The Four Critical Issues in Technology Escrow Agreements
1/22/2004
Brian Burr
Technology Escrow Agreements have become commonplace in all industries of technology, from
Information Technology to Biotech Industries, and every day licensors are placing into escrow
software, biological material, chemical compounds, and other embodiments of valuable intellectual
property. The preparation of Technology Escrow Agreements has become routine, and several
prominent escrow agency services provide ready-to-use form agreements on their websites. These
forms are useful and they reduce the transaction costs, but they invariably need review and revision
to address the following four critical issues:
1. The licensee or beneficiary needs a present grant to use the deposited material. Often we
see deals done where there's a grant to use, for example, object code, and then a
"springing" grant to use the underlying source code upon bankruptcy. Such a springing
grant is not likely to be enforceable. The beneficiary needs a present grant (i.e., granted at
or before the time the Technology Escrow Agreement is signed) to use the source code or
biological material deposited. And the grant should not be conditioned upon release, or
“springing,” but should be crafted simply as a present grant to use the released deposit
material. The grant should be drafted as carefully as any other license grant, specifying
what use or distribution rights the beneficiary has. For example, the deposited source code
can be used during the remaining term of the license agreement solely to perform the
maintenance and support obligations of the licensor, to the extent such obligations are not
met by the licensor.
2. Be sure the release conditions are written carefully, recognizing that release upon the
initiation of bankruptcy proceedings is not likely to be legally enforceable. Therefore, the
beneficiary should specify several alternate release conditions, always including breach of
the related license agreement. In our software example above, breach of the licensor’s
maintenance obligations may be grounds for release. As licensor, consider insisting that
the beneficiary can access the deposited material for breach only if beneficiary relies on
such breach to terminate the related license agreement. Otherwise, it can be awkward for
the beneficiary to have access to the deposited materials all the while insisting that the
licensor continue to perform. For example, if the beneficiary takes the source code from
escrow to self-maintain software, arguably the licensor should not have a continuing
obligation to maintain the software after it has been modified by the customer. The release
triggers must be customized for each transaction to suit the specific contingency
circumstances that are motivating the Technology Escrow Agreement in the first place.
3. These agreements come in two varieties. Most forms provide that the licensor must
consent before the deposited material can be released to the beneficiary. Other forms
provide that the deposited material is released upon the beneficiary certifying that a release
condition has been met, and if licensor disagrees licensor can seek an injunction or initiate
arbitration. This is a matter of pure negotiating leverage. If the beneficiary has negotiating
leverage, the beneficiary should insist on the latter formulation. Otherwise the beneficiary
may have a very costly delay in accessing the deposited material.
4. The Technology Escrow Agreement should transfer title to the tangible media representing
the deposited material to the escrow agent so it is not part of the licensor’s bankruptcy
estate.