Software Escrow | Escrow Service | Escrow

Escrow

2009-03-26T19:32:00.000-07:00

Definition 1
Documents, real estate, money, or securities deposited with a neutral third party (the escrow agent) to be delivered upon fulfillment of certain conditions, as established in a written agreement.

Definition 2
An account held by the lender into which a homeowner pays money for taxes and insurance.

Related terms

bulk sales escrow, closing statement, servicer, escrow account, escrow receipt, HUD-1 statement, in escrow, mortgage servicing, occupancy agreement, settlement sheet

escrow appears in these other terms

escrowed to maturity

escrow appears in the definitions of these other terms on BusinessDictionary.com

escrow agreement, software contract

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Escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay). In the UK escrow accounts are often used during private property transactions to hold solicitors' client's money, such as the deposit, until such time as the transaction completes.

Escrow is also known in the judicial context. So-called escrow funds are commonly used to distribute money from a cash settlement in a class action or environmental enforcement action. This way the defendant is not responsible for distribution of judgment monies to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).

Escrow Service

2009-03-26T19:31:00.000-07:00

Escrow is also used in the field of automated banking and vending equipment. One example is automated teller machines (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.

Source code escrow agents hold source code of software in escrow just as other escrow companies hold cash. The highly valuable (and often secret) source code is only released by the agent to either party upon specific terms of the escrow agreement (such as failure to maintain the application, transfer of ownership of the intellectual property rights, or the liquidation of the owner of the source code)..

Software Escrow

2009-03-26T19:30:00.000-07:00

The Verification Trap

What is the point of having source code in escrow if it has not been verified as complete and authentic?

That is the question many escrow agents ask before suggesting that they, a supposedly independent third party, should do the verification. At first glance, it all seems fairly reasonable, but on closer inspection the warts begin to show.

When a licensor deposits Product X Rel 1.23 into escrow, he should swear a certificate in writing by a responsible individual that indeed the source materials lodged with the escrow agent are complete and authentic. But when the escrow agent urges you to hire him to verify somethng that the licensor has already certified, the escrow agent, by implication, is asking you to conclude two things:

(a) that he is more competent than the licensor to decide the matter of completeness and authenticity, and
(b) that he is more honest than the licensor who, for some unspecified reason, might swear a false certificate, whereas the escrow agent would not.

As to the first of these conclusions, the escrow agent is a complete stranger to the software and will simply hire an outside consultant to climb a steep learning curve, the massive cost of which will land on your shoulders, and will most likely deliver a report full of reservations and qualifications. A simple yes or no is unlikely.

As to the second conclusion, it is arrogant to the point of insult.

Let us turn now and examine the possible consequences to the licensor.

Source code might be protected by patent or copyright, but the real protection comes from the law of trade secrets, which states that the law will protect your secret information only if you keep it secret. Putting that another way, the more people who know the secret the weaker the legal protection becomes, until at some point the information is deemed to be public.

While a well drafted non disclosure agreement signed by the outside consultant would probably satisfy a judge that the trade secret had been properly protected, there is a less obvious but much greater risk from another direction. When a potential future buyer of the licensor's business performs due diligence he looks for warts before signing the check. Unlike a judge, that buyer is not governed by legal rules and the balance of probabilities. He is simply looking for ways to knock down the purchase price of the licensor's business - and what better way than to create a doubt that the trade secret (probably the core asset of the business) is out of the bag because the escrow agent and an outside consultant have seen it, and therefore the licensor at best is selling damaged goods. Also, the attorney who fails to warn his client about the risk associated with this method of verification might find himself facing a malpractice claim.

Then how should a source code deposit be verified?

Over the past thirty years we have found several ways, none of which required intrusive participation by us or third parties. Some are pre-deposit and others are post-deposit depending on the situation, but they all protect trade secrecy while allowing proper verification, and do so with little or no fee to the escrow agent or others. But more importantly, we know our verification procedures work because in all that time we have never had a release of escrow materials that proved false or deficient.

If your escrow agent is pressing to be hired for verification, beware of the trap, and find another escrow agent.

Why do some escrow agencies charge so much more?

They do because their first priority is to take full commercial advantage in an industry that is still learning about software escrow.

Based on more than 30 years of experience, we have set a fee structure that allows us to earn a reasonable profit while providing our clients with the highest level of professional service in the world. We take a long term view rather than seeking to front end load profits.

Consider this - if an escrow agency has demonstrated by its conduct that it takes commercial advantage of its clients at the very first opportunity, should you feel comfortable about entrusting that company with your source code - or leaving it there if you already have?