As the leader in the technology escrow industry, Iron Mountain is frequently challenged on the merits of technology escrow protection. We've been asked questions ranging from "Does technology escrow really work?" and "If I get the source code, what am I going to do with it?" to "Can't the technology vendor block a release of source code anyway?" With 20 years experience behind us, we are uniquely qualified to answer these and other questions about the best ways to protect a company's intellectual property assets using technology escrow. Following is a list we've compiled of the most commonly misunderstood aspects of escrow, the truth behind those issues and advice on how to address them.
Concern Source code released from escrow is unusable.
Fact: A common misconception about escrowed source code is that it would more than likely be useless to the licensee because the version of the software actually in use doesn't match what is maintained in the escrow deposit. In truth, receiving incomplete or out-of-date code from an escrow deposit can happen. But this is easily preventable.
First, include in the terms of the escrow agreement that the deposit must be updated quarterly or whenever a new version of the escrowed technology is released. Second, monitor the account activity reports Iron Mountain distributes, which list, among other things, all deposit updates to the account.
Next, explore technical verification services. These services verify the integrity of the deposited materials and can range from simple tests that confirm the physical content of the media to actual compilation of the code to test functionally. They can help ensure that the licensee receives complete and useful source code in the event of an escrow release. If the parties are unable to agree on an individual to perform these tests, they may elect to employ Iron Mountain's verification services.
Concern: Source code released from escrow – even if the correct and most up-to-date version was in deposit – is useless if the software user doesn't have the technical staff to maintain it in-house.
Fact: No doubt, this is a real problem. Ensuring that escrowed source code is complete and useful does not guarantee that the licensee will be able to work with it. There are a few things that can be done to overcome this, though.
Many escrow beneficiaries (licensees) request that a list of technical maintenance personnel from the software development company be included as part of the deposit. If the company goes out of business, these employees can be asked to be available as consultants for a period of time after the release has occurred, helping to ensure that the licensee has access to support personnel familiar with the product.
If that is not an option, licensees should be prepared to hire an outside consultant to maintain the technology. With the source code in hand, the licensee can at least keep operations running for the short term until it can find a replacement technology. Or the licensee can opt to train someone full time. Another attractive benefit is that the licensee can afford more leisure in evaluating other products and has greater leverage in negotiating a fair and reasonable software license agreement with a new vendor.
Concern: If the escrow depositor (licensor) objects to a beneficiary's release request, the escrow agreement is moot, and the beneficiary is blocked from gaining access to the source code.
Fact: In order to preserve their neutrality, escrow agreements do allow for depositors to oppose a beneficiary's release request. This does not, however, force the beneficiary into lengthy court proceedings before gaining access to the code. There are several options that can be written into the release process of an escrow agreement to avoid litigation over source code.
The most common escrow provision to resolve a release in dispute is arbitration. This is a low-cost, quick and decisive alternative to the courts. As soon as Iron Mountain Intellectual Property Management receives contrary instructions from the depositor not to release the escrowed materials, parties to the agreement are immediately notified that there is a dispute to be resolved. In its 20-year history, however, Iron Mountain has received over 400 release requests, and not once has a dispute ended up in arbitration.
Instead, when a release is disputed, the top executives for each party meet and resolve their differences. In essence, the escrow agreement and the threat of a release act as catalysts to facilitate action and dialogue between the two parties. In addition, the escrow can be written to require that disputes be "expedited" with set timetables to complete each step.
Some influential licensees can even wield enough power to negotiate a release-on- demand clause in their escrow agreements. This clause instructs Iron Mountain to release a deposit immediately after receiving a request from the beneficiary.
Concern: Software licensors cannot be expected to trust an escrow company recommended by licensees and vice versa.
Fact: Iron Mountain acts as a neutral third party – without bias toward the licensee or the licensor. We work under the provisions agreed upon by all parties signing the escrow agreement. Our reputation and business would be at stake if we failed in this area. This is the main reason why it is not recommended that attorneys act as an escrow agent – with the obvious conflict of interest.
Concern: Escrow gets in the way of a sale.
Fact: Some licensors may hesitate to establish an escrow account for fear that escrow negotiations would only further lengthen and complicate the sales process. However, licensors that offer escrow protection to their customers up-front may actually help their own cause.
By automatically offering escrow as a value-added service to their license agreements, licensors allow themselves the opportunity to quickly move past licensees' concerns about sustaining technical support and move on to other pressing areas of the license. In fact, it often takes more time to talk licensees out of an escrow than to provide them with an escrow that is fair and that they pay for themselves.
Another advantage is that licensors can have more control over the terms and conditions of the escrow agreement if a ready-made contract only awaits the licensee's signature as an enrollee to the account.
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