Today I sat down with John Trotti, our contracts expert, to discuss the difference between a Three Party Escrow Agreement and the Master Three Party Agreements for both Licensors and Licensees. These questions get a bit detailed for those of you who are detail-oriented like me, but if you want a high-level overview to get the gist of the conversation, stay tuned for our next blog.
- What are the major differences between a Three Party and a Master Three Party Agreement?
A Three Party agreement is signed by the escrow agent, the licensor (depositor), and the licensee (beneficiary). The agreement only supports one escrow account and no additional parties may be enrolled into the account. Master Agreements come in 2 varieties: the Master Beneficiary Agreement and the Master Depositor Agreement.
The Master Beneficiary Agreement is an agreement between the escrow agent and the licensee. The licensee may enroll developers into the agreement using an enrolment form. The enrolment form is signed by all of the parties and incorporates the terms of the master agreement as decided on between the parties. In effect, each enrolment becomes a separate agreement between all 3 parties. Under the Master Beneficiary Agreement, each enrolment of a licensor creates a new escrow account so that each licensor’s escrow materials is maintained separately.
The Master Depositor Agreement is very similar to the Master Beneficiary Agreement, but there are some important differences. Under a Master Depositor Agreement, the dlicensor and the escrow agent sign a master agreement. Licensees may be enrolled into the account using an enrolment signed by all of the parties which incorporated the terms of the master agreement. In contrast to the Master Beneficiary Agreement, multiple licensees can be added to the same escrow account. This is a big practical benefit to a licensor because they can put one set of materials in escrow and support multiple llicensees. In addition, the Master Depositor Agreement can support multiple escrow accounts. What this means is that a licensor has 3 suites of products. A Master Depositor Agreement would allow the licensor to set up 3 corresponding accounts and enroll licensees into each account as needed.
- What are the benefits of using a Master agreement as a developer and as a licensee?
For both licensors and licensees, the main advantage is that the master party has an opportunity to pre-negotiate the terms to meet their legal and business needs. In practice, the enrolments into master agreements typically have much less negotiation and review than a 3 Party Agreement so that can help streamline deal closure. In many cases, the enrolment is simply signed by all of the parties without any negotiation. Also, in aggregate the fees for the Master Agreement are cheaper than for multiple 3 Party Agreements.
From a strictly licensor perspective, one of the big advantages of the Master Agreement is its flexibility and scalability. The Master Agreement, as mentioned, can support multiple escrow accounts which correspond to product suites of custom code. In addition, one account can support multiple enrollees so it’s less burdensome for the developer to support their escrow obligations. For instance one set of material in an escrow account could support 5 enrollees rather than the licensor having to submit five sets of duplicate materials to support the same number of licensees.
From a strictly licensee perspective, the major advantage of the Master Agreement is that it is scalable across any organisation. The typical master beneficiary is a larger or growing company and it can be difficult to manage software acquisition in such an environment. Obtaining a signature for enrolment into the Master Beneficiary Agreement is a relatively easy action item compares to a negotiation of a separate 3 Party escrow agreement. The escrow enrolment can be added to procurement or IT checklist to help ensure internal compliance with risk mitigation procedures.
- What is the best approach to negotiate the terms in my Master Agreement?
Master agreements can remain in effect for years so it’s important to keep the terms of the Master Agreement general and avoid specific references to licenses or license provisions that may change over time of from enrollee to enrollee.
During the enrolment process, there is an opportunity to make some adjustments to include appropriate references or other terms (see next question). The other thing to bear in mind is that while the master should reflect the master party’s legal and business needs, the agreement shouldn’t become too one-sided. Aside from potentially poisoning the trust between the licensee and the licensor in the final stages of closing the licensing deal, a one-sided master could trigger requests for significant edits or a stand-alone 3 Party Agreement which defeats the primary benefit of the Master 3 Party.
- Can I modify my Master Agreement for Individual Licensors or Licensees?
The Master agreement should be kept as general as possible to preserve its flexibility (as mentioned above). However, the terms of the Master Agreement may be amended to add to a particular party in the enrolment. Remember that the enrolment creates a separate agreement between all 3 parties that incorporate the terms of the underlying Master Agreement. It’s a fairly straight-forward process to incorporate select amendments within the enrolment form. Common edits include changes to the release provisions to align them with the license agreement and sometimes choice of law or dispute provisions.
- If I am a licensor. Do I need to have different escrow accounts for each of my different technologies (products)?
I would recommend storing them in separate accounts. As part of the release process, all material in the escrow account is released to the licensee. So, if you have multiple products you would likely only want to have material released to a licensee that had actually licensed the material.
- Are there different pricing arrangements with a Master Agreement?
Sure. Each enrolment may have different terms for which party pays the fees. The one item to remember is that for a Master Depositor Agreement, the Master Depositor should pay the fees for the escrow deposit account as this is a fee that affects the whole account. You wouldn’t want a licensee’s failure to pay its escrow bill impact your entire master account.
- How can I negotiate unique release conditions for my escrow account?
These can be negotiated in the enrolment form. It’s very important to allow the terms to be reviewed by the escrow agent prior to signatures. Often times, the terms need to be tweaked or clarified and it’s much easier to do prior to signature.
- Can I have a different dispute resolution for a unique customer?
Yes, the enrolment may provide for changes to the dispute resolution process. As with changes to the release conditions (above) it’s very important to allow the terms to be reviewed by the escrow agent prior to signatures.
If you have any further questions, please email me at email@example.com and I can connect you to the right person. If you have any other topics you want to cover in a Q&A, please comment below!