By Jonathan Chisholm
I recently attended an event where I had the opportunity to mingle with a large group of Intellectual Property lawyers. A private practice lawyer who recently left a legal position at large software developer company shared a story of his countless years of software escrow experience and how silly he thought the entire practice was.
His comments were along the lines of: “I’ve negotiated hundreds of software escrow contracts and we hardly ever made more than two or three deposits during the life of the agreement.” He went on to say, “Seriously, even if there was a release there’s no way anybody could manage the source code on their own.” Since it really wasn’t the time or place for a spirited debate, I chose to listen to and acknowledge his point of view rather than challenge his thinking – until now.
Let’s really think about this – Who creates the value for an escrow agreement?
A software escrow agreement (also known as a source code escrow agreement) is an agreement between three parties – the software developer, the buyer or licensee who uses the software, and a neutral, third party such as Iron Mountain, who is the escrow agent. Here is the breakdown of responsibilities of each party:
- The developer’s role is to deposit the software source code and other supporting materials with the escrow agent on a regular, pre-determined basis.
- The escrow agent safeguards that source code, which is the developer’s intellectual property, and will not share it unless release conditions specified in the escrow agreement are met. If there is a reason for release (such as bankruptcy, obsolescence, lack of support, merger or acquisition), the escrow agent will release the source code and supporting materials to the licensee.
- The licensee can use the released source code to keep their business up and running by continuing with in-house development or finding and implementing a replacement for a suddenly unsupported product.
The value for a software escrow agreement is created when all three parties uphold their responsibilities.
Roles and Responsibilities
For a software escrow agreement to be useful, each party must understand what they bring to the table, and ensure they are adding value. This begins with the developer making timely, complete, and accurate deposits to the escrow account. As new functionality is added and technology is enhanced, updated deposits should coincide with these enhancements.
Software licensees should build a specific required deposit schedule into the escrow agreement. If the licensee isn’t policing the developer’s deposit process, then there’s a higher likelihood of an incomplete deposit account. This ensures all the materials in the escrow account are accounted for and up to date in case a release is needed – and all parties have a clear set of expectations to follow. Licensees should also make sure the appropriate release conditions and use rights are specified in the agreement.
The escrow agent’s role is to protect the software source code and, if needed, release it when the conditions are met. The escrow agent can also help validate the accuracy of the escrow material with escrow verification services. Your escrow agent should be experienced, trusted, and provide the infrastructure, security, and expertise you need to protect your vital assets and preserve the integrity of your intellectual property. Think of it this way … an escrow agent is like a bank that securely holds intellectual property instead of money. The value of the escrow relationship depends on the information that is submitted into the deposit account.
Thinking back to the lawyer I met, when he was working for the software developer, his company was truly doing a disservice to their customers by not upholding their end of the bargain and even possibly breaching their contractual obligations. By neglecting to make regular, accurate escrow deposits, the company’s software source code would most likely be out of date and unusable if there was ever the need for a release to a customer.
Instead of seeing the escrow process as bothersome, developers can instead use software escrow as a differentiator when selling their products. Custom software vendors are often small, unproven entities, but they can ease customer concerns, gain confidence, and shorten the sales cycle by offering escrow protection.
Want to learn more?
Read: Software Escrow – The Developer’s Edge
Jonathan Chisholm is a manager of strategic partnerships for Iron Mountain’s Intellectual Property Management (IPM) group. His primary role is to partner with law firms, educate, and create awareness of IPM solutions. To contact an Iron Mountain escrow advisor directly, please call 800-962-0652 or email email@example.com.
Nov2019, Software Magazine