Published OnOctober 24, 2018In this post, we’re going to discuss the triggers that would cause the escrow agreement materials to release and the agreement to terminate.
Over the last few months, I’ve introduced some best practices for improving technology escrow relationships (see earlier posts in this series, starting here). We’ve discussed the importance of reviewing the deposit content (upfront) and creating a schedule for tracking development changes. We also reviewed “when & why” you should verify your escrow material, and in my last post we covered who should be responsible for payment.
In this post, we’re going to discuss the triggers that would cause the escrow materials to be released and the agreement to terminate. Almost all of the escrow agreements submitted for legal review include changes to the release conditions.
There are three “standard” release triggers:
- Breach of the Licensing Agreement
- Failure to function as a going concern or operate in the ordinary course
- Voluntary or involuntary bankruptcy
As technology changes and developers find new and creative ways to deploy their solutions, the risks associated with the business relationship will also change.
For example, during the end of the dot-com boom, voluntary/involuntary bankruptcy was the number one cause for a release and termination of an escrow agreement. Today, lack of support is the leading cause for a release. Lack of support is defined in many different ways but essentially, it’s a predetermined threshold related to service levels or maintenance obligations defined within the business contract, not in the escrow agreement.
In some cases, a lack of support can be caused when a developer has decided to “sunset” (discontinue) a solution. We call that “product bankruptcy” and it often happens as a result of a merger/acquisition.
Today’s top three reasons for an escrow release (2018):
- Lack of Support
- Joint Instruction
Typically, during the release process, the licensee will start to think in earnest about the content of the escrow deposit and may try to request that the developer add information, they “forgot” or “overlooked,” during the original escrow conversation. Unfortunately, asking your developer for any assistance during the termination of your business relationship is a lot like asking your significant other for a prenuptial agreement during the divorce process. In a nutshell: horrible timing.
Once a release is requested and processed, the escrow agreement terminates. Therefore, it’s critical to ensure everything you need is in the deposit account before you need to request a release. The “right to use” following an escrow release allows the licensee the right to manage and maintain the escrow deposit material for the sole purpose of continuing the benefits provided to them through the business agreement with the developer. One of the problems that you want to avoid is trying to negotiate additional rights, especially if the developer is bankrupt. The reason being, this may be in conflict with Section 365(n) of Title 11, United States Code (the “Bankruptcy Code”).
The developer typically assumes that there will be a narrow path of access to their escrow solution for a short period of time. On the other hand, the developer’s client will require a tremendous amount of access and exposure to the solution in order to determine the appropriate course of action for managing the application.
This could include, outsourcing the project to a Managed Service Provider (MSP) or contacting an Independent Consultant to determine which companies to partner with, in order to keep the solution running. Long story short: The licensee needs to think of the end game at beginning of the relationship.
Please note: Upon receiving the escrow material, the licensee inherits the obligations to maintain the confidentiality of the Intellectual Property (IP).
In my next blog, I will discuss the mechanism to the release process. We will discuss the logistics to the release process and the steps the developer must follow to dispute a release. We will also discuss alternatives to the standard release mechanism most escrow agents and the industry offers.