Drafting Source Code Escrow Agreements: Allocating Risks and Costs Between Parties, Record Retention, Data Security

This CLE course will provide counsel with best practices on drafting source code escrow agreements, particularly when the business utilizes a software-as-a-service solution. The panel will address how providers are more frequently including source code escrow in their form subscription agreements to appeal to prospective customers wary of business continuity risks. The panel will also advise attorneys for consumers in assessing the risk of onboarding a SaaS solution from the actual, practical transitioning of the application, data center, and hosting environment in the event of a release condition that may be more catastrophic than the downtime itself.

A software escrow is a deposit of source code of software and other materials with a third-party escrow agent. Because software developers typically make a significant portion of their profit on recurring maintenance contracts instead of the basic license fees, often software developers will forego basic license fees and focus instead on ensuring that the licensee is captive for longer periods using a maintenance contract, which may include services in addition to maintenance of the code itself.

Counsel for developers drafting software escrow agreements must consider the risks of releasing the source code from escrow and minimize potential lost business. As a part of this risk assessment, the software developer will need to maintain flexibility on circumstances where source code would not be released from escrow due to appropriate business decisions. Counsel for licensees must account for the risk of insolvency of the developer or acquisition by another company.

As part of developing an enforceable software escrow agreement, the parties must identify and agree on the escrow agent. Key in determining who to select as a software escrow agent is that they are an independent third party unaffiliated with the software developer and have experience in administering source code escrows. The parties must consider if the complete source code of the licensed software goes into the escrow, along with associated materials such as documentation, software libraries, and appropriate third-party items, and what the retention of the data entails. Finally, the parties need to be careful in their license to differentiate which payments are for using the licensed software and related intellectual property and which for maintenance.

Listen as our expert panel discusses the complexities of software escrows as a vital part of a software purchaser's intellectual property plan and strategy. The panel will provide best practices for contracts to provide access to source code if the software developer cannot further maintain a code critical for a licensee.