Understanding Software Escrows

The Parties to a Software Escrow

A software escrow is an arrangement involving an Owner, a Beneficiary and an Escrow Agent, such as EscrowTech. The Owner is a licensor, developer or vendor who licenses or otherwise provides software to the Beneficiary. The Beneficiary is the licensee, customer or other user of the software.

Background - Object Code Software License

Diagram 1

Source Code withheld by Owner

Owner (as licensor) and Beneficiary (as licensee) are parties to a License Agreement that licenses Beneficiary to use the object code of the licensed software. Beneficiary may also receive user manuals. However, typically, Beneficiary does not receive the source code of the software or other proprietary materials that may be necessary or useful for maintaining, updating or enhancing the software. This source code (and possibly other proprietary materials) is (are) placed into escrow with the Escrow Agent.

Deposit Materials

Diagram 2

Owner and Beneficiary agree on the items to be placed into the software escrow. These items are referred to as the "Deposit Materials" and include, at a minimum, the source code. Owner may agree to also include other proprietary materials as part of the Deposit Materials, e.g., programming documentation, build instructions, software tools, utilities, and/or other items. The Deposit Materials are delivered by Owner to the Escrow Agent who holds them in escrow in accordance with the Software Escrow Agreement. Owner should keep the Escrow current by depositing updated Deposit Materials to keep them current with the licensed software.

Deposit Procedure Followed by EscrowTech

Diagram 3

Owner delivers the Deposit Materials to EscrowTech. Owner includes a Deposit Inventory Form with the Deposit Materials. The Deposit Inventory Form identifies the Deposit Materials and is signed by Owner. The Deposit Inventory Form is the Owner's representation to the Beneficiary and EscrowTech that the Deposit Materials include the content identified in the Deposit Inventory Form. Typically, the Deposit Materials and Deposit Inventory Form are sent by a commercial courier or by mail, but electronic transmission via FTP is an option and other arrangements can be made.

Confirmation of Receipt of Deposit Materials

Diagram 4

After EscrowTech receives the Deposit Materials and Deposit Inventory Form, they are processed by EscrowTech's office. EscrowTech then sends a "Confirmation of Receipt of Deposit Materials" to the Owner and the Beneficiary. A copy of the Deposit Inventory Form accompanies the Confirmation. The Deposit Materials are then stored in secure facilities for long term safekeeping for the duration of the escrow.

Release Condition; Permitted Use

Diagram 5

Upon the occurrence of an agreed upon "Release Condition" (e.g. the Owner goes out of business, the Owner's bankruptcy, the Owner's breach of its maintenance obligations, etc.), the Deposit Materials are released by Escrow Agent to the Beneficiary. Owner and Beneficiary decide what the Release Conditions will be. The released Deposit Materials may be used by the Beneficiary for a "Permitted Use" (e.g., to maintain, modify, update and enhance the software).

How a Licensee Benefits

A licensee's business may depend on software licensed from a licensor. A knowledgeable licensee is concerned about timely maintenance of the software to correct programming errors and about updating or enhancement of the software to meet changing needs. Typically, the licensee does not have the source code or other proprietary materials needed or useful for maintaining, updating or enhancing the software, and therefore is dependent upon the licensor to maintain, update and enhance the software. If the licensor goes out of business, or fails to maintain, update or enhance the software, the licensee may suffer significant interruption of, or damage to, its business. A s a "Beneficiary" to a software escrow, the licensee will receive the Deposit Materials if a Release Condition (e.g., bankruptcy, breach of maintenance agreement, etc.) occurs and will have the right to use them to maintain, update and enhance the software.

How a Licensor Benefits

By establishing an escrow, the licensor can address the concerns of its prospective licensees without exposing the licensor to the risks inherent in distributing source code and other proprietary materials to licensees. Even under non-disclosure obligations, the proliferation of source code and other proprietary materials to licensees makes it difficult or impossible to ensure against eventual disclosure to competitors or loss of trade secret rights. By using an escrow as an "Owner", the licensor can make its software more marketable and can use the escrow as a selling point to prospective licensees. Having an escrow already in place, can eliminate needless negotiation over source code rights and can prevent delays in getting the deal done! An escrow also creates a partial intellectual trail for the licensee.

Typical Release Procedure

If a Release Condition occurs, the typical release procedure includes the following:

Request for Release. Beneficiary informs the Escrow Agent that the Release Condition has occurred and requests that the Deposit Materials be released by the Escrow Agent to Beneficiary. The Escrow Agent then gives notice of the request to Owner. Owner has a specified period of time (e.g., two weeks) to object if Owner believes that the Release Condition has not occurred. If an objection is not made within this time period, then the Escrow Agent releases the Deposit Materials to Beneficiary.

Objection. If Owner objects (e.g., disputes that a Release Condition has occurred), then the Deposit Materials are retained by the Escrow Agent and the matter is resolved by arbitration between Beneficiary and Owner or by other agreed upon means of dispute resolution. The Deposit Materials will not be released unless the arbitration or other dispute resolution concludes that the Beneficiary is entitled to a release of the Deposit Materials.

Mandatory Release Procedure (For Immediate Release)

If a Beneficiary is concerned about the delay that may be caused by an Owner's objection to a release of Deposit Materials, the Beneficiary and Owner may agree to a Mandatory Release procedure as an alternative to the Typical Release Procedure. A "Mandatory Release" procedure provides for an immediate release of Deposit Materials to Beneficiary upon Beneficiary's written demand for a release and Beneficiary's representation to the Escrow Agent that a Release Condition has occurred. If Owner objects to the release, the issue will be resolved by arbitration or other dispute resolution means, but such objection does not delay or prevent the release of Deposit Materials to Beneficiary. If it is resolved that the release was improper (e.g., the Release Condition did not occur), then Beneficiary must return the Deposit Materials to the Escrow Agent and must pay damages, if any, suffered, and attorneys' fees and costs incurred, by Owner. If it is resolved that the release was proper (e.g., the Release Condition did occur), then Beneficiary may retain the Deposit Materials and Owner must pay attorneys' fees and costs incurred by Beneficiary. Variations on this procedure and other creative solutions are possible.

Released Deposit Materials - Permitted Use

The Escrow Agreement typically provides for the protection of the Deposit Materials if they are released to the Beneficiary. Regardless of the release procedure followed (see above), the Beneficiary should only be allowed to use the released Deposit Materials in accordance with the Permitted Use. The Beneficiary should also be obligated to keep the released Deposit Materials confidential. However, Beneficiary may be given the right to use independent contractors to help Beneficiary use the released Deposit Materials for the Permitted Use. This may include the right to "team up" with other Beneficiaries to share resources and programmers (or a maintenance service). The Software that is maintained, updated or enhanced with the use of the Deposit Materials should be used only in accordance with the License Agreement between the Owner (licensor) and Beneficiary (licensee).

Technology Escrows

"Technology Escrows" are essentially the same as Software Escrows, except that the Deposit Materials are not necessarily software related. EscrowTech can do escrows for any kind of situation, e.g., ASP or hosted environments, e-commerce, intellectual property licensing in any area (chemical, biotech, electrical, mechanical, etc.), architecture, products, etc. The "Deposit Materials" placed into this escrow can be any technology, information, data, encryption keys, passwords, drawings, documents, prototypes, samples, formulas, or materials you desire, provided that they are safe and legal.

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