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Drafting software escrow agreements: A software escrow agreement can help limit the risks associated with licensing technology.

If you are involved in license negotiations for software, you are probably familiar with software escrow. Sometimes referred to as source code escrow, software escrow is an agreement under which the client can obtain access to the program's source code and other proprietary information if certain events occur (such as the software vendor filing for bankruptcy). This allows the client to maintain business continuity, even if the vendor cannot.

Software escrow has become so popular over the last two decades that many clients require an executed escrow agreement before signing a software license. Simply signing on the dotted line, however, does not guarantee adequate protection of an organization's assets. Several key factors must be considered to produce an agreement that effectively meets each party's requirements.

The Escrow Process

Before escrow negotiations begin, technology developers and their clients must clearly understand the role of the escrow agent. The escrow agent is a neutral third party, trusted to safeguard the vendor's technology assets and protect parties licensing that technology. The escrow company does not sign the license agreement and does not have the right to act on or modify the terms of the license agreement. Rather, the escrow agent represents all parties without bias, carrying out their instructions as spelled out in the escrow agreement.

Type of Agreement

Professional escrow agents have standard agreements available that can be Customized to meet clients' unique escrow protection requirements. The agreements generally fall into two categories: two-party agreements and three-party agreements. Because two-and three-party agreements afford the escrow parties different levels of protection, including important rights issues, organizations must understand which type of agreement is under discussion before negotiating terms.

Three-party agreements, which are signed by the vendor (the escrow depositor), the licensee (the escrow beneficiary), and the escrow agent, offer more customization and service options to satisfy unique escrow requirements than do two-party agreements. For example, three-party agreements allow the parties to negotiate release conditions and use-right provisions. Release conditions identify the circumstances that will allow beneficiaries access to the source code. Use rights describe the rights awarded to the beneficiary in the event of a source code release.

Only the depositor and the escrow agent sign two-party agreements. Since the beneficiary does not sign the agreement, the only negotiations are between the escrow agent and the depositor to conform the contract language to the agent's policies and procedures. Two-party agreements generally enable depositors to simply enroll beneficiaries to the escrow account. This is most applicable when the beneficiaries are using the same technology and when they require only a basic level of escrow protection.

If a vendor licenses the same product to several clients and those clients require a high level of escrow protection, the parties can arrange a "master" agreement. This escrow provides the services inherent in a three-party agreement under the umbrella of a two-party format. Under this arrangement, depositors add beneficiaries to the escrow account with a one-page addendum, allowing new beneficiaries to accept pre-existing contract conditions.

Release Conditions

Any escrow agreement involving a depositor and beneficiary includes release conditions, or events that trigger release of the escrow materials to the client. This includes two-party agreements that do not permit beneficiaries to negotiate for release conditions.

Typical release conditions include vendor bankruptcy, product bankruptcy, a merger and/or acquisition of the vendor company, and the vendor's loss of personnel critical to providing support for the technology. All conditions that could impact the parties during the life of the license agreement should be included in the escrow agreement.

Once the parties have defined the release conditions, they must consider how the materials will be released if a release condition occurs. A standard release process requires the escrow agent, after being notified in writing by the beneficiary that a release condition has occurred, to directly notify the depositor of the release request. The depositor has a predetermined period (usually 10 days, but this can be negotiated) to oppose the release in writing. If the agent does not receive an objection from the depositor during the time period, the release occurs. If the depositor objects to the release in writing, the parties resolve the issue on their own or through the resolution process defined in the escrow agreement.

In another instance, the parties agree to an "expedited release," which allows for access to the source code immediately after the beneficiary notifies the escrow agent that a release condition has occurred. An escrow agent also can combine the standard and expedited release procedures. For example, a custom agreement could require the escrow agent to perform a standard release, if the release is related to support or maintenance of the technology, and an expedited release if the vendor declares bankruptcy.

In addition, if the escrow includes multiple beneficiaries enrolled in a single account, the escrow should permit the escrow agent to make copies of the deposit materials, so they can be delivered to each beneficiary upon release, according to the agreement terms.

Contract Terms

The rights to use released materials also must be addressed in the escrow agreement. These rights generally are defined in the original license agreement, but often only address rights to object code and not source code. (Object code is machine-readable and is derived from source code, which consists of human-readable program statements. Access to the source code is necessary to modify and maintain the object code.) The escrow agreement presents the opportunity for clients to confirm or further clarify these rights, such as their right to modify, improve upon, or resell the software.

Technology Verification

If a beneficiary is concerned about the usefulness of released escrow materials, it may wish to require a technical verification of the deposit when the escrow account is created. A technical verification consists of a series of tests that validate the deposit's accuracy, and is performed by the escrow agent or another party. Many escrow agreements include a provision that explains the parties' rights to a technical verification. If such provisions are not included in the agreement and the parties want verification, they should add these terms to the agreement. The additions should include who will perform the verification and when, as well as which of the escrow parties will pay for the services. The beneficiary typically pays for technical verification services.

Dispute Resolution

As with most other legal contracts, a process for dispute resolution should be clearly defined in the escrow agreement. The most common dispute resolution process is arbitration, which often is quicker and less costly than the courts. The arbitration process also should be outlined in the agreement. Questions that must be answered include:

* Who will perform the arbitration?

* How many arbitrators will be required?

* Will the escrow agent be involved in the process?

* Where will the arbitration take place?

It is important to note that because the escrow agent is a neutral third party, s/he does not have sole responsibility for resolving a dispute among the parties. However, the agent can be a party to the arbitration. The agent also will satisfy court requirements if called on to produce documentation representing the escrow.

Deposit Updates

To ensure that the most current version of the technology is deposited, the escrow agreement often requires the depositor to regularly update the account. When and how frequently the updates are made is negotiable. Escrow agreements commonly require the depositor to submit updates 60 days after the vendor releases a new version of software. The escrow should require the deposit to be updated rather than replaced by subsequent software versions. This helps ensure that the beneficiary's current software version remains protected in escrow.

Complete Escrow Protection

While including escrow as part of a software license is a good first step to protecting the technology assets of software vendors and their clients, organizations should have a firm understanding of the most important elements of an escrow agreement to limit risks associated with licensing technology.

About the Author

JERRY LIMBERG is a senior contract administrator with DSI Technology Escrow Services. She is a member of the San Diego Chapter. Send comments on this article to
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Copyright 2002 Gale, Cengage Learning. All rights reserved.

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Author:Limberg, Jerry
Publication:Contract Management
Geographic Code:1USA
Date:Jul 1, 2002
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