What Every Developer Should Know

Developing technology is risky business. Licensing that technology can invite even more risks. Besides the uncertainty in developing a viable product and getting it out to market on time, there are also legal risks to consider. What if a company enters into a joint venture or cross-licensing arrangement to develop or enhance technology? How can the company ensure that its proprietary information is protected if the outside party defaults on its commitments? In addition, smaller and younger software companies may find themselves competing for sales with larger, more established vendors. Even though they may have superior products, what can these companies do to alleviate their licensees' concerns about continued technical support - leveling the playing field against their more established competitors? Or what if a former employee develops a similar product with a competitor? There are many ways to mitigate these risks, but the option that is the least expensive, most versatile in its protection and easiest to set up is establishing a working escrow arrangement that protects all aspects of a company's intellectual property assets.

Developer Issues
For technology vendors, making more sales is typically their biggest worry. Believe or not, an escrow account can help. Once a customer has expressed interest in a product, offering escrow as a value-added service is one of the best ways to lay to rest the licensee's concerns about future support issues. If offered up-front, this can have an impact in shortening the sales cycle.

In addition, software vendors should consider taking the proper steps in protecting their trade secrets and other intellectual property assets that are vital to the survival of their business. What if a contributing party in a development venture challenges royalties or rights issues? Or what if a company needs to make a claim on trade secret misappropriation, in the event a former employee walks off to a competitor with proprietary information? How does the company prove it developed the technology first? Where's the documentation? Companies should consider the lost time and revenue that would result from the misappropriation of its crown jewels, including the legal fees that may be required to settle a long dispute through the courts.

An escrow arrangement not only provides protection for a vendor's licensees, but it also represents an audit trail of technology development work that strengthens intellectual property rights in the long-term and, in the short-term, provides an accessible copy of source code.

Three-party  or Two-party?
So, what type of escrow protection is right? Three-party relationships involve the vendor (also known as the depositor), the escrow agent and the licensee (also known as the beneficiary) and offer more customization and service options to satisfy unique escrow requirements than do two-party arrangements. For example, these relationships allow for more customization of the release conditions and use-right provisions in the escrow arrangement. The release conditions identify the circumstances that will allow beneficiaries access to the source code. The use rights describe the rights awarded to the beneficiary in the event of a source code release. Depositors who want to limit the beneficiary's rights to modifying or reselling the technology must clearly state this intent in the escrow contract.

A two-party escrow arrangement between the depositor and the escrow agent allows companies that offer it as a value-added service to have more control over the terms of the contract. Since the licensee doesn't sign the contract, there are no negotiations - except between the escrow agent and the depositor to conform the contract language to the agent's policies and procedures. This gives the depositor more control over terms, such as the release conditions and use rights.

Two-party arrangements generally allow depositors to simply enroll beneficiaries to the escrow account, as long as the customers under the contract are using the same technology.

Lastly, if a vendor licenses the same product to several clients, and those clients want a high level of escrow protection, there is a special type of escrow that can be arranged - one that provides the services inherent in a three-party protection but under the umbrella of a two- party format. Under this arrangement, depositors may add beneficiaries to the account with a one-page addendum, allowing new beneficiaries to accept the pre-existing contract conditions with their signatures. These are generally called Master agreements.

Added Benefit: Technology Protection
Every standard two- or three-party arrangement includes protection against copyright, trade secret and patent infringement. When establishing an escrow account, an audit trail is automatically created when the escrow agent inspects, dates and time-stamps the deposit materials. And as long as deposit materials are updated and not replaced, this inherently tracks the genealogy of a vendor's products or ideas, providing proof of when and how the product was developed. This proof can offer added protection for patented and copyrighted material, as well as substantiate the due diligence and protection claim to validate trade secrets.

Developers who do not license their technology and simply want to safeguard the ownership of their technology should file early versions of their work in a stand-alone Technology Protection Agreement.

The Role of the Escrow Agent
Whatever type of account is chosen, it is imperative that the parties involved select a qualified escrow agent to administer the account. The escrow agent must be a neutral third party that clearly understands its role in managing intellectual property assets, with clearly defined procedures in place to ensure the safety of the materials in deposit.

While there are too many responsibilities of an escrow agent to list here, one of the most important is the agent's willingness to be forthright in communicating how it administers escrow deposits by enumerating those procedures in its escrow contracts. The escrow agent should track account activity, notify parties of that activity, and be able to verify deposits.

In addition, a full-service escrow agent should maintain a secure, environmentally controlled vault. The facility where escrow deposits are administered should be guarded and designed specifically for storing electronic media, with state-of-the-art fire-retardant systems.