Tech & Sourcing @ Morgan Lewis

Clauses dealing with intellectual property (IP) rights in commercial agreements can present nuanced challenges, particularly when they relate to information exchange. Two such clauses that often surface in technology contracts are residuals clauses and affirmative feedback licenses. While both relate to information shared during the course of a commercial relationship, they serve very different purposes and have distinct implications for IP ownership, confidentiality, and future use.

Residuals Clauses: Managing Memory in Complex Collaborations

Residuals clauses permit a party to use information that is retained in its employees’ unaided memory, even if such information was initially disclosed under a confidentiality obligation. The rationale is practical: in collaborative engagements, especially involving technical personnel, separating retained know-how from confidential material may not always be feasible.

For example, consider a software development company collaborating with a client on a new application. During the project, the company’s developers may learn certain techniques or concepts that are not documented but are retained in their memory. A residuals clause would allow the company to use these retained ideas in future projects without breaching confidentiality obligations.

Residuals clauses are often relevant in non-disclosure agreements (NDAs), services agreements, and collaboration frameworks. They are particularly useful in industries like technology and pharmaceuticals, where technical know-how is frequently exchanged.

Rationale for Clause Elements

• Right to Use Retained Information: This allows parties to continue leveraging knowledge gained during a collaboration, which is crucial in industries where innovation is rapid and cumulative
• Exclusions for Tangible Materials: To prevent misuse, residuals clauses typically exclude the use of written or recorded materials, ensuring that only genuinely retained knowledge is used
• No Rights in Underlying IP: This clarifies that while residuals can be used, they do not confer ownership of the underlying IP, maintaining the original IP holder’s rights

Frequently Negotiated Elements

• Scope of “general” information that can be retained and used
• Specific exclusions, such as patented information
• Duration of the residuals clause applicability

Notable Pitfalls and Ambiguities

Common misunderstandings arise regarding what constitutes “unaided memory” and the potential overlap with trade secrets. Parties may consider narrowing their scope, for example, by excluding certain categories of information protected under applicable copyright, patent, or trade secrets legislation. In some cases, parties may opt to omit the clause altogether where highly sensitive data is involved.

Affirmative Feedback Licenses: Rights to Use Suggestions and Improvements

Affirmative feedback clauses provide that any feedback given by one party may be used by the recipient. These clauses are typically structured to give the recipient the flexibility to incorporate ideas, improvements, or suggestions into their offerings without additional licensing obligations.

Imagine a tech company releasing a beta version of its software to select users. Users provide feedback on bugs and suggest new features. An affirmative feedback license allows the company to use this feedback to enhance the software without negotiating separate licenses for each suggestion.

These clauses are common in beta testing, evaluation, and development contracts, where user feedback is integral to product refinement.

Rationale for Clause Elements

• Non-Exclusive, Perpetual License: This ensures the recipient can use feedback indefinitely and without exclusivity, promoting continuous improvement.
• Assignment of IP Rights: In some cases, assigning IP rights in the feedback itself can prevent future disputes over ownership.
• Disclaimers: These confirm that feedback is provided “as is,” reducing liability for the feedback provider.

Frequently Negotiated Elements

• Whether feedback should be licensed or assigned.
• The scope of the license, including geographical and temporal limitations.
• The inclusion of disclaimers regarding the feedback’s quality and confidentiality.

Notable Pitfalls and Ambiguities

Ambiguities often arise around the scope of the license and the potential for feedback to include proprietary or sensitive information. Clear drafting and mutual understanding of the feedback’s nature can help avoid disputes.

Comparing the Clauses

From a drafting perspective, these clauses are structurally different and serve distinct commercial purposes. Negotiators may wish to consider:

• Whether residuals clauses are needed in the context of the information exchanged
• Whether feedback should be licensed or assigned, and if any carve-outs are appropriate (e.g., for jointly developed IP)
• The role of feedback disclaimers as a potential middle ground, preserving flexibility without a formal license or assignment
• As always, clause structure should reflect the commercial relationship, risk appetite, and intended use of any information or feedback exchanged

How Can We Help?

Our technology transactions, outsourcing, and commercial contracts team advises on complex commercial agreements across the IP and sourcing lifecycle. We support clients on structuring confidentiality, feedback, and residuals provisions, tailoring terms to suit their business model, regulatory obligations, and strategic priorities.

We stand ready to assist businesses in tailoring these clauses to their needs or in assessing their existing IP frameworks.