The rise of digital transformation has brought about the digitalization of analog business processes. This has led to the use of software for tasks ranging from critical infrastructure to the simplest of operations.

Software has become a vital tool for maintaining business continuity in a company's inventory. However, competition and resulting unfair practices or copyright infringement have also increased in the software world, putting both the companies that use software as customers ("Customer") and the technology companies that create and own the software ("Software Owner") in a challenging position.

Software Ownership vs. Customer Business Continuity

When Software Owners license their software to a Customer, they share the object code with the Customer instead of the source code that constitutes the essence of the software. The object code is enough for the Customer to run the software.

Sharing the source code of the Software Owner with the Customer would allow the Customer and third parties to make changes, developments, and updates without the knowledge of the Software Owner. This would remove the need for the Software Owner to provide maintenance/support services, or allow the software to be duplicated.

To prevent these situations from creating unfair competition and/or copyright infringement, Software Owners clearly state in their license agreements that the source code of the software will not be shared.

However, from the perspective of Customers, the "non-sharing of source code" reaction, which is fair and understandable, can cause some risks. Bankruptcy of the Software Owner company, decision not to release new updates/patches of the relevant software, or failure to properly fulfill the maintenance and support services agreed upon in the licensing agreement may cause failures in the business processes of the Customer company that has licensed the software.

To protect the labor and know-how of the Software Owners and ensure the business continuity of the Customers, source code escrow agreements (generally called escrow agreements) create a mechanism that serves this purpose.

Understanding Escrow Contracts

Escrow contracts are a type of legal agreement that typically involves three parties.

The parties involved in an escrow contract are the Software Owner, the Customer, and the Escrow Agent. In rare cases, the contract may also be made between the Software Owner and the Escrow Agent.

Under this triple relationship, the Software Owner and the Customer agree to store a copy of the software's source code with a third party, the Escrow Agent. The Escrow Agent is responsible for delivering the source code to either the Customer or the Software Owner only in specific circumstances, such as when the software company goes bankrupt, stops updates, or the contract expires. The code is maintained in a secure way that prevents the Customer from accessing it otherwise.

The Software Owner provides the Escrow Agent company with a copy of the source code, which is preserved without granting access to the Customer or any third parties unless a triggering event occurs.

Understanding Triggering Reasons

Source code escrow agreements allow parties to freely determine triggering reasons without any limitations.

However, given the nature of the job, triggering reasons are often related to the following:

  • Bankruptcy of the software owner company
  • Transfer of the software to a third party
  • Failure to fulfill maintenance and support obligations in the license agreement
  • Termination of the license agreement for the use of the software.

In the event of any of these triggering reasons occurring, the escrow agent will deliver the source code to either the customer or the software owner.

Review Obligation in Escrow Agreements

For the healthy operation of the process, it is important to control and review the source code delivered to the escrow agent under the escrow agreement.

Including a review obligation is useful to detect whether the source code is correct, complete, and virus-free at the first stage.

In practice, the escrow agent usually carries out the review obligation given the nature of the job.

Escrow Process for Software Update

To achieve their desired benefit in escrow agreements, parties require the currency of the source code.

Therefore, the software owner should include an obligation to update the source code within these agreements as a responsibility. Within the framework of this obligation, the software owner should update the source code that it delivered to the escrow agent when making any development, correction, or update on the software.

How is the Fee to be Paid to the Escrow Agent Determined?

In order to preserve the software, a fee must be paid to the escrow agent. There is no obligation as to who must pay this fee, and the parties can freely decide whether to pay it jointly or individually.

Can the Escrow Process be Executed in Software License Agreements?

Source code escrow agreements are generally executed as an attachment or independently from the license agreement due to their three-party structure.

However, some license agreements include commitments from the parties to sign an escrow agreement if there are trigger events that require the execution of the escrow process.

This commitment mechanism cannot be used in the event of trigger events such as bankruptcy. However, it is seen that the transfer of the software by the Software Owner company to another company is a frequently used triggering condition in license agreements.

Can Only Source Codes Be Subject to Escrow Agreements?

Other technical documents required for the development of software can also be subject to escrow agreements.

Can Every Company Be an Escrow Agent?

Yes. There is no requlatory requirement to be an escrow agent.

Is It Necessary to Make an Escrow Agreement for Every Software License Agreement?

No, there is no legal obligation except for certain sectors. The need for an escrow agreement may arise depending on many factors such as the reliability of the Software Owner company and how the Customer company uses the software in which business process.

In light of the above information, we believe that increasing awareness and the widespread use of escrow agreements, which provide significant legal and technical advantages for software and technology companies operating in the field of source code development or R&D and guarantee the business continuity of Customers, will create a win-win situation for both parties.

References

Source Code (Source Code) Escrow Agreement, Assist. Prof. Dr. Dilsad Keskin

http://www.ajindex.com/dosyalar/makale/acarindex-1423934853.pdf

Is the Software Really Usable with the Software Escrow Agreement? , Meltem Yapar

https://medium.com/databulls/yazilim-emanet-escrow-sözlesmesi-ile-güvende-miyiz-35adefe29266

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.