7. Source Code Escrow

With particularly important or critical software, it may be necessary to require the vendor to deposit the source code of the software with a third party escrow company. This permits the licensee to obtain the source code for the purpose of supporting, maintaining, and modifying the software in the event the vendor fails to provide support and maintenance, for example, due to the vendor's bankruptcy or a decision by a purchaser of the vendor to stop supporting the software.

There are two types of source code escrow agreements: two party and three party. Two party agreements are by far the most common. In a two party arrangement, the Licensor has established a single, general escrow for the benefit of all of its licensees. Additional licensees are added as beneficiaries of the escrow by signing a simple one or two page form. Three party agreements are escrow agreements created specifically for a given transaction and are signed by the licensee, licensor, and the escrow agent. Three party escrow agreements are not common.

A common error in source code escrow provisions is to have the source code treated exactly as the licensed software, with no change in the uses to which the software can be put. The correct approach is to expand the scope of the license to permit the licensee to provide its own support and to modify the source code.

Example Provision:

Escrow of Source Materials.
- 24.1 Escrow Agent and Release Conditions. Vendor has deposited a copy of the Source Material (as defined below) for the Licensed Software with _________________________________, a software escrow agent (the "Escrow Agent"), located at _____________________, ____________ (the "Escrow") pursuant to a written Escrow Agreement. During the Term, Vendor shall continually update the Source Material by promptly depositing in the escrow each new release, update, version, enhancement, correction, patch, and improvement of the Licensed Software.
- 24.2 Use of Source Material. Upon the occurrence of a Release Condition (as defined in the Escrow Agreement), Customer will, upon payment of the duplication cost and other handling charges of the Escrow Agent, be entitled to obtain a copy of such Source Material from the Escrow Agent. Customer shall be entitled to use the Source Material as needed to remedy the event of release and mitigate any damages arising from such event. Such use will include, but is not limited to, Customer's right to perform its own support and maintenance and alter or modify the Source Material. Nothing herein relieves Vendor of its obligation to provide support as required under this Agreement.
- 24.3 Customer's Right to Verify Source Material. Regardless of whether one of the Release Conditions occurs, Customer shall have the right, at Customer's sole expense, to require the Escrow Agent to verify the relevance, completeness, currency, accuracy, and functionality of the Source Material by, among other things, compiling the Source Material and performing test runs for comparison with the capabilities of the Licensed Software. In the event such testing demonstrates the Source Material does not correspond to the Licensed Software, Vendor shall reimburse Customer for all costs and fees incurred in the testing and immediately deposit the correct Source Material with the Escrow Agent.
- 24.4 Source Material - Defined. For purposes of this Agreement, "Source Material" shall mean, with respect to the DMS, the source code of such software and all related compiler command files, build scripts, scripts relating to the operation and maintenance of such application, application programming interface (API), graphical user interface (GUI), object libraries, all relevant instructions on building the object code of such application, and all documentation relating to the foregoing, such that collectively the foregoing will be sufficient to enable a person possessing reasonable skill and expertise in computer software and information technology to build, load and operate the machine-executable object code of such application, to maintain and support such application and to effectively use all functions and features of such software.
- 24.5 Fee. There shall be no charge to Customer for the maintenance of the Escrow under this Agreement.