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Source Code Escrow

VIEWS: 22 PAGES: 29

  • pg 1
									Mass Software & Internet
        Council

Source Code Escrows
         John Hession
           Partner
  Testa, Hurwitz & Thibeault    TESTA ,
                               HURWITZ
    December 10, 2002             &
                               THIBEAULT
                                  LLP
                Overview
1.   Purpose of Source Code Escrows
2.   Licensor’s Perspective
3.   Licensee’s Perspective
4.   Release Conditions for Licensee’s Access
5.   Process for Release: From Triggers to Use
6.   Dispute Resolution: The “unProcess”
7.   Use of Source Code After Release
8.   Bankruptcy, Section 365(n) & Source Code
                                                  TESTA ,
9.   Bankruptcy: Trademarks?                     HURWITZ
                                                    &
                                                 THIBEAULT
                                                    LLP
       What is Source Code?
• Crown Jewels, Keys to the Kingdom of IP
• IP = Trade Secrets, Patents, Patentable
  Inventions, Copyrightable Works, Know-How
• Programming Language in Human Readable
  Form, Technical Specifications, Algorithms,
  Blueprints, Programmer’s Comments, Flow
  Charts, Logic Diagrams
• Assists Licensee in recreation, modification or
  enhancement of object code, executable code,H
                                               T
                                               ESTA ,
                                              URWITZ
                                               &
  machine-readable code                      T
                                             HIBEAULT

                                              LLP
            Object Code
• Computer code executed by CPU
• Not comprehensible -- but decipherable
  with assistance of source code, compilers,
  assemblers
• Example of Binary Code:
  10010010010011100100010010010101000
  01010100011101000010101001001110001
  00100010101001010001010101000100001
  00001000111100010001000100010100100
                                            TESTA ,
                                           HURWITZ
                                               &
                                          THIBEAULT
                                               LLP
            Source Code
• Source Code = higher level language, more
  closely approximating English
• Examples:
      Assign (TextVariable, “FOO”);
            WriteLn (TextVariable, “This is
            some text.”);
            Close (TextVariable);
      Open “FOO” for Output as #1
      Write #1, “This is some text.”
      Close #1                                 TESTA ,
                                              HURWITZ
                                                 &
                                              THIBEAULT
                                                 LLP
  Definition of Source Code
• Source Code = programs written in
  programming languages (e.g., C++), including
  all comments & procedural code, e.g. job
  control languages
• In a form intelligible to trained software
  programmers, capable of being translated into
  object code for operation on computer systems
  through assembly or compiling
• Accompanied by documentation, e.g., flow
  charts, schematics, statements of principles of
                                                    T
  operations, architecture standards,              H
                                                      ESTA ,
                                                     URWITZ
                                                      &
  programming tools                               T HIBEAULT

                                                     LLP
   More Definitional Stuff
• Describes the data flows, data structures,
  and control logic of software programs in
  sufficient detail to enable a trained
  programmer, through study of the
  documentation and comments, to
  maintain, enhance and modify the
  programs without undue
  experimentation, and facilitate
  interoperation with other software and T   ESTA ,

                                           H
  other operating systems                   URWITZ
                                               &
                                          THIBEAULT
                                             LLP
  Purpose & Scope of Escrows
• Protect Licensee’s investment in
  Licensor: time, effort, resources, $$$
• Access to valuable trade secrets &
  other IP if Licensor unable to perform
• Permits Licensee to assume control of
  project, complete development, fix
  bugs, modify & enhance software,
  create connections (interoperability),
  perhaps additional functionality with T  ESTA ,


  Licensee’s software                    T
                                          H
                                          URWITZ
                                           &
                                         HIBEAULT

                                          LLP
      Licensor’s Perspective
• Why transfer trade secrets to third party or
  directly to licensee?? => Fear of leakage
• Loss of control over Crown Jewels
• Trade secrets, once leaked, can never be
  restored to former status
• BUT: Perception of stability & security
  offered to large vendor or customer
  negotiating with startup company
                                            T
• Code often doesn’t make it into escrow H
                                              ESTA ,
                                             URWITZ
                                              &
                                           THIBEAULT
                                              LLP
     Licensee’s Perspective
• Stability & Security for Licensee
• Access to source code in event of trouble
  in Licensor’s paradise:
• Bankruptcy, insolvency, cessation of
  business (non-bankruptcy), failure to
  maintain or support product
  maintenance or development, risk of non-
  completion of development, discontin-
  uation of product line or version
• Leverage in negotiations                  H
                                             TESTA ,
                                             URWITZ


• Protect investment in product            T
                                              &
                                            HIBEAULT

                                             LLP
     What Implicates Escrow?

•   Software Development   • System Integration
•   Web Development        • ASP Services
•   Value Added Reseller   • Large Software
•   OEM                      Implementations
•   Research &             • Manufacturing
    Development

                                                   TESTA ,
                                                  HURWITZ
                                                     &
                                                  THIBEAULT
                                                     LLP
       Current Landscape
• Until 2000 the frequency of escrow
  releases was less than 1% of all DSI
  arrangements (DSI data)
• Substantial increase in frequency of
  releases since 2000
• Between 2000 and 2001 number of
  releases more than quadrupled
                                          TESTA ,
                                         HURWITZ
                                            &
                                         THIBEAULT
                                            LLP
       More Topography
• Most common triggers: failure to support
  by Licensor or Licensor out of business
• Only 12% of releases triggered by
  bankruptcy
• Many escrow arrangements committed
  but never completed – nothing put in!!!

                                         TESTA ,
                                        HURWITZ
                                             &
                                        THIBEAULT
                                           LLP
     Options re Source Code:
• Grant license to source code up front,
  deposit copy with licensee
• Right of Licensee to reverse engineer object
  code upon default & release conditions
• Grant security interest in tangible copy of
  source code, take possession, file UCC-1
• Licensor contracts to provide source code &
  grant source license if default conditions
                                               T
• Third-party deposit arrangements
                                                ESTA ,

                                              HURWITZ
                                                &
                                             THIBEAULT
                                                LLP
    Escrow Arrangements
• Two-Party Arrangements: Licensor
  & Licensee
• Three-Party Arrangements: Escrow
  Agent (DSI), Licensor & Licensee
• Multiple Party Arrangements:
  Escrow Agent, Licensor & Multiple
  Licensees (Licensees become
                                     T ESTA ,
  beneficiary of Master Escrow)     H URWITZ
                                         &
                                    THIBEAULT
                                       LLP
         Release Conditions
• Bankruptcy of Licensor, voluntary or
  involuntary => Chapter 11, DIP
• Failure to maintain & support product: bug
  fixes, ongoing maintenance, old versions
• Insolvency events: cessation or suspension of
  operations, state insolvency proceedings,
  renegotiation of debt, transfer of assets, debt
  extensions
                                               T
• Acquisition of Licensor, Contract default H
                                                ESTA ,
                                               URWITZ
                                                &
                                             THIBEAULT
                                                LLP
        Process for Release
• Licensee notifies Escrow Agent that
  release condition has occurred, and no
  cure
• Agent notifies Licensor
• Licensor can object to occurrence of
  conditions – time periods vary by
  negotiating position
• If no objection, release occurs
• If objection, dispute resolution process    TESTA ,
                                             HURWITZ
• ISSUE: time period for resolution             &
                                             THIBEAULT
                                                LLP
   Dispute Resolution (JMH)
• Notice by Licensee to Escrow Agent & Licensor of
  default & release conditions [10 business days]
• If contested default, independent referee
  appointed by Licensor w/n 5 days
• Within 20 business days, referee meets at Agent,
  hears testimony & evidence over 3 business days,
  day of evidence for each, rebuttal day last
• Within 2 business days, referee decides
• Referee’s expertise?: accounting firm, information
  processing, management support … ?                T   ,
                                                       ESTA

                                                   H  URWITZ

• Costs split between Licensor & Licensee         T
                                                      &
                                                     HIBEAULT

                                                      LLP
  Dispute Resolution (DSI)

• DSI Preferred Method: “Any dispute
  shall be settled by arbitration under the
  commercial rules of American
  Arbitration Association”
• Disputes often settle before arbitration
• Settlement generally involves release
                                               TESTA ,
                                              HURWITZ
                                                 &
                                              THIBEAULT
                                                 LLP
 Use of Source Code Post Release
• Licensor needs continuing preservation of trade
  secret status of source code
• Restrictions on Use: controlled access, restricted
  programmers (need to know), lock & key, clean
  room environments, physical security, version
  management of enhancements or modifications
• Use on “AS IS” basis: no representations
• License limited to term of object code license
• Return of code if breach cured
                                                    T  ESTA ,

• See Model Document, Exhibit C                    H  URWITZ
                                                      &
                                                    THIBEAULT
                                                       LLP
  Bankruptcy, Section 365(n)
• Section 365: Executory contracts (e.g.,
  License Agreement) can be rejected by
  Trustee in bankruptcy
• Lubrizol: Lubrizol, licensee, acquired
  software; licensor filed bankruptcy;
  trustee rejected agreement to facilitate
  sale of technology; Court held agreement
  was executory and terminable by Trustee
  (ergo, money damages, But no specific
  performance); Lubrizol left without        TESTA ,

                                            HURWITZ

  access to software                       T
                                                 &
                                            HIBEAULT

                                             LLP
  Executory Contracts:
Licensor Covenants include:
• Most Favored Nations clauses
• Duty to defend or pursue IP
  infringement
• Maintenance obligations
• Indemnities & warranties
• Ongoing training
• Confidentiality provisions      TESTA ,
                                 HURWITZ
                                    &
                                 THIBEAULT
                                    LLP
      Executory Contracts
Licensee Covenants include:
• Accounting and ongoing royalty
  obligations
• Maintaining records, permitting audits
• Confidentiality obligations
• Restrictions on license scope or use
• Maintenance fee obligation
                                            TESTA ,
                                           HURWITZ
                                              &
                                           THIBEAULT
                                              LLP
 Bankruptcy, Section 365(n)
• 1988: amendments to Bankruptcy Code,
  Section 365(n), to address Lubrizol
  problem and protect licensees of software
• Designed to protect rights of non-debtor
  licensees using technology
• Covers “intellectual property” OTHER
  THAN trademarks (so … trade secrets,
  patents, patent applications, copyrights,
  mask works)
• Covers agreements “supplementary” to HT   ESTA ,
                                           URWITZ
                                              &
  the license (ergo, Escrow Agreements) T HIBEAULT

                                           LLP
     Bankruptcy, Section 365(n)

•    Before rejection of a License Agreement,
     Debtor must:
    1. Perform under the license,
    2. Not interfere with Licensee’s rights under
       agreements “supplementary” to the license
       agreement (also true after rejection)

                                              TESTA ,
                                             HURWITZ
                                                &
                                             THIBEAULT
                                                LLP
   Bankruptcy, Section 365(n)
• After rejection of license, Licensee may:
  1. Accept rejection, treat license as terminated,
     stop payment of license fee, file unsecured claim,
     or
  2. Retain rights to IP that Licensee enjoyed pre-
     bankruptcy,
  3. BUT continue to make payments of ongoing
     license fees without setoff
  4. Waive administrative claims                    T ,
                                                     ESTA

                                                  HURWITZ
                                                     &
                                                  THIBEAULT
                                                     LLP
 Bankruptcy: Drafting Points
• State that escrow agreement is
  “supplemental” to Section 365(n)
• License grant to use source should be
  current, but subject to later release from
  escrow
• Have clear deposit requirements & timing
• Separate SW license & other fees (e.g.
  maintenance, TM)                           T ESTA ,

                                            HURWITZ
                                               &
                                            THIBEAULT
                                               LLP
 Bankruptcy & Trademarks
• Trademarks, servicemarks not covered as
  “intellectual property” u/ Section 365(n)
• Perceived difficulty of segregating
  trademark from goodwill of the debtor’s
  business in which the mark is used
• Allocate portion of license fee to
  trademarks if trademark included: if
  bankruptcy, licensee receives reduced fee
  – i.e. deduction for portion allocable to HTESTA ,
                                             URWITZ

  trademark value                           T
                                              &
                                            HIBEAULT

                                             LLP
 Why Trademark Exclusion?
• Legislative history indicates the
  intentional exclusion of executory
  trademark licenses
• Drafters cite to the fact that trademark,
  trade name & service mark licensing
  relationships depend to a large extent on
  control of the quality of the products or
  services sold by the licensee
                                             T
• Issue: What about Chapter 11, DIP?        H
                                               ESTA ,
                                              URWITZ
                                                 &
                                            THIBEAULT
                                               LLP

								
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