Intellectual Property in Escrow Agreements

Ritvik M. Kulkarni, III BSL LLB, ILS Law College, Pune 

An escrow is a financial instrument which is held by a third party (escrow agent) on behalf of the (mostly two) parties to a transaction. The monies in this escrow account are released only after the happening or non-happening of certain pre-decided events.

The most common example of such escrow arrangements can be found in the sale of real estate (in the US), where the buyer is required to deposit a certain amount of money in an escrow account, which is released and paid to the seller after the former has successfully met with all the conditions of their agreement to sell.

Another instance of an escrow arrangement is when a lender asks the borrower to put up security against the loan. In such agreements, the lender requires the borrower to deposit a certain amount of money (either at once or on a monthly basis) in the escrow account. If the borrower fails to pay back the amount of the loan (in accordance with the loan agreement), then the lender can, inter alia, withdraw the borrower’s money in the escrow account to adjust her dues.  On the other hand if the Borrower successfully pays back the loan amount, then she will get back all the money in the escrow account.

In both the above examples, we have seen that the deposit in the escrow account is in the form of money. But it can also be in other forms such as shares, source code and patents. Yes, you heard that right! So naturally, now that I have led you finally into the IP angle of the post, I’m going to briefly discuss as to how intellectual property can (among other things) act as a bargaining chip in escrow arrangements.

Today intellectual property has occupied an important position in the list of valuable assets owned by an entity. It is not uncommon for lenders to create a floating charge on the borrower’s intellectual property to secure repayment of the loan amount. However, there arises a need to secure the future existence of the charged IP as well. For this purpose, the lender and borrower decide upon a third party (escrow agent) to store the IP into an escrow account. In this way, the IP will remain intact for the purpose of disbursement to the lender on occurrence of an event of default (as contemplated by the loan /facility agreement).

On the other hand, some business arrangements like infrastructure projects require regular technical and / or creative support and supervision for a long time. For example, if a State Government in India enters into a Public Private Partnership (PPP) to build the Metro in a city; then the former will require constant technical support from the latter. This technical support can mean anything from software upgrades to better online security to complete reconstruction of essential hardware. This kind of support heavily relies on intellectual property possessed by the supplier.

However, the State Government will always be dependent on the Supplier for technical support, fearing the consequences of non-compliance on part of the Supplier. On the other hand the Supplier will be reluctant to share her IP with any other party for security reasons. In such a time, such parties enter into an agreement to store the required IP (for providing support to a project) in an escrow account with an escrow agent. The escrow agent ensures that no unauthorized person gets access to any part of the proprietary data stored with them. In this way, both the State Government and the Supplier remain secured with respect to the IP.

After the Facebook debacle over the ownership of its source, most persons and companies deposit their source code with a third party (IP Escrow Agent) while entering into any licensing agreement. The most important reason to form such an arrangement is to protect the authorship of the source code, since otherwise there is no patent or copyright in an idea. Until such time as the source code is completed, this intellectual property is only in the form of a trade secret, which is fairly difficult to protect. In such arrangements, the IP Escrow Agent ensures the authorship and ownership of the intellectual property through stringent tests and measures.

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