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In our fast-paced, long-distance world, how do you build enough trust between a buyer and a vendor to cement an ongoing business arrangement? What do you do when the continuing success of the deal rests upon the continuing use of, say, one party’s trade secret, which, for obvious reasons, that party does not want to share? But the other party, for equally obvious reasons, is leery about investing a lot of money in reliance on something it can’t know. Trust can seem a thin reed when millions are on the line. So companies turn to legal contracts and due diligence to get everything spelled out. Yet even with stronger vigilance, modern business relationships may still need to rely on trust. Sometimes trust just needs a backup — such as using intellectual property as collateral. Let’s say, for instance, that a giant pharmaceutical company has invested billions of dollars in research and development for a new miracle drug. For the drug to be effective, its ingredients must be 99.99 percent pure. The company finds a vendor who can provide a continuous supply of a certain ingredient in its purified form. That vendor holds a proprietary trade secret on the needed purification process. However, the vendor is also a small start-up without a stable financial history. Before investing more in marketing, sales force training, and production capacity, the giant company has to be sure that, some time in the future, commercial troubles for the vendor won’t lead to a sudden interruption in the supply of the pure ingredient. In business jargon, the pharmaceutical company must secure its return on investment. Delving into the business acumen of the vendor’s management may help, but the pharmaceutical maker should ask for more than smart executives. It should insist that the trade secret — the details of the purification process — be fully documented and held in trust by a neutral third party. Then if something happens to the vendor, the pharmaceutical giant would still have assured access to the purification process. In other words, the answer is escrow. While the pharmaceutical maker should surely demand an escrow arrangement, the small vendor also could suggest this option, and thereby demonstrate to the big company that its concerns are understood and manageable. In business, that’s called a win-win strategy. EMPLOY A NEUTRAL Escrow arrangements are used all the time by parties that can’t afford to rely only on good will. For example, many people who buy something on eBay pay through a clearinghouse such as PayPal — a neutral third party that holds the money until the buyer accepts the goods. Similarly, by employing a neutral third party (such as my firm, Iron Mountain) to hold a certain IP asset as collateral, both the buyer and seller have assurances that one party’s asset will be available to deliver to the other party, but only under the agreed-upon circumstances. The so-called escrow agent can also help corroborate claims in a legal dispute by providing information to reinforce a particular party’s right to the intellectual property held in trust. Who should consider holding IP in escrow? A business licensing mission-critical software applications. A business that develops mission-critical software for others. Any enterprise in a supply-chain relationship — like our hypothetical giant pharmaceutical company — where the seller provides a unique product or service that is guarded against competition via trade secrets. For example, mobile phone companies offering new services powered by third-party-owned technologies often protect their investments through strongly worded escrow agreements. TRUST, BUT VERIFY Agreeing to escrow is just the beginning of the process. A good arrangement can be undermined by a bad execution. There are often oversights — good-faith oversights — when materials are deposited into an escrow account. Sellers placing their IP in escrow for the first time sometimes miss things, resulting in an incomplete and potentially useless deposit. So just as lenders examine collateral before they sign a loan, the best practice for an escrow arrangement is to verify and test the deposited materials. This should happen soon after an escrow agreement is executed to ensure that all the deposit materials are present and usable. Subject-matter experts and engineers in the same field of practice often conduct the verification testing. Brought in under strong confidentiality terms, these experts typically work under close supervision in a secure environment owned by the escrow agent. Depending on the work required, they may perform a simple inventory of the deposit materials; they may rebuild the technology or perhaps even test the functionality of the rebuilt technology. A thorough verification strengthens the “leverage value” of the escrow: The buyer now knows that should a release be necessary, it would be able to effectively utilize the deposit materials without the seller. Knowing that this potential exists, the seller will tend to its responsibilities more closely. Unfortunately, deals too often get done in a vacuum. Without strategy or planning, “needing things yesterday” often takes precedence over “doing things right.” But there’s no reason that escrow arrangements should be executed on the fly. Companies benefit from creating a repeatable process to protect their IP-related investments each time they enter into a business arrangement. Pre-defined language or template documents can be introduced early in the negotiations. Corporate lawyers should know how the escrow arrangement works and how to present the arguments supporting it. Escrow arrangements should also be discussed early because protection carries costs. Escrow and verification are akin to hazard insurance: They serve to protect an investment. And, like insurance, their costs must be factored into the deal. MANAGE THE RELATIONSHIP Lastly, it is paramount that the ancillary protection arrangement be monitored even as one manages the main vendor relationship. Changes within companies can alter the relationship between buyer and seller, and that, in turn, can alter the intellectual property that should be on deposit. As the vendor relationship matures, buyers may upgrade their wares to support the needs of their own business. If the intellectual property in escrow is not updated, then the deposit materials may become obsolete. Or if the key vendor contact most familiar with the buyer’s business and the technology in escrow leaves the company, he may take with him know-how critical to using the deposit materials. To make sure that the deposit materials remain current and usable throughout the relationship, the deposit should be periodically audited. Online tools for managing escrow can help ensure that all materials are up to date. Instant access via an online portal, for example, can facilitate things like updating contact information, obtaining copies of escrow documentation, and viewing deposit activity. No one enters into a relationship with a business partner expecting it to terminate catastrophically with the loss of access to vital intellectual property. But the danger is real. A well-designed and executed escrow arrangement can turn a risky deal into a sound deal. By taking the time to walk through an escrow arrangement, the parties to the deal might also engender some mutual trust — a commodity that can go a long way in making all negotiations easier.
Frank Bruno is a senior business strategist for Iron Mountain Intellectual Property Management. He consults with corporations and contract management professionals throughout the United States.

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