Protecting Emerging and Existing Technology Investments with Escrow

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The annual National Defense Authorization Act (NDAA) is working its way through Congress, with the current version emphasizing research and development of next-generation technologies such as artificial intelligence, 5G, quantum computing and advanced cybersecurity. The goal, according to the Senate Armed Services Committee, is for the U.S. to keep pace with its adversaries.

The importance of deploying emerging technology within the Department of Defense is obvious. However, one of the key concerns for all government agencies — especially DOD with its national security mission — is what happens to the technology they have procured when a commercial developer determines that it will no longer support that version of the technology, merges with or is acquired by another company, goes out of business or no longer has the ability to make changes to the software source code or underlying technology?

When this occurs, it likely results in the DOD ripping and replacing that technology to maintain the given system — adding potentially significant costs and delayed deployment, in addition to any integration issues. Both the DOD and its contractor community need a better way of safeguarding their investments. They need to consider a technology escrow program.

What is technology escrow?

Technology escrow is a method of protecting both the developers of a technology and those who are contracted to use it. On a basic level, it is:

  • A legal agreement between all parties involved in a technology transaction.
  • Managed by a neutral, third-party escrow agent with the ability to secure the developer’s intellectual property.
  • An agreement where the escrow agent can release the IP under agreed upon terms, or release conditions, should triggering events occur, such bankruptcy, merger, acquisition or lack of support.

For those in the DOD or contractor community, the process for establishing technology escrow is relatively straightforward and includes four key steps:

Step 1. An escrow agreement is established among the parties that secures the IP rights and identifies the release conditions. This is accomplished alongside the contracting agreement.

Step 2. Prime and sub-contractors submit their deposit material for the associated IP.

Step 3. The escrow agent receives, verifies and stores the deposit material in National Archives and Records Administration-compliant storage space with classified-level certifications.

Step 4. Deposit materials are sent to the agency and/or prime contractor if a specified release condition occurs.

DOD should start the process of engaging in a technology escrow relationship as early as the request-for-information process, identifying the key technologies within the procurement that are vital to the system and ensuring escrow language is included — either on behalf of the DOD or the prime contractor. Contracting officers should also be engaged in this process to make sure that the technology escrow language is addressed in any response, eliminating those submissions that do not adhere to the requirement.

Specific technology escrow language should identify all parties involved in the response — from a prime and sub-contractor perspective — as well as the specific roles and responsibilities of each. From there, a timeline of the initial deposit and all associated updates must be included to provide a clear roadmap to the DOD and the escrow agent.

Finally, a specific escrow agent must be named within the response, providing that third-party organization the ability to store the escrow deposit materials and granting it unlimited rights to perform technology verifications — specifically, the ability to put the underlying technology through a testing process to ensure it works properly. The escrow agent also manages the relationship between the parties.

Benefits of technology escrow

Establishing a technology escrow agreement is relatively easy, but the benefits can be significant for the DOD. First, it serves as a legally binding agreement to protect the best interests of DOD and its contractors by mitigating risks should contractual default occur with the technology provider. It can help the DOD avoid a potentially costly litigation process — offering more control to the DOD — should the technology no longer be supported. Ultimately, it promotes transparency and visibility between the DOD and its contractor community and covers prime contractors that are responsible for integrating several different technology components into a large-scale, mission-critical system.

With the world of government contracting being so fluid — mergers/acquisitions, new companies coming and going — and the pace at which new technology is being developed and deployed, the DOD and its contractor community must limit risks. This is even more important when considering the safety of our warfighters and the overall security of the nation. Incorporating technology escrow as part of the contracting process should be a priority moving forward.

This article was originally published in Defense Systems on August 14, 2020.

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