Intellectual Property Escrow: Everything You Need to Know
Intellectual property escrow is the use of an escrow service company that helps you gain an extra layer of security for your intellectual property.4 min read
Intellectual property escrow is the use of an escrow service company that helps you gain an extra layer of security for your intellectual property. These companies help protect your valuable IP, which helps reassure your potential licensees that any investment made in your technology is safe. Essentially, an escrow service acts as a security guard. Information technology is one of the most common arenas for escrow in tech transfer. This is because the software and source code may reside on the inventor's computer only, which means there is a risk of it being wiped out in a system crash, fire, or other disaster.
The use of escrow services is growing as many licensees are starting to require an escrow arrangement in their agreement. If something happens to your protected technology that is housed on-site at your business or something happens to the developer, the licensee would still have access to the technology.
Intellectual Property in Escrow Arrangements
Escrow is held by a third party, known as the escrow agent, on behalf of involved parties to the transaction. The contents in the account will only be released after an event or nonevent based on predetermined criteria. You've likely heard of escrow as it relates to a real estate transaction. This is where the buyer has to deposit a specified dollar amount into an escrow account. This is released and then transferred to the seller once all agreement conditions have been successfully met.
If the borrower does not pay back the loan amount per the agreement, the lender can withdraw his or her money in the escrow account to adjust the dues. If the borrower pays back the loan amount as agreed, he or she will get all the money back in the escrow account.
Software licensing includes a great amount of risk and it necessitates a tremendous degree of trust between the involved parties. The developer has to trust that a user will respect the intellectual property and not misuse, corrupt, or alter it in any way. The licensees, or users, are left to trust that the developer will ensure the software is fully functional today and in the future.
Maintaining confidence in a software company's integrity is key, but that is a huge difference between having faith that everything will work itself out if there is an unexpected event and developing a continuity plan that makes sure it will.
Software escrow is also called technology escrow, and it benefits both the developer and the licensee by mitigating risk when negotiating a technology or software license.
Importance of Software Escrow
- Having a neutral third party who stores your intellectual property can help eliminate the risk of source code abuse if the licensee is granted access from the vendor.
- An escrow can help facilitate negotiations while increasing confidence.
- All necessary materials, including the source code, are kept safe, and it's more secure being stored by one neutral party rather than by a bunch of different customers.
- From a licensee perspective, an escrow can help remove any risk of depending heavily on software without any materials required to run it.
- A licensee can relax some knowing there is no fear of interruptions or damages. He or she can also legally maintain and update it whenever necessary without concerns about the vendor's capabilities.
Source Code Escrow
The source code is the sequence of logical operations and statements written in a computer programming language that is human readable. It controls data processing and software functionality. The source code can consist of hundreds of thousands of lines of code. It is typically written and designed by software programmers who use a variety of programming languages like Java, C++, or Visual Basic.
When it's finished, the source code is then compiled into an executable code that is downloaded, installed, and used on a computer. Users can use the software, but they are not privy to see how it processes data or completes functions and typically have no ability to make any changes to the software and how it operates.
Changing functionality or repairing programs can only be done with the source code, which is why escrow of source code is commonly used in large software transactions, especially those that involve custom developed or critical operation applications. Like other types of escrow, source code escrow involves a trusted third party — the escrow agent who holds the source code and related documentation.
The source code is only released upon a specific event, noted as a “release event,” which can be something like the developer filing bankruptcy.
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