Software Escrow agreements – what are they really worth? Christiaan Murphy delves into why you might consider escrow agreements and why you probably shouldn’t bother.
A Definition of Software Escrow Agreements?
An “Escrow Agreement” in the context of software licensing is where a software vendor deposits the source code of the software product into an “escrow account” in the hands of a trusted third-party. This trusted third party, known as the “escrow agent” will release the source code to those customers of the software who have participated in the escrow agreement if a predetermined event occurs.
The principal event customers guard against by participating in an escrow agreement is the bankruptcy of the software vendor. However, customers may insist on other triggers for the release of the source code by the escrow agent. These triggers would all centre around the software vendor being unable or unwilling to support the software product, or support key functionality within the software product.
In the event of the software vendor filing for bankruptcy, having access to the source code of the product, customers are then in a position to support and maintain the software product.
When might a software source code escrow agreement make sense?
There are a few situations where this might make sense. For example, when buying highly-customised, niche software products. If you are dealing with a small software company which has only a few other commercial customers, or if you are having products written specifically for you by a software developer and you do not own the resulting IP (see post on IP ownership).
Why software source code escrow agreements usually don’t make sense
In most situations, however, I think escrow agreements are a waste of time. Here’s why…
Ask yourself what the likelihood is that the software vendor will go bankrupt. Established software vendors do not tend to go bankrupt as they do not tend to have large overheads. In hard times they will cut back on sales, marketing and development costs, but being forced to go out of business from one day to the next is rare. They are far more likely to be acquired by a competitor, and you will struggle to get the software vendor to agree that an acquisition should be a trigger to have the source code released from software escrow agreements.
Does the software have commercial value in the market?
Even if the software vendor were to go bankrupt, unless the software is completely worthless, it is unlikely that the software product would completely disappear from the market. The software vendor might go bankrupt, but its trustees in bankruptcy will want to recover value from the software by selling the intellectual property rights to another software vendor. So someone will pick up the software and continue to provide commercially available support on it. Buying support and maintenance from the new owner will almost always be a more attractive proposition than delving into the software source code yourself.
Would you really use the source code that was maintained in the software escrow agreement?
Even if that were not the case, imagine that the software company goes bankrupt and you are left with the source code. Would you really continue to develop and maintain it solely for your own internal business purposes? Unless it is extremely niche and specific to your business with no alternatives in sight, I doubt that this would make sense. You would be more likely to migrate to another commercial software product. So having the source code would only be useful for short term troubleshooting until the software could be replaced. You have to assess the importance of the software to your business and the likelihood of the software vendor going out of business and weigh that against the cost of paying for an escrow agreement. 9 times out of 10, this will not make sense.
Using software escrow agreements in the event that the software vendor stops maintaining the software product.
When a software vendor is developing a specific solution for your company, but you will not own the resultant IP, then there is more of an argument for having a software escrow agreement. In this situation there is a risk that, over time, the software vendor will neglect to maintain the software. You could define in the contract that failure to maintain the software is a trigger to have the source code released. But what then? It is unlikely that you will have the expertise to maintain it yourself, but, even if you did, would you want to? Firstly, you would not own the IP, so you risk infringing the software vendor’s IP rights, and, secondly, would you really want to invest in the knowhow to maintain the software product? It would be far more efficient to compel the software vendor to maintain the code by stipulating the maintenance requirements in the licensing agreement and attaching penalties to non-compliance with those requirements.
If you disagree? Please comment, I would love to hear arguments in favour of escrow agreements.
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Image credit: “Safe” by Rob Pongsajapan, Creative Commons, Flickr.com