In the last few years, business has become increasingly dependent on licensed software. This may cause a problem for businesses dependent on third parties' technology, because under most software licenses, the licensee ("user") gets only a copy of the object code version of the software while he is not granted access to the source code which would allow him to modify the software.
The idea of a source code escrow is to provide a mechanism which ensures access for the user to the source code if support for the software becomes unavailable. Third party neutral agents protect the rights of the end-users of licensed technology without touching the property of the technology of the developers by a mutually agreed upon escrow arrangement. The deposit is made with instructions to release the source code to the user upon the happening of certain named events such as the bankruptcy of the software owner.
The recommended approach from the user's point of view is to negotiate the escrow agreement before the software license is signed and thereby take advantage of the user's pre-signing bargaining position.
The most prevalent application of technology escrow is the developer/end-user arrangement. Here the licensees are motivated to use an escrow when the license represents a considerable investment for their company, or if the company's business depends heavily on the system.
The agreement provides rights to the licensee in the event of loss of support. A common misconception is that bankruptcy is a primary culprit, when in fact, many venders disappoint their clients without ever going bankrupt. A second type of arrangement takes place, because small, start-up software companies seeking to take advantage of increased capital to fund their businesses are increasingly agreeing to escrow agreements as a colateral for the investment. With a software escrow agreement, if the company ceases business, the investor will at least have a complete set of technology which allows him to reassign development tasks to another group of programmers or consultants. Another area where an escrow can be beneficial are joint ventures. These development projects, where two or more companies have joined efforts to maximize their strengths, are becoming more common. If one company in the partnership goes out of business or otherwise fails to meet its obligations, the remaining company may seek to continue development operations. Escrow agreements can be maintained where access to the other company's technology will provide future benefit.
Regardless of the type of agreement, several main issues must be addressed regarding terms and conditions in order to ensure an effective arrangement for all parties. At the heart of the agreement are the release conditions or "trigger events". All parties to the agreement will provide their own unique perspectives on this issue. The end-user might suggest very liberal release conditions, such as release upon any request. The developer will offer very strict conditions, such as complete cessation of business. Regardless of actual trigger events, the escrow agent's emphasis and focus should be on clear and precise instructions.
For further information please contact Dr. András A. Gurovits or Markus Alder.
The content of this article is intended to provide general information on the subject matter and is not a legal advice. An individual matter requires legal advice according to the specific circumstances.