SOFTWARE ESCROW CONTRACTS

In the late 1970s, computers were still a relatively new phenomenon, and software companies were just starting to come on the scene. The practice of licensing software instead of selling it outright was a new business model that was being tried by various vendors. During this time, a man named Dwight Olson worked for Control Data Corporation as a software product manager responsible for technology procurement. To support a project that he was working on, he contracted some software development work to an outside firm for $1 million. Unfortunately for Olson and Control Data, that firm went bankrupt. Olson never received his software code or the return of his company's $1 million. Try explaining that predicament to your CEO. This story does have a happy ending, though. Olson realized that, in this new software industry, there had to be a way to protect software source code that would benefit both the software developer and the licensee. With two partners, Olson founded Data Securities International in 1982, and technology escrow began.   

Most business 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 contracts 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 contract.  Thus, when software or other technology assets are licensed, source code escrow contracts 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 contract will clearly instruct the escrow agent when and how to deliver the escrowed source code.

Pinsky Law can provide a full spectrum of commercial contracts services to our clients with focuses on corporate, intellectual property and technology law and has experience in drafting contracts for protection and exploitation of intellectual property.  We can assist clients of all types (from middle market to start-ups in high tech, financial, entertainment, publishing, marketing and other industries) on business and marketing issues and strategies (including risk management), the protection and exploitation of creative and technological works (including trademarks, copyrights and patents), litigation management, and other intellectual property.