Tuesday, February 7, 2012

Software - Software Source Code Escrow

As source code is the inner workings of the licensor’s intellectual property, most licensors are unwilling to provide source code except in special circumstances. Those situations are when the Licensor is unable or unwilling to support the product such as bankruptcy. Buyers may also not want to receive source code as the is confidential information and there is always a risk in receiving confidential information. The most common approach with respect to source code is to have a requirement that it be escrowed.

When you deal with commitments to escrow source code you need to address several key items.
1, What materials will be included in the escrow package that the supplier must place into escrow. As you may need to support the product on your own, you want everything that would be required to do that and you want it updated each time there is a change..
2, Who is escrow agent and location? Who is responsible to pay the escrow agent? For standard applications the licensor may already be holding the source code in escrow so the only time you would want to pay would be if it was unique to you.
3. You need to establish the specific actions called “triggers” where once the trigger has occurred you can demand the release of the source code? Bankruptcy is not a good trigger. That’s because once the licensor has filed for bankruptcy, all decisions are managed by the trustee in bankruptcy and they do not have to honor your agreement or the agreement with the escrow agent. It would be better to have triggers be things like breaching the warranties or maintenance agreement and failing to cure within the allowable period, or having a substantial deterioration in the licensor’s financial status to a point where its only a matter of time before they would need to file for bankruptcy..
4. What are the provisions for release? This means what steps do you need to do to be able to demand release from the escrow agent and what do they have to provide you.
5. What rights and obligations do you have in using the released source code? This can include things like:
a) Standards of confidentiality for maintaining the source code.
b) Restrictions on use such as using it strictly for the purpose of supporting the licensed software application.
c. What is the license grant that you have with the source code. As you will be supporting yourself with the source code if you don’t have the right to create and own derivative works under the license grant, you could demand that possibly subject to a restriction on use to internal use only.

Many companies may want software licensors to escrow on all the packages they purchase. To me it’s a business call that should be driven by several factors:
1.How critical is the application is to your business?,
2.How long and what cost would it take to change to another application?
3.How stable is the software?
4.Will you need to modify or change the software in the future?
5.What is the cost to have the materials held in escrow?
6.How long would it take your people or a third party to understand the application and how it works to be able to support it or to make changes. For complex applications unless you were able to hire someone that thoroughly knew the source code it could take multiple years to understand the program and its structure enough to make changes.

I’m a firm believer that if someone is prepared to provide something to me for no additional cost, I’m happy to let them do it even if I don’t need it or plan on relying upon it. If a supplier puts a master copy in escrow for all customers to potentially access, its an easy decision to make. For escrows that would require payment of escrow agent’s cost I would go back to the business to review the real benefits and costs of requiring an escrow.

Is it critical? If no, I probably would not recommend paying for holding the materials in escrow.

Can it quickly and cheaply be replaced? If yes, I probably wouldn’t recommend paying for materials to be held in escrow?

How financially stable is the developer? If they are strong financially I probably wouldn't recommend paying for it..

How stable is the software? If it’s stable, I may not need the materials to be held in escrow so I wouldn’t pay for it.

Do I need to be able to modify or change it in the future? If I did I would want to have it held in escrow.

How long would it take to use it? If it was going to require years and a substantial investment of people to be able to use it to support, modify, or change it, I would want to take that into account in terms of which is better. Continuing to support something that will be unique to you or investing in a new application where the supplier will be making and selling upgrades to their customer where it will cost much less for support.

Having an escrow does not provide you 100% protection if there is a problem. It provides you only part of what you may need. The key to its value is how long will it take for you to understand what you received so you can potentially use it. The second key is how much will it cost you to use and support it. It may be more than you want or can afford to pay.

These are decisions that the using business needs to decide.

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