Software Escrow Agreements provide much-needed protection for both developers and consumers alike.
Most businesses today rely on software to run part or all of their business. Now, imagine if that software crashed and you were left completely reliant on the supplier’s ability to fix the problem.
Perhaps they had closed up shop, failed to maintain and/or update the software or fallen into insolvency. What then? If you don’t have access to the software’s source code or have the knowledge to know how to fix the problem, you’re effectively powerless.
However, from the supplier perspective, their source code is their trade secret. Making their code open to customers means it can swiftly be copied by thousands of people, and bringing infringement procedures against so many would be impossible. This is precisely why software developers grant a licence to use their products and withhold the source code.
Escrow Agreements provide a middle ground that protects the interests of both suppliers and their customers and are especially beneficial where software is of high value, business-critical or bespoke to the needs of the licensee.
What is an Escrow Agreement?
Under an Escrow Agreement, one party entrusts a third-party agent to keep safe property which is the subject of a commercial transaction. For example, deeds, software, stocks and shares.
This is kept until a specified event occurs that triggers the agent charged with safekeeping the property to release it to a party (or parties) set out in the escrow contract.
What is an Escrow Agreement for software?
When developers create software, they will create two types, a source code version and an object code version. Object code cannot be read by computers.
Therefore, if a bug occurs in the software, the human-readable source code must be amended in order to make the object code run properly.
When a customer purchases a licence for a particular type of software, they are purchasing the object code. The source code, which contains the developer’s intellectual property, remains with the developer.
And as mentioned above, this can cause problems if the developer transfers their business, fails to maintain the source code, or becomes insolvent.
Enter the Software Escrow Agreement (SEA), which ensures the intellectual property of the developer is protected, and no business customers are paralysed because their software fails to work and they cannot track down the necessary source code required to fix the problem.
A Software Escrow Agreement works as follows: The source code developer (D) deposits the source code with an independent third party – an ‘escrow agent’ (A) – and under the agreement, A will release the source code to the user (U) in the event that a ‘release (trigger) event’ occurs.
What should developers and software licensees look for in an Escrow Agreement?
When entering into an escrow agreement, developers and software licensees should consider some of the following questions:
- What type of escrow agreement is most suitable? For example, NCC Group, a major provider of escrow services, offers several agreement types, including:
- Multi-licensee Software Escrow Agreement
- Escrow as a Service Access and Replicate Agreements
- Information Escrow Agreement
- Data Escrow Agreement
- Holding Agreement (where the customer retains the IP rights for the bespoke aspects of software they are paying for)
- Exactly what will be deposited with the escrow agent, and how will this be done? (i.e. will physical media be posted to the escrow agent, or a secure cloud-based upload be undertaken?)
- How often will software updates be deposited with the escrow agent? (e.g. every time there is a change to the software or on the anniversary of the last software update)
- How and in which circumstances will the material held in escrow be released?
- What can the licensee do with the material once it has been released?
- What are the obligations of the licensee to keep the code confidential and secure?
- Is the software code and documentation deposited with the escrow agent sufficient to enable the licensee to use it? (i.e. is any additional proprietary code or knowledge required in order to make use of the code?)
- Does the escrow agent have the necessary processes and technical expertise to validate and verify the media deposited with them?
- Is there a service-level agreement defining how fast any code should be released to the licensee?
- In which legal jurisdiction should be escrow agreement apply?
It’s also important to understand the costs associated with the Escrow Agreement, including any annual fees, scheduled update fees, unscheduled update fees, deposit refresh fees, virtual machine fees, release fees, and additional fees (e.g. if the amount of data storage used exceeds a set limit).
How to set up an Escrow Agreement
There are many different types of IT Escrow Agreements and several escrow agents in the UK (and many more globally).
In most scenarios, software Escrow Agreements are entered into by three parties; the software licensor, the licensee, and the escrow agent (referred to as a Tripartite Agreement).
It’s first essential to engage the services of a specialist in Software Escrow Agreements who will guide you through the complete process and ensure the agreement is maintained and adhered to over time.
Based on the needs of the software licensee, licensor, and agent, a bespoke escrow agreement will be drafted, and the terms and fees will be agreed upon.
Get legal assistance from LawBite
LawBite can provide expert support in drafting Software Escrow Agreements, which offer essential protection for developers and consumers.
When entering an Escrow Agreement, it's essential to consider factors such as the type of agreement, what will be deposited, how often updates will be deposited, release conditions and the costs involved. Our team of experts can guide you through the entire process, ensuring that your agreement is tailored to meet your needs and adhered to over time. Book a free 15 minute consultation or call us on 020 3808 8314.