IP Escrow Agreements

Tomorrow I’ll be filming a short piece in London on Intellectual Property Escrow Agreements (“IP escrow agreements”).  If you prefer to read instead of watch, I thought I’d write briefly on it.

IP escrow agreements are being heavily used today in commercial contracts for technology.  The way they work is this – Let’s say you build municipal infrastructure like telecom or transportation and you need me to manufacture some of the computerized components for the project.  You will need to service and upgrade the infrastructure for many years.  To do this, however, you will need my constant assistance.  You are concerned that someday I will not be able to provide that assistance, so what do you do?

Well you could buy the IP from me, but that could be quite expensive, and you know that we both want each others’ long term business.  The solution is to put my IP in a safe place where you can access it in the event I cannot or will not provide my products to you.  That’s where the escrow comes in.

The basic framework is that the manufacturer deposits its patents, copyrights (software), designs, schematics, trade secrets, etc. with a secure third party IP escrow company; everything the customer will need to manufacture the goods.

There are basically four big issues to tackle for IP Escrow:  Who pays for it?  Who selects the IP escrow company?  How do you confirm that the IP deposit is complete?  Under what circumstances can the customer access the IP?

Who pays for it?  This one is relatively simple.  If the customer wants IP escrow, the customer should pay for it.  Bargaining power can of course change this.

Who selects the IP escrow company?  This one is a bit more complicated.  The manufacturer will be nervous to deposit its treasured IP with a third party.  So much so that if the manufacturer does not get to pick who to deposit it with, it could kill the deal.  Also, the IP escrow company should be geographically close to the manufacturer to make sure the complete materials are deposited and easy to update.  Therefore, in sum, the manufacturer should pick the IP escrow company.

How do you confirm the IP deposit is complete?  Remembering that we are likely dealing with trade secrets here, highly technical information, or voluminous object or source code, this can be very difficult.  The customer will need to prepare a detailed list of what it wants to see deposited and then consider/negotiate how much of it can actually be audited.

Under what circumstances can the customer access the IP?  These are known as “Triggering Events”.  Usually it has to be a very serious problem such as the manufacturer’s bankruptcy.  However, the Bankruptcy Court may not let the customer have the IP if it is a valuable asset that could be sold to satisfy the manufacturer’s debts.  Careful drafting of Bankruptcy provisions is therefore critical, and not necessarily airtight.  Triggering Events also need to be considered for other situations such as the break down in the business relationship, usually caused by a material breach of contract.  However, I’ve seen Triggering Events for issues as small as the customer not approving the manufacturer’s subcontractor, or any delay in a manufacturer’s performance.  In my opinion, this goes to far, but I can see the customer’s point – a secure flow of vital components is critical.  You have to be on the look out for a veiled grab at IP, though.

The next time you consider an IP escrow agreement keep these rules in mind, pay attention to the details of the Triggering Events, and you may have something of value, to both parties, in the long run.

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