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Technology - Software Escrow Agreements

Most technology lawyers - and all software licensing lawyers - have experienced the pain of negotiating escrows. They are one of a handful of issues that tend to persist until the bitter end of a licensing deal. Negotiating escrows is a tug-of-war over a lock box in which source code, product specifications, or some other family jewels of the licensor are guarded jealously. The licensee wants more access; the licensor wants to restrict access. What one concedes, the other gains, a zero-sum game. Negotiating them can feel like being trapped inside a lock box. As with all zero-sum games, though, the trick to winning is to think outside the box.

The source code has great value to both the vendor and the user. It is in the vendor's interest to deliver only the object code  to the user, and it is in the user's interest to obtain the complete source code from the vendor. By receiving only the object code, the user cannot make any modifications to the software system. In such a situation, the user is entirely dependent upon the vendor for any modifications to the system. If modifications cannot be made, the software may become useless to the user, who may be forced to discard the entire system. If the vendor goes out of business and either closes or files for bankruptcy, the user is put into a precarious position. The source code then becomes permanently unavailable. In addition, once the vendor is out of business, there will be no one to perform modifications or updates to the licensed software.

Source code escrow agreements are established to protect the "deposit" from outside creditors. By placing the source code (the human-friendly version of the operating code) into escrow, the vendor ensures the user that the licensed software will continue to be useful even if the vendor goes into bankruptcy or is otherwise unable to fulfill the underlying software license agreement. Thus, when software or other technology assets are licensed, source code escrow agreements ensure that the user will have sufficient access to information necessary to the user's continuation of its own business even if the vendor cannot continue to provide services to the user. Finally, the source code escrow agreement will clearly instruct the escrow agent when and how to deliver the escrowed source code.