Understanding the “Use Rights” for Software Source Code in Escrow

When two parties enter an escrow relationship, the last thing either party wants, is an escrow release.  For good reason, the developer is usually afraid of outside parties accessing their intellectual property; and licensees really don’t want to manage the software themselves. (Hence the reason for the business relationship, so the developer can manage the software for licensee.)

When it comes to software, trade secrets protect the source code and copyright is used to protect the expression of intellectual property (software application) that the developer is creating.  Software is basically a set of instructions for computers to follow. The developer is a lot like an author writing a guide book in the 0s and 1s of binary code, explaining instructions for an application to perform.

According to the U.S. Copyright Office, Publications Section, the challenge with a “right to use” is it may give the licensee more rights to the software than the developer realizes. To eliminate potential confusion, the developer should determine upfront:

• Will the licensee have the right to distribute the code to a third party to modify/support?
• Can the licensee reproduce the software? and if so
• How long can your licensee reproduce the software?

On the other hand, as the recipient of intellectual property (software) from an escrow release, the licensee has the right to use the software for the sole purpose of continuing the benefits afforded to them via the license agreement.  This also means the licensee is obligated to maintain the confidentiality of the released software.  I’m pretty sure you can see the problem.

If the licensee has the right to use the software for the “sole purpose of continuing the benefits,” but they lack the aptitude required (“reasonable knowledge”) to manage the software, then outsourcing the problem to a third party becomes the only option.

At the end of the day, your licensing agreement should provide clarity in regard to the actual “rights” in the “use rights” clause in your agreement.  It’s too easy for misinterpretation and nobody wants their software misappropriated.  The developer should determine what level of access they feel comfortable with before entering an escrow agreement. 

As the developer, will you provide:

• Source code for modifying or creating derivative work
• The right to share under existing confidentiality provisions with a third party that will maintain or support
• The right to use within the company and not be restricted by current platform, machine or server.

Of course, if the software is embedded or distributed, then the example above targeted around internal use does not apply and you would want use rights that allow you to sell, reproduce, enhance, and continue with your intended plans around embedding in your service or product that you sell.

We hope this has been helpful in explaining more about use rights for software source code in escrow. If you have any questions please contact us.