Key Legal Issues in Software Escrow Agreements: A Guide for Licensors and Licensees

Software escrow is a mechanism through which a software’s source code is deposited with a neutral third-party escrow agent. This is commonly used in licensing arrangements where the licensee wants to ensure they can maintain and operate the software if the licensor becomes unable or unwilling to provide ongoing support or maintenance. The escrow agreement sets out the conditions under which the source code will be released to the licensee.

Understanding the intricacies of software escrow agreements is crucial for both licensors and licensees, who have distinct concerns when entering these agreements. Below, we delve into the key legal issues from both perspectives.

For the Licensor: Protecting Intellectual Property

As a licensor, your primary concern is safeguarding your intellectual property. Key legal considerations include:

• Scope of Deposit Materials: Clearly define what is being deposited into escrow. This may include the source code, documentation, and any other relevant materials.
• Conditions for Release: Specify the precise conditions under which the escrow agent is permitted to release the deposit materials to the licensee. These should be stringent, narrowly defined conditions, that are not easily triggered, such as the licensor filing for bankruptcy or ceasing to do business. If a condition for release occurs, the agreement should require the licensee to provide proof to the escrow agent of the condition and set out a verification process before the source code can be released.
• Rights After Release: Establish the rights of the licensee to use the deposited materials upon release and any limitations on such use.  For example, a licensor might require that the licensee can only use the source code for maintenance and support, not for further development or resale.
• Termination:  The licensor wants the right to terminate the escrow agreement under certain conditions, such as if the licensee breaches the software license agreement.
• IP Protection: To prevent misuse of its intellectual property, the licensor needs strong confidentiality provisions in the agreement and restrictions on the licensee from further distributing the source code if it is released.

For the Licensee: Ensuring Continuity of Business Operations

As a licensee, your main concern is ensuring that your business operations remain uninterrupted. Important legal issues to consider are:

• Verification Rights: Ensure the deposited materials are complete and usable.  A licensee should negotiate for the right to verify the completeness and accuracy of the escrow materials periodically and test the source code in a controlled environment.
• Update Frequency: Ensure that the source code is up-to-date.  The agreement should require the licensor to regularly update the escrowed materials to reflect current versions.
• Conditions for Release:  A licensee wants wider conditions for triggering release of the source code, such as if the licensor fails to provide updates, support, or breaches the software license agreement.
• Usage Rights: Ensure that the agreement grants you the necessary rights to use the escrow materials effectively in the event of a release.
• Duration: A licensee wants the escrow arrangement to last as long as it is using the software.

Mutual Concerns: Aligning Licensor and Licensee Interests

Both parties should pay attention to:

• Escrow Agent Selection: Choose a reputable escrow agent with proven experience with software escrow arrangements. While a licensor may want to use an agent it has used in the past, the licensee needs to ensure the agent is neutral.
• Dispute Resolution: Include clear dispute resolution mechanisms to address any disagreements that may arise regarding the escrow agreement.
• Confidentiality: The agreement must protect the confidentiality of the escrow materials, with strict controls on access and usage.

How can Logan & Partners help? 

Software escrow agreements are a vital component of a robust software licensing arrangement. By addressing the key legal issues outlined above, both licensors and licensees can ensure that their interests are adequately protected. Should you have any further questions or require assistance in drafting or reviewing a software escrow agreement, please contact Jana King Allen and schedule a 20-minute free consultation.

Image by macrovector_official on Freepik