Software License Agreements II – Source Code Escrow Agreements

So if you are a licensee of a software service or product, which you use internally or you sell (sub-license) to end users,  you’ll want to be sure that there is no interruption in service for the term of the license provided you pay the license fees.  Interruptions in access to the software can come in many forms, sometimes the licensor has issues with the software or its delivery (such as hosting provider’s downtime), and sometimes the licensor is acquired by a larger company that doesn’t pay as much attention to the particular software, or worse, the licensor has financial troubles and either ceases to operate as a going concern or files bankruptcy.  You as a licensee, who needs the software to keep your operations steady or to keep your stream of revenue uninterrupted, will want to ensure that there is no break in the access to the software.

If the source code of the software is not in the possession of the licensee, and the licensor disappears or goes kaput, the licensee may be out of luck.  To alleviate this concern, in such situations, the licensee may require, as part of the software license agreement, that the licensor and licensee enter into a separate agreement being a source code escrow agreement with a third party so that if a triggering event occurs (to be defined in the agreement(s)), the source code is released to the licensee, who can them use it themselves (or have another software company facilitate its use like the licensor used to).

There are a number of larger players in the source code escrow game, some of the most well known being NCC Group and Iron Mountain (the only two publicly traded companies that provide this service, I personally like NCC and tend to use them).

Generally if a software licensor is small or been in business less than five years, they should not be surprised if the licensee asks for a source code escrow agreement. However, even where the licensor is large and is established, if the size of the deal for the licensee is large enough, they may require a source code escrow agreement.

From my experience very little source code ever gets released.  It is a process to get the agreements set up and the escrow agent is very conservative about whether it should be released (as it should be).  The escrow agreement, like most things is negotiable between the parties.  Notwithstanding the fact that it can be customized, the triggers for release of the source code are generally:

  1. Material Breach of the software license agreement (always best to be specific as to what that means);
  2. A change in control of the licensor which was set forth or prohibited by the Software License;
  3. Licensor going out of business (ceasing to operate as a going concern, or similar language – which should probably be flushed out); or
  4. Licensor becoming insolvent or filing bankruptcy (you should watch out for a trigger which could be made by the licensee filing an involuntary bankruptcy action on behalf of the licensor – that’s an old trick).

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