Case Study: A Law Firm Discusses Software Escrow & Verification Services

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CHALLENGE

Both startup and enterprise clients of the firm are often unclear about the benefits of software escrow, how an escrow agreement works, or if one is needed.

THIS LAW FIRM PARTNERS WITH IRON MOUNTAIN TO EDUCATE CLIENTS ON SOFTWARE ESCROW AND VERIFICATION SERVICES AS A RISK MITIGATION STRATEGY WHEN NEGOTIATING TECHNOLOGY-RELATED AGREEMENTS.

Foley & Lardner LLP is a law firm with approximately 1,100 lawyers in 24 offices across the United States and in Mexico, Europe, and Asia. They are viewed as trusted business advisors and approach client service with an understanding of their clients’ priorities, objectives, and challenges. Michael Overly, a partner and intellectual property lawyer at Foley & Lardner, counsels clients in the areas of technology acquisition, including negotiating technology-related agreements and software licenses. One of the issues that comes up often is software escrow.

Whether he is representing the developer or the licensee, Overly’s clients are frequently a bit fuzzy on the concept of software escrow. As someone who has been working on technology escrow agreements with Iron Mountain for over 20 years, Overly has both the experience and expertise to provide guidance in this area.

WHY SOFTWARE ESCROW?

“In high-risk industries, we need to document how we’ve mitigated risk,” Overly explains. “Either it’s a critical system we just absolutely, positively must have in operation or it’s an important application but from a really small vendor. In either case, we have to start thinking of escrow and documenting that we’ve put risk mitigation practices in place.”

EDUCATION ON ESCROW

Often times, the firm’s clients know that software escrow exists, but they don’t understand all the details. Overly says, “I do a lot of training for clients; we’ll give them the basics of escrow. We’ll talk them through the whole process of the pros and cons. What type of escrow should they be getting? Is it going to be a two- or three-party agreement? What are the benefits of each?” Overly has come to realize that even sophisticated clients need some instruction on escrow.

The firm also works with Iron Mountain to instruct their lawyers on the intricacies of escrow via Lunch and Learn presentations so that they can accurately educate their clients.

ESCROW IN DIFFERENT CONTEXTS

Foley & Lardner has partnered with Iron Mountain in many different contexts to put escrow agreements in place. These situations range from the classic software escrow agreement, where the firm represents a vendor and they establish an escrow agreement for the benefit of one or more customers, to reasons that are more unusual. Overly describes a situation where, in connection with an acquisition, there was real concern that the target company was going to essentially vanish. “They were vastly underfunded, and they were losing people right and left,” he explains. “As legal counsel for the acquiring company, we required that the target company’s technology be escrowed until the transaction was completed.” This case illustrates the flexibility of technology escrow: There are lots of uses beyond the obvious for an Iron Mountain escrow agreement.

THE VIRTUES OF VERIFICATION

In addition to recommending software escrow, the lawyers at Foley & Lardner are huge fans of verification. “If you’re on the customer side where you’re going to implement a $50 million information system and you’re worried about the stability of this particular vendor, then yes, we do want to escrow that source code,” states Overly. “But here’s the problem. If next week that vendor declares bankruptcy, and we go in and find out that they’ve deposited nothing or something doesn’t work properly or it’s four years out of date, we’re in a world of trouble.” As a result, Overly talks to clients about how verification services are absolutely critical and how they need to account for that in the contract they have with the supplier.

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