Residuals clause

What is a residuals clause?

A residuals clause lets the receiving party of confidential information use what its people remember from it. It is an exception to a confidentiality obligation: whatever stays in someone’s head after working with the other side’s information, the “residuals”, may be used freely.

It usually appears in non-disclosure agreements (NDAs) and in technology, outsourcing and development agreements. Large technology companies often ask for one, because their engineers see confidential information from many partners and cannot forget it on demand.

Example: a software company evaluates a startup’s product under an NDA. Its engineers learn how the startup solved a caching problem. A year later, they build something similar for their own product. Without a residuals clause, the startup could argue that its confidential information was misused. With one, the company can say the engineers only used what they remembered.

What does “unaided memory” mean?

Almost every residuals clause limits residuals to information retained in the unaided memory of people who had access to the confidential information. Memory is unaided when:

• the person did not intentionally memorize the information to use it later, and
• the person does not look at notes, documents, files or copies to recall it.

Some clauses add a third test: the person cannot identify the information as the other party’s confidential information when recalling it. The sample clauses above show these definitions in full.

The problem is proof. Once information is in someone’s head, it is very hard to show whether they memorized it on purpose or looked at a document. That is why the disclosing party should negotiate the scope of the clause, not rely on the definition.

Why a residuals clause is risky for the disclosing party

From the discloser’s side, a broad residuals clause can undo much of the NDA:

• Free use, even against you. Many clauses allow residuals to be used “for any purpose”, including to build a competing product.
• Trade secret protection. To protect a trade secret, its owner has to take reasonable steps to keep it secret. A clause that lets the other side use your information freely can weaken that argument.
• Hard to enforce. A dispute turns on what someone remembered and how, which is difficult to prove either way.
• Wide circle of people. Clauses often cover employees, contractors, affiliates and advisers.

For the recipient, the clause removes a real risk: without it, any product its team builds after seeing a partner’s information can be questioned.

How to negotiate a residuals clause

If you are disclosing the information:

• Strike it if you can. Many NDAs, including the free mutual NDA template, have no residuals clause at all.
• Exclude what matters most: source code, trade secrets, product roadmaps, business plans, financial and personal data.
• Require unaided memory with no intentional memorization and no reference to notes or copies.
• Keep confidentiality intact. Residuals may be used, but never disclosed, and the source of the information may never be named.
• Grant no license. Say expressly that the clause gives no license under your patents, copyrights or other intellectual property.
• Limit who and how long: only people who actually worked with the information, and only after a set period.
• Limit access. Share the most sensitive material with as few people as possible.

If you are receiving the information, keep the clause mutual if both sides share information, and make sure the definition covers general skills, know-how and experience so your teams can keep working normally.

Residuals clause example

Residuals clause vs. related terms

Building the clause into your NDA template

Most NDAs should go out without a residuals clause, but some deals with large technology partners need one. In fynk, conditional logic includes the narrow residuals clause in an NDA template only when a field such as “Residuals clause needed” is set to yes, so one template covers both cases. An approval workflow on the template makes sure legal signs off before any NDA can be sent for signature, so a residuals clause never goes out unchecked.

Which contracts include a residuals clause?

Non-disclosure agreements with technology companies, joint development agreements, IT outsourcing and managed services agreements, license and collaboration agreements, and some acquisition and spin-off agreements. This free template includes one:

For help with the rest of the NDA, see how to write an NDA.

Related clauses

• Confidential information The Confidential Information clause typically outlines obligations regarding the handling and protection of sensitive data shared between parties in a contract. It specifies what constitutes confidential information, the duration of confidentiality, and any exceptions to these terms, ensuring proprietary or private information is not disclosed to unauthorized third parties.
• Exclusions From Confidential Information The "Exclusions From Confidential Information" clause outlines specific categories of information that are not considered confidential under the terms of the agreement. Typically, these exclusions include information that is publicly known, already known by the receiving party prior to disclosure, independently developed by the receiving party, or disclosed by a third party without breach of any confidentiality obligation.
• Mutual confidentiality A mutual confidentiality clause is an agreement between parties to protect each other's confidential information from unauthorized disclosure or use. It requires both parties to maintain the confidentiality of shared sensitive information and can outline the duration, scope, and any permissible exceptions to this obligation.
• Return or destruction of confidential information The Return or Destruction of Confidential Information clause specifies the obligations of parties to either return or destroy all confidential information upon the termination or completion of the contractual relationship. This ensures that sensitive data is not retained unnecessarily, thereby protecting proprietary information and maintaining confidentiality.
• Duration of confidentiality The "Duration of Confidentiality" clause specifies the time period during which parties involved are obligated to maintain the confidentiality of the disclosed information. This period may extend beyond the termination of the agreement, ensuring continued protection of proprietary information for a defined duration or indefinitely.
• Breach of confidentiality A breach of confidentiality clause stipulates the obligations and responsibilities of parties to protect sensitive information from unauthorized disclosure or misuse. It outlines the repercussions and potential legal ramifications should any party fail to uphold these confidentiality commitments.

Frequently asked questions

• What is a residuals clause in an NDA?

  An exception that lets the receiving party use information its people retain in their unaided memory after seeing the other party's confidential information, usually for any purpose. It is common in NDAs with technology companies.

• What is the definition of unaided memory in a residuals clause?

  Memory of a person who did not intentionally memorize the information and does not refer to notes, documents or copies when recalling it. Some clauses add that the person cannot identify the information as confidential.

• Should I accept a residuals clause?

  As the disclosing party, only if you must, and in a narrow form: unaided memory only, no disclosure, no license under your IP, and exclusions for source code, trade secrets and business plans.

• Does a residuals clause give a license to patents?

  It should not. Well-drafted clauses state that they grant no license under patents, copyrights or other intellectual property rights. Check for that sentence before signing.

• Is a residuals clause the same as residual knowledge?

  Mostly. Residual knowledge is the information itself; the residuals clause is the contract term that lets it be used. In employment contracts, residual knowledge clauses let employees keep using their general skills.