than an another company producing a comparable product. It should be borne in mind that a company claiming to be the “greenest” or “most environmentally friendly” is also a comparative claim. The company must be able to prove the veracity of the claim in relation to all relevant products on the market for the entire period of the advertisement.

What do the certification labels certify?

In particular, the GVH also highlighted the importance of ensuring that the qualities certified by the certification labels on the product can be easily checked by consumers and that the advertising message communicated through the label does not go beyond what the label actually certifies. 

Environmentally conscious promises

Companies should also be wary of making brand-building statements about their future activities. The companies should only make commitments that they are able to deliver in the foreseeable future, that are realistic and that consumers can follow. It is not advisable to make commitments that the company is already delivering, as this does not represent a real change, requires no effort and misleads the consumers.

Businesses need to be aware that not only specific environmental or sustainability claims can be considered green marketing, but also implicit signals such as the green colour, the visual placement of flowers or a globe, or even specific sound effects. Companies need to be aware of the overall effect, and should not imply that a product is environmentally friendly, even by implicit signals, if it is not.

By Lili Horvath, Junior Associate, Act Legal

The Hungarian Parliament adopted the bill on Hungarian architecture on 12 December 2023, and the Hungarian Architecture Act was officially published 10 days later. The date of entry into force is different for certain sections of the Act, namely 30 December 2023, 1 October 2024, 1 January 2026 and finally 1 July 2027.

As the Act will create a transparent and coherent regulatory framework instead of the currently fragmented regulatory system by repealing the act on the professional chambers of designers, professional engineers and architects, the act on the professional chambers of the built environment, the act on the development and protection of the built environment and the act on the protection of the urban landscape, it is important to review the steps of its entry into force.

• 30 December 2023

The act on the acceleration and simplification of the implementation of investments of priority national economic importance was repealed, however, it was recodified with some amendments as part of the unified Hungarian Architecture Act. Amendments to act on national property were declared, as per the provision of the Hungarian Architecture Act, the “public beaches of Lake Balaton” are introduced as new national assets (owned by the state or the municipality).

Amendments to act on the spatial planning plans of Hungary and certain priority regions were made. In addition, some national amendments for the Budapest agglomeration have also entered into force as of this day.

• 1 October 2024

The majority of the Hungarian Architecture Act will enter into force from 1 October 2024. According to the drafters of the act, these are the provisions of the act that will result in the “dawn of the Hungarian architectural reform era”. The new legislation encompasses not only general architectural matters but also a range of related regulations pertaining to urban landscape preservation, cultural heritage protection, and advertising activities.

A notable alteration in the building permit process is the transformation of the simple notification of building activity into an acknowledgment procedure under the new Act. This mandates that within a 15-day period, the building authority will oversee adherence to relevant regulations and take measures to halt any unlawful activity if detected. Anticipated revisions in the occupancy procedure include a significant requirement wherein the architect’s declaration becomes obligatory for the issuance of occupancy permits in specific cases Furthermore, the Act mandates compulsory designers’ liability insurance for all building and landscaping projects. The regulation of this insurance will be overseen by a government decree aimed at ensuring developers’ effective protection.

The aim of the new legislation is to redirect new property developments toward the underutilized existing older property stock rather than expanding into new property areas on the outskirts of Hungarian cities. This is facilitated by the implementation of a three-tier system of chief architects with strengthened competencies. Additionally, the responsibilities of municipal planning councils will be expanded, enabling them to intervene in new developments to enhance the urban landscape.

• 1 January 2026

The National Register of the Building Industry will be introduced. Within the framework of this register, the electronic documentation systems and applications are operated and used for the security of supply of construction materials and transparency, such as a construction materials database, a construction product database, a declaration of performance database, a construction cost database; and any other database as may be specified by Government Decree.

• 1 July 2027

Two sets of provisions would enter into force from this date, the legislator intends to abolish the role of the county councils in drawing up spatial plans, and this type of spatial plan would be phased out and replaced by the national spatial plan. The drafters of the law justify this on the grounds of the development of spatial information technology; they hope that from this point onwards it will be possible to determine land use from a national centre to the nearest plot subdivision. The necessary “overlapping” of previous land-use plans due to imprecision of scale will be avoided from the date indicated.

The Hungarian Architecture Act is currently the most important piece of legislation in the field of construction law. Following thorough review and critical analysis by professional organizations, the industry welcomes the legislative change. However, given that the new act entails a reinterpretation of the existing framework of building laws and regulations, an adjustment period and some minor challenges in practice are anticipated.

By Denes Glavatity, Associate, KCG Partners Law Firm

Due to the holiday season and the legislative dumping at the end of the year, the important new milestone in the ESG field did not receive much publicity, even though Act CVIII of 2023, the ESG Act, which is the first comprehensive Hungarian regulation in the field, entered into force as of January 1, 2024. The field, which until now has mostly been covered by EU sources of law and in one Hungarian law, has finally ceased to be a stepchild and has been given the first comprehensive and unified law, which the legislator himself named the ESG Act.

What is ESG?

ESG has been a hot topic for years, but in the beginning, it is worth noting that ESG is an acronym that contains the initials of three areas: environmental, social and governance.

These are the aspects that have so far been fragmented and mostly imposed on the largest companies in EU legislation (e.g. the Taxonomy Regulation, the CSRD Directive) and in domestic legislation (e.g. the Accounting Act, Act LXVII of 2019), so that they take into account these aspects and sustainability issues in their operations and investments.

Until now, there has been no single Hungarian ESG regulation, but the duties and obligations of the companies concerned had to be selected from the EU and national legal sources that entered into force at different times. 

Scope of the ESG Act

The new single regulation, which is called Act No CVIII of 2023 on the rules of corporate social responsibility, taking into account environmental, social and societal aspects, and amending other related acts, in order to promote sustainable financing and unified corporate responsibility, is therefore a step forward from a regulatory and enforcement perspective. This is particularly true if we consider that the ESG Act contains rules applicable not only to the companies concerned but also to the public regulators/authorities and to the ESG market players. 

The ESG Act applies mainly to large companies with a balance sheet total of more than HUF 10 000 million, an annual net turnover of more than HUF 20 000 million and more than 250 or 500 employees. According to the ESG Act, at least two of the previous annual figures of a large enterprise must exceed the above thresholds set out in the Act in order to be covered by the Act. 

Small and medium-sized enterprises that qualify as a public interest entity are also subject to the law, regardless of the above thresholds, i.e. not only giant companies should get acquainted with the new ESG Act, calls the attention Dr. Péter Weidinger, LL.M., expert at act Bán & Partners. Such a public interest SME is a company whose transferable securities are admitted to trading on a regulated market in a state of the European Economic Area. In other words, Hungarian-based companies listed on an EEA stock exchange already fall into this category and are subject to the new rules.

However, due to its comprehensive nature, the scope of the Act extends not only to these companies, but also to service providers in the ESG market, i.e. ESG certifiers, ESG qualifiers, but also companies producing and distributing ESG softwares.

Obligations of the companies

The law has created a number of obligations for companies subject to the ESG Act, the breach of which can result in fines of up to millions of forints. However, the good news for the companies concerned is that not all of these obligations will be required from 2024 and fines for non-compliance with ESG reporting obligations will only be imposed from January 1, 2026.

The most important obligation for companies, which is reflected in principle in the ESG Act, is to assess and manage the social and environmental impacts of their operations and to prevent, minimise or eliminate social or environmental risks. 

The most tangible obligation is that the companies concerned will be required to prepare and publish ESG reports on an annual basis (in ascending system). The first stakeholder group will have to prepare ESG reports for the first time in 2025 for the financial year 2024 and the last stakeholder group will have to prepare it in 2027 for the financial year 2026. The ESG report should be made publicly available free of charge on the company’s website and should include, among other things, a description of the company’s sustainability due diligence process, the social responsibility and environmental risks identified by the company, or the measures taken by the company and the company’s objectives.

Other obligations include setting up a risk management system, carrying out regular risk analyses, or reporting ESG data. It is important to underline that it is not enough for companies to look in-house, but that they also need to look at the whole supply chain, as well as the activities of direct suppliers and subsidiaries. This can ultimately lead to a company being obliged to suspend or, in the worst case, terminate its business relationship with a direct supplier that persistently breaches its environmental obligations.

It is worth pointing out that companies should also ensure that they have an internal or external complaints system in place to enable anyone to report the company’s social responsibility (“CSR”) and environmental risks and breaches of CSR or environmental obligations arising from the economic activities of the company, its subsidiaries or its direct suppliers. It is important to note that a company may also use its internal whistleblowing system, established under the Hungarian Whistleblowing Act transposing the EU Whistleblowing Directive, as such a complaint handling forum.

State actors

The ESG Act also regulates the role of the state in ESG. The Minister responsible for this area will be the Minister responsible for economic development, who will establish and operate the National ESG Council. The members of the Council will be delegates from several ministries and economic actors (e.g. the Hungarian Chamber of Commerce and Industry), while the Council will be chaired by the Minister.

The tasks of the authority will be carried out by the Authority for the Supervision of Regulated Activities (“SZTFH”). This is the authority that, among other things, supervises gambling, tobacco and bailiffs and liquidators. It will also maintain the records required by law, e.g. on ESG reporting companies, ESG certifiers and ESG qualifiers.

The SZTFH has also been given strong powers of control and sanction, as it has the right to enter the premises, buildings and other facilities of the company during its inspections, and can also inspect and make copies of documents. And anyone who obstructs the inspections of the SZTFH can face fines of up to millions of forints.

SZTFH will also be the operator of the electronic platform for the preparation and submission of the ESG report, the ESG management platform.

Additional rules 

The attention of practitioners should also be drawn to the changes of the Accounting Act and the Auditing Act, which also entered into force as of January 1, 2024. Of particular importance is the new chapter of the Accounting Act on Sustainability Reporting, which will also become an indispensable point of Hungarian ESG regulation. 

Since the ESG Act is a framework regulation, the specific details will be laid down in government decrees, ministerial orders and decrees of the President of the SZTFH. These will therefore complete the Hungarian ESG regulation, but in the meantime it is worthwhile for affected companies to prepare for ESG-compliant operation and implementation of the ESG Act rules.

By Peter Weidinger, Partner, Act Legal

The new provisions on compulsory environmental insurance entered into force on 1 January 2024 through the modification of the Waste and a new Government Decree.

According to the Waste Act, those economic operators are obliged to have  environmental insurance to be able to cover unforeseen environmental damage caused by their activities (i) whose activities generate waste in quantities specified in the Government Decree, (ii) which carry out an activity subject to a waste management permit or registration under Waste Act, excluding the operator of a landfill site; or (iii) which import, export or transport waste into the territory of Hungary for the purposes specified in the relevant EU regulation on shipments of waste.

The Government Decree specifies the quantities of waste the producer of which is obliged to have environmental insurance. A waste-producing economic operator shall take out environmental insurance for an amount of at least HUF 10 million per insured event and per period if the annual amount of waste generated and held on any of its sites exceeds (a) 200 kg of hazardous waste, (b) 2 000 kg of non-hazardous waste, or (c) 5 000 kg of non-hazardous construction and demolition waste. This new obligation shall be applied to all business entities that generate at least the above levels of waste.

By Eszter Ila-Horvath, Attorney at Law, KCG Partners Law Firm

Under Hungarian law, conciliation boards were set up more than two decades ago, which provide a fast, efficient and inexpensive forum for dispute resolution compared to litigation in specific cases. The competence of the conciliation boards in relation to goods and services covers (i) the quality and safety of the services; (ii) application of product liability rules; and (iii) conclusion and performance of contracts. This type of conciliation can only be initiated by the consumer as an individual.

There are two possible outcomes of the procedure, depending on whether the company involved in the dispute declares that it will abide by the decision of the conciliation panel. If the company declares in advance that it does not accept the decision, the procedure ends with a non-binding recommendation. If the company submits to the decision, the procedure is closed by a binding decision, or if the parties can reach an agreement.

As of 1 January 2024, the rules described above have partially changed and the conciliation boards have extended powers. In the event of a dispute with a value not exceeding HUF 200,000, the company may be prosecuted irrespective of the declaration of submission. Upon request of the consumer, a personal hearing can also be held. With the change in legislation, businesses are likely to seek to resolve disputes with consumers within their own organisation.

Further changes are also expected as the Budapest Chamber of Commerce and Industry has submitted draft legislation to the Ministry of Justice to allow micro, small and medium-sized enterprises to also use this alternative dispute resolution forum.

By Bálint Éberhardt, Attorney at Law, KCG Partners Law Firm

From 1 January 2024, taxpayers can benefit from a tax allowance for investments in the construction of electricity storage facilities. The tax allowance is available for 6 tax years, with the first tax year being either the year of installation or the following tax year, at the taxpayer’s option. This incentive is intended to encourage the installation of new electricity storage facilities which enable the taxpayer to store electricity generated for its own use.

To qualify, the taxpayer must purchase at least 75% of the energy fed into the electricity storage during the year from a renewable energy power plant connected to the public grid at the same point as the electricity storage. The aid intensity of the tax incentive, including all state aid, is 30% of the eligible costs of the investment in present value, up to a maximum of EUR 30 million. The intensity can be increased by 20 percentage points for small enterprises and 10 percentage points for medium-sized enterprises. Eligible costs are the cost of the investment, calculated at market prices in the case of linked enterprises.

The tax allowance can only be applied if the taxpayer makes the relevant electronic notification to the Minister responsible for tax policy before the planned start of the investment. It is advisable to pay particular attention to the deadlines, as no request for verification can be submitted if the notification is late. The tax incentive can be claimed in accordance with the regulations in force at the time of the notification. In order to benefit from the allowance, there are further conditions (such as a valid and effective network connection contract and network usage contract).

The tax allowance cannot be used in combination with the development tax credit, the energy efficiency tax credit and the aid under Commission Decision SA.102428. Moreover, the tax incentive is not accessible to – among others – operators of fisheries and aquaculture products, companies facing financial difficulties or having unpaid debts resulting from illegal aid. Compliance with the conditions of the tax allowance will be monitored at least once before the end of the third tax year following the first use of it.

By Krisztian Kiralyvolgyi, Attorney at Law, KCG Partners Law Firm

Starting on 1 January 2024, a new feature was launched regarding personal income allowances, meaning that certain tax base reduction allowances can also be claimed on a continuing basis. The purpose of the existing tax advance return is to allow the employer to determine and deduct the tax advance, considering both benefits and costs.

However, individuals can reduce their total taxable amount through various types of tax allowances. These include mothers with four or more children-, young people under 25, mothers under 30, first-time mothers, family allowance and personal allowance. A continuing advance tax return means that it is not required to file a new advance tax return every year, but the employer can take it into account without change until a new return or request is filed that the advance tax return be disregarded. This option is available for mothers with 4 or more children, for those entitled to the personal allowance, and for first-time married couples, as long as they select the continuation option when filing the return (via the Online Form Filler of National Tax and Customs Administration). For first-time married couples, continuing advance tax return credits are valid from the month following marriage and last for up to 24 months.

It should be noted that the allowance for young people under the age of 25 is automatically claimed by the employer, so it is still not necessary to request it separately. On the other hand, mothers under 30 years of age and those entitled to the family allowance must continue to declare annually, without the possibility of making a continuing advance tax return.

If a person has made a continuing advance tax return but later ceases to be entitled to the benefit, they must make a new advance tax return in an appropriate time. If the person fails to notify their employer and a tax shortfall occurs, the unauthorized allowance must be repaid. Additionally, a 12% differential penalty must be paid on the difference by the annual deadline for filing the income tax return.

Due to the rise in average gross income, the income threshold for tax exemption has also increased. Furthermore, the recent changes to advance tax returns mean that employers and regular income payers are no longer required to file a new advance tax return annually.

By Eszter Kamocsay-Berta, Managing Partner, KCG Partners Law Firm

Nowadays, one can hear a lot about generative artificial intelligence (“Generative AI“), which can be used to create different types of content (e.g., text, images, software source code) in an automated way by giving simple instructions (so-called “prompts”). Companies may reasonably ask whether it is worth investing, at this point, in software using Generative AI; however, the current Hungarian legislative environment does not provide answers to this question, which could clearly provide guidance in all cases, on a general basis. For this reason, the legal implications of each investment (be it either procurement or “in-house” development) need to be examined on a case-by-case basis.

In the following, we will present a number of considerations that may be key, from a Hungarian legal point of view, before investing in software using Generative AI.

What data has been used to “teach” the AI?

A key prerequisite for the lawful use of Generative AI is whether the data used in the machine learning of Generative AI has been lawfully used, exploited or utilized (collectively: “use”).

For Generative AI, the content used in machine learning is often protected by some form of intellectual property rights. This is because if the content is of individual and original nature, then the author – or, in certain cases, their legal successor – has, at least, rights stemming from copyright law without any further registration requirements. Naturally, the content may also be protected by a trademark (e.g., the image to be used may be a figurative trademark) or other intellectual property rights, e.g., the use of certain types of content may lead to the exploitation of patents or utility model related rights (e.g., if the purpose of Generative AI is to generate design documentation for technical equipment and the software development company develops Generative AI by using design documentation).

If the relevant content is protected by any of the intellectual property rights mentioned above, then the content’s user must obtain an appropriate license from the respective right holder to use the content lawfully. The absence of appropriate licenses will not only make the use of the content in the context of machine learning unlawful, but will also likely affect the legal status of the content generated by the end user of Generative AI (e.g., an image generated by Generative AI may contain elements that are either directly derived from other images that have been unlawfully used in the course of machine learning or, at least, very similar to elements of such images).

If machine learning also involves the use of personal data, the relevant data processing activities must be compliant with the EU General Data Protection Regulation (“GDPR“) and Hungarian data protection laws. To mitigate data protection risks, in most cases it may be recommended to anonymize personal data prior to its use; however, this does not relieve the software developer of its data protection related legal obligations prior to anonymization if the data is not initially collected anonymously. Among the relevant rules of data protection law, it is worth noting that before beginning a data processing activity relative to Generative AI, it is particularly justified to assess whether conducting a data protection impact assessment is necessary, considering that new technology is involved. In such an impact assessment, the data controller must assess, among others, the risks that the data processing might cause to natural persons concerned with the data processing, and whether such risks can be mitigated to a level that complies with the principles of necessity and proportionality.

In addition to the above, the use of data in machine learning should not conflict with other laws, including in particular rules on trade secrets and know-how and, where appropriate (e.g., if the software was originally developed by the developer for a public body and subsequently “recycled”), requirements on the use of classified data.

Legal status of generated content

The most common question about content created by Generative AI is whether the content is eligible for copyright protection and, if so, who is the author. Is it possible that Generative AI itself is the author? Although we often see articles (or headlines) that make these questions appear settled, in reality, such questions can only be answered in relation to a particular jurisdiction. Therefore, we will approach them on the basis of the Hungarian Copyright Act (Act LXXVI of 1999; “Act“). The Act provides that a work is eligible for copyright protection if it is the result of the intellectual activity of an author and is of an individual and original nature.

Of the above criteria, the easiest to examine is the existence of “individual and original nature”. The Act itself does not define this term, but, based on case law and legal literature, nothing precludes content created by Generative AI from having it. This is made possible by the fact that, in the course of machine learning, the AI is able to produce not only elements that it knows but also outputs that are different from those elements.

Regarding the term “author”, the Act states only that “the author is [the person] who creates the work”. The pronoun “who” (in Hungarian: aki), which can only refer to a person, implies that the author can only be a human being. The author could be someone else – a company, an animal or even Generative AI – only if the pronoun “which” were used here. Another element in the definition of author is that they “created the work”, i.e., had an active role in the creation of the work. The end user of Generative AI may be reassured to know that this relationship is, in our view, rather indirect between the software developer and the content, i.e., the software developer would most likely not acquire any rights over the content. In contrast, under the current wording of the Act, the end user who has shaped the output/ content that was generated after using Generative AI is certainly an author in relation to the modifications made by them. For example, if the end user has drawn buildings and people on an image of a landscape produced by Generative AI, and these drawings have an individual and original nature, then the end user may be considered the author of these drawings. Similarly, if a coder generates certain elements of the source code of the software using Generative AI but adds to or rewrites them in an individual and original manner, then such coder may be considered as an author in relation to those additions or rewritings.

However, there is one more player whose authorship is uncertain: the person who gives the prompt. Although without their contribution the output would not have been produced, the giving of the prompt is unlikely to constitute creation in itself. This is supported by the fact that, according to case law and legal literature, “intellectual activity” is ultimately an expression of personality, of the individual’s freedom of choice. However, content production by Generative AI cannot be considered as self-expression as the actual “creation” is done by the software, without human intervention.

According to a conservative interpretation of the Act, content produced by Generative AI can, therefore, be protected by copyright if the content has an individual and original nature and the content has been shaped by someone after the Generative AI. However, it is worth considering that neither the Hungarian nor the EU legislator has so far introduced specific rules for content created by Generative AI, nor, to our knowledge, are they planning to do so. We are also unaware of any court judgments within the EU that have examined the authorship of such content. (We note, however, that there is already a judgment outside the EU that confirm our findings: in the US, in Thaler v. Register of Copyrights, a federal district court ruled that AI-generated works that were created “absent any guiding human hand” cannot be protected by copyright.) Therefore, it may be worth stipulating explicitly in the license agreement that only the end user has direct rights to the generated content; moreover, for a higher-value or business-critical intellectual property, it is still worth relying overwhelmingly on human creative activity, at least for the most essential elements of the content.

What should be requested from the software provider?

Above we have presented the importance of considering what data has been used to develop Generative AI. For this reason, it may also be legally critical that the company providing the software warrants the following:

• by using the software, the procuring company does not infringe third party rights, such as rights relating to copyright and trade secrets or the right to privacy and the protection of personal data; and
• the company providing the software has the appropriate rights and licenses to grant the procuring company a license to use the content generated by the software for the purposes negotiated during the procurement.

Naturally, it is also of paramount importance that the contract for the use of the Generative AI software accurately reflects the terms negotiated during the procurement process and provides the procuring company with a sufficiently broad license to use the content generated by the software. When concluding the contract, it is also necessary to consider whether the contract must be in writing to be formally valid under Hungarian law, noting that when the contract is concluded electronically, it is deemed to be in writing only if certain conditions are met.

In software contracts, it is common for the company offering the software to limit its liability in relation to any legal claims that may arise. As such limitation of liability is a market practice, avoiding such contractual clauses may not be a realistic option in most cases. However, excessive limitation of liability should be avoided, as risk management is key in the current uncertain legal environment.

For in-house development, it is important to note that there is a difference between the legal status of employees and of contractors (e.g., those contracting as sole proprietors or through single-member LLCs) involved in the development of the software. In order to mitigate the likelihood of future disputes, it is also advisable to set in advance what remuneration the employee or contractor will receive for the creation and use/utilization of the software or, as the case may be, what additional remuneration is excluded.

In addition to the above, it is worth mentioning that a regulation is being drafted in the EU that will set new rules for the use of AI and will be directly applicable in all EU Member States. Although the new legislation, according to the text of the draft currently available, will not cover, for example, intellectual property related issues of Generative AI-generated content, once adopted, that regulation may have an impact on other legal issues in software procurement.

By Andras Gaal, Attorney, and Mihaly Budai, Junior Associate, Baker McKenzie