A residuals clause is a provision in an IP agreement or non-disclosure agreement stipulating that if a party learns some general information regarding the other party’s IP while working with the other party, the party learning such information is free to use that information retained in its unaided memory in its own business, regardless of the confidentiality or non-use restrictions in the agreement.
The argument in favor of the residuals clause is that it is difficult to separate general information that you learn from each business partner from previously known information or from IP that you may be developing for someone else or internally. For example, even though a software development company may not use specific code that it writes for a client, it would be difficult for such company to separate general methods of writing code that it learns from such client from its own methods or methods that it learns from other clients.
However, even the most carefully crafted residuals clause poses risks for the disclosing party. For example, it can be difficult to prove whether something was retained in someone’s unaided memory, and the concept of what constitutes “general” information can be murky.
There are several steps you can take to minimize the risks of a residuals clause:
- ensure that the residuals clause specifically excludes any license under the discloser’s patents and copyrights;
- ensure that the clause only applies to information retained in the recipient’s unaided memory without specific or intentional memorization or reference to written or electronic information;
- ensure that the clause does not affect the prohibition on disclosure of confidential information (i.e., the recipient can use the residual information for its own internal purposes, but may not disclose the discloser’s confidential information to third parties);
- if possible, limit general information to a specific category of information (e.g., each party may use the general ideas, concepts, knowhow, and techniques relating to security software programming…);
- if you are disclosing various categories of confidential information, some of which are highly sensitive, carve out the highly sensitive information from the residuals clause; and/or
- restrict the recipient’s employees or independent contractors from working on competing projects for some period of time. This exception is often difficult to negotiate.
If you are the party disclosing confidential information, especially sensitive confidential information, the best option is to avoid the residuals clause entirely. If this is not possible, try to implement as many of the suggestions above and limit the disclosure of confidential information as much as possible.