Reasons for Technology Escrow Agreements – A Licensee’s Perspective

The majority of Software Source Code Escrow Agreements are established in order to resolve the ‘source code dilemma’.  Establishing an Escrow Agreement provides the Licensee with access to the Technology Vendor’s source code and documentation, in the event that a specific, release/triggering event agreed upon by the Technology Vendor and Licensee occurs. This works by having the Technology Vendor submit a copy of the software source code to an agent of a source code escrow account, who will then in turn, store the source code IP in a secure location. If a release/triggering event occurs, the agent will then have the right to pass the source code IP, that was deposited into escrow, to the Licensee.

Below please find the Top Reasons why Licensees should want to establish Technology Escrow Agreements.

Reason #1The cost associated with implementing another vendor’s solution

Explanation:  Investing in a Software Escrow Arrangement may not be a priority to your organization if you can easily swap out the “now defunct” vendor’s IP with another vendor’s solution. It’s another story when the “now defunct” vendor’s solution is responsible for a mission-critical application installed and implemented in your environment.  The cost of establishing/maintaining an Escrow Arrangement is minimal compared to that of investing in another vendor’s solution.  A typical Escrow Agreement will stipulate that once released, the Licensee shall have the right to use the source code IP for the sole purpose of continuing the benefits afforded to them by the License Agreement.

Reason #2The Vendor is unable to satisfy its maintenance and upgrade obligation

Explanation:  A typical Escrow Agreement will stipulate that the software source code will be released if the Vendor is unable to discharge any of its maintenance obligations to the licensed Program in accordance with the warranties or other standards set forth in either the License Agreement or, if applicable, a written software maintenance agreement.

Reason #3The Vendor is unable to correct an Operational Defect

Explanation:  A typical Escrow Agreement will stipulate that the software source code will be released in the event that the Vendor is unable to correct any Operational Defect in the Program, which prevents it from functioning in accordance with the applicable specifications, documentation, performance criteria and other warranties and descriptions defined in the License Agreement.

Reason #4The Phone Number for your Vendor is no longer ‘active’.

Explanation:  Typically, a Vendor will not advertise that they are closing their doors.  A typical Escrow Agreement will stipulate that the vendor’s source code will be released in the event that the Licensee has reasonable cause to believe that an event has occurred which will cause the Technology Vendor to fail to meets is warranty and maintenance obligations.  Events include:

  • Insolvency
  • General assignment for benefit of creditors
  • Receiver appointment
  • Assets become subject to insolvency proceeding
  • Wind-up or business liquidation

Reason #5Your Vendor’s website does not exist anymore

Explanation:  See #4 above.  Additional events include:

  • Bankruptcy
  • Bankruptcy Proceeding
  • Assets become subject to bankruptcy proceeding

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