The High-touch Legal Services® Blog…for Startups!

© 2009-2018 Dana H. Shultz, Attorney at Law

Software Escrow No Longer Required

Picture of a lock box, symbolizing software escrowSoftware escrow requirements once were common in my law practice. In this post, I will explain why that no longer is the case.

I have seen such arrangements principally with respect to software that a developer hosts (software as a service – SaaS). In a software escrow, the developer delivers a copy of the software’s source code to an escrow company. The developer provides updated versions of the source code from time to time.

If the developer goes out of business, the escrow company delivers the source code to the developer’s licensee (customer). The licensee then has the right to use and modify the source code for its own internal purposes.

Software Escrow – Theory

The following are typical assumptions on which a licensee would base the decision to request a source code escrow:

  • This software is critical to our business operations.
  • The licensor (developer) is a small company.
  • If the licensor goes out of business, we may have difficulty running our business.
  • If we have a copy of the source code, we can take over maintaining and supporting the software.

While those assumptions are reasonable, they frequently differed from reality.

Software Escrow – Practice

The major problem with a software escrow is that few licensees actually are in a position to utilize the source code if and when they receive it!

  • Many licensees do not have in-house software developers with the expertise required to utilize the source code.
  • And if they have qualified developers, those developers already are busy working on other projects.
  • So, the licensee can hire a third-party developer to come in and work with the source code.
  • But that approach requires a significant amount of time and expense before that third party can come up to speed on how the software works and how all of its pieces fit together.

So, the approach that I see more frequently nowadays is for licensees to receive copies of their data in a commonly used format.

  • In addition to the licensee receiving data copies on a regular basis, they can request data copies at any time. This may be appropriate if the licensee becomes concerned about the licensor’s remaining in business.
  • This dovetails with licensee data rights and transition assistance if the parties’ relationship terminates other than, or in anticipation of, the licensor’s going out of business.
  • The licensee then can look for another company to host the data.
  • And even if the licensee were to obtain source code, the licensee requires a copy of the data anyway!

Check out all posts about software.

Photo credit: Fort McMurray Industrial Cleaners Ltd.

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.