Deposit Releases are not Uncommon

Uses for technology escrow are varied, and the high-tech industry continues to find new applications for services provided by trusted third parties like Iron Mountain. But our core business is still source code and technology escrow, which protects proprietary information and software assets. Last year, 14 companies received source code that Iron Mountain had managed for their benefit in an escrow deposit account. This means that from 1990 to 1999, Iron Mountain has released escrow materials 96 times, or about one release for every 200 deposits. How does this process work? What did those companies do with the source code? What would have happened if they had not established an escrow account? What conditions occurred that triggered the release of the source code? Did the depositor (the software developer) file for bankruptcy? Or was it that they simply stopped supporting that product? Here are a few of their stories.

Production Software
In late July 1999, NEC, a digital imaging company based in Nashville, Tenn., sent Iron Mountain documentation that showed that the company from which it licensed some expensive software had gone bankrupt. The software, licensed only a year ago, was an integral part of the company's production process, cutting down on production time and improving output.

When the company did not respond to Iron Mountain's notices and numerous phone calls, Iron Mountain - following the language of the contract - started the process to release the source code to the licensee. NEC received the escrow deposit materials once it was able to provide proper documentation of the software license agreement.

"We spent $1 million on this software, and without the code, we would not be able to get into it and make changes," said Joe Jacobs, vice president of finance for NEC. "If we did not get the code out of escrow, we could not continue to operate for very long and we would have lost our investment in the software."

"Typically, when we lease software from a supplier, especially major software enhancement, we set up an escrow so that if someone defaults on the contract or goes out of business, we have access to the code," Jacobs said.

After NEC received the source code, Jacobs said they hired a few consultants from the bankrupt software company to enhance the software, and production cycle times have since been further reduced.

Joint Partnership Goes Bad
A major semiconductor manufacturer entered into a joint development agreement with a company to add a specialized function to an existing software product. After working on the project for several months, however, the software vendor suddenly stopped updating the materials and no longer provided any product maintenance.

Prior to setting up this arrangement, the two parties had entered into an escrow agreement with Iron Mountain, and frequent updates of the source code were deposited with Iron Mountain. The semiconductor manufacturer contacted Iron Mountain and asked for a release of the deposit materials. According to the escrow contract, the depositor had 10 days to respond to DSI's release notices. During that time, Iron Mountain made several attempts to reach the depositor and its legal counsel - via next-day air courier and by phone. When those efforts failed to elicit a response, the source code was released to the beneficiary of the escrow agreement.

"We invested $150,000 into the software in capital expenses, and within days of receiving the source code, we were able to use it and compile it into software that actually ran," said the manufacturer's CAD director.

He said that the software performs an extremely critical function - that the company uses it for semiconductor product development. "It simulates the behavior of the circuit and analyzes the design of the circuit to see if it would actually work once it is put into production."

If the company had not gone under, the joint agreement would have enabled the vendor to sell the newly added capability as part of their product. Unfortunately, that opportunity would not come.

"The escrow agreement gave us a backup solution if all else failed," the director said. And it worked. The company, meanwhile, is still searching for a permanent solution to perform the software's function - one that would be supported commercially, instead of in-house - but until then, the source code pulled out of escrow is holding up.

"Ideally, I would like all of the software we license to go into an escrow account, even if the vendor is well-known. While they don't go out of business too often, sometimes large vendors will change their corporate focus and decide not to support older products. That happened to us once."

Reseller Gets Code - Well, Most of It
Viasoft Inc. is a software developer whose products include third party technology embedded for resale. If one of its suppliers goes out of business, Viasoft becomes responsible for supporting that technology to its customers. Late last year, Viasoft got a trial run on what that would be like when the vendor for a private label that Viasoft was carrying went out of business.

While in this case, Viasoft had stopped offering the product and, more than likely, would not get any calls from customers who needed support, a Viasoft representative said that as a safety precaution it should still have a copy of the code on file.

The source code was delivered to Viasoft within weeks of its request - after Iron Mountain had served the appropriate papers to the vendor and carefully followed the letter of the contract, making sure that the release process had been met. So, when Iron Mountain's notices were returned as undeliverable and phone messages went unanswered, the source code was released - but, interestingly, one of the CD's on deposit could not be read entirely, and Viasoft could not access some of the code.

Luckily, Viasoft was able to correct the problem by resourcefully leveraging the relationship it had with the vendor. But, in the process, Viasoft learned a valuable lesson.

"Had we needed that information for a current product and not been able to find the vendor and get cooperation from them, we would have had a serious problem," said Carol Barresi, corporate contract administrator. "So we may have to require that all of our escrow deposits be verified somehow."

At the time she made that statement, Barresi was unaware that Iron Mountain offers several types of verification services. In fact, verification is often overlooked as a safeguard to ensure that a complete set of deposit materials is in escrow. Depending on the level of verification required, Iron Mountain can do a technical assessment of the environments needed to support the code, make sure that the media is readable, and even recompile the code to make sure that it runs as it is intended. This is the only way to guarantee that materials in an escrow deposit account will be useful to the beneficiary in the event of a release.