When Escrow Agreements Go Bad …

John Boruvka

Q&A with John Trotti

John Trotti

John Trotti is a senior leader and in-house attorney for Iron Mountain’s Intellectual Property Management group. He answers questions about problems he’s seen with technology escrow agreements, and how to avoid them.

Q: From a contracting perspective, can you discuss what you have seen in terms of difficulties when developing a technology escrow agreement?

John Trotti: Sure. From a process perspective, one mistake that happens quite a bit is that the software developer doesn’t engage with the escrow agent (such as Iron Mountain) early enough in the contracting process. Sometimes, the developer and the licensee go off and try to work it out between themselves. Then, they come to us, and what they’ve outlined isn’t going to work, and we need to make some changes to it.

In a similar vein, we run into issues when one party, such as a licensee or developer, is cut out of the negotiations until the very end. Typically, that’s going to be a trigger for a lot of last-minute edits and consternation.

Finally, many times lawyers will be involved in a deal, and they will feel like they have a unique situation. We can tell they have spent a lot of time trying to resolve it in sometimes unnecessarily elaborate ways. But, for us, escrow is all we do. So, we’re familiar with how to resolve it efficiently and usually have a pretty good answer. We can be a resource to help set up the agreement, and we can work in conjunction with your lawyers.

Q: What is your advice about modifying or customizing escrow agreements?

There are things that we urge our customers not to modify in agreements because our experience tells us it’s not a good idea. There are also things that we flatly won’t accept because we know it could result in a negative outcome in the administration of the escrow over time.

For instance, I’ve seen parties who want to use their own custom agreements, but those custom agreements are missing basic terms like fees, the deposit acceptance procedure, and even a clear procedure for release. We end up plugging a lot of those holes with our standard terms, which is fine, but they lose a lot of the “efficiency” they may think they’d gained from using their own agreement.

Also, any reputable escrow agent will need to revise a custom agreement to conform to its standard operational practices. If they don’t, it should be a red flag that they are not actively managing the escrow. Standardization of the processes is what helps provide assurance that the terms of the agreement will be followed. It is possible to customize an escrow agreement, but the best way to do that is to start with one of our templates.

Question: Can you talk about a couple of specific examples of complex escrow contract issues?

John Trotti: We’ve had agreements where there is a developer and a licensee, but they both have a role as a depositor because they may be acting as partners co-developers on a specific project. So, it can be a very complicated agreement, not just from supporting it but even from drafting it. In this case, I would recommend implementing two agreements with mirrored or paralleled provisions between them so that they don’t have to worry about the differences.

Another scenario for complexity is that the parties will introduce terms from the license agreement that aren’t directly germane to the escrow. At Iron Mountain, we’re here to handle the release, and we don’t have a role in any of the preparatory steps. From the party’s perspective, it’s also a mistake because those provisions are being mirrored from their other license agreement, and over time they may become out of sync.

A third situation is that customers will sometimes try to add other parties beyond just the developer and the licensee into the agreement. You want to be very deliberate about who you add to the agreement and carefully define their rights. That said, we do have an ability to add contract parties and limit their rights just to receiving notices. So, that’s a simple fix if all you want to do is inform the other parties – it’s like adding them as a cc: on an email.

Question: What do you wish that escrow customers knew?

John Trotti: First, we are here to help. If you have any questions, ask! There’s a lot of info on the Software Escrow Customer Support page, plus our contact info is there.

Knowing how to use the Exhibit B properly and to understand the deposit acceptance procedure is key. Reach out and work with the vault team if there’s an issue.

The Escrow Management Center is an extremely useful tool. It provides insights regarding your account and you can set alerts there. Developers can manage and track licensees, as well as make deposits. Licensees can track deposit activity and access their agreement or enrollment. I encourage both developers and licensees to set up their Escrow Management Center account and use it.

Another tip is that if you’re escrowing the crown jewels then you should be encrypting your deposit. Remember to deposit the key with us separately.

And, finally, at Iron Mountain, we will follow the agreement. That’s why you put it in place!

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