Nondisclosure Agreements: Understanding the Risks and Benefits of a Residuals Clause

Residuals clauses can affect how confidential information may be used after it is disclosed. For recipients, they can provide practical protection for general knowledge retained in unaided memory. For disclosing parties, they can create risk if they are drafted too broadly.

What is a residuals clause?

In a nondisclosure agreement, one provision that is often negotiated is a “residuals” clause. If included, a “residuals” clause is an exception to the recipient’s confidentiality obligations that allows the recipient to use and disclose general knowledge retained in their “unaided memory”. As the recipient of confidential information, this provision protects your personnel from having to unlearn concepts, skills, or ideas that may have been learned during the course of the project covered by the nondisclosure agreement. This knowledge blends in our minds and cannot be easily separated, so it seems reasonable not to penalize the recipient simply for learning from experience and applying in other contexts.

Why should disclosing parties be cautious?

As the disclosing party, however, this can present a major risk. If broadly drafted, a “residuals” clause could undermine the entire agreement or result in destruction of trade secret protection. Disclosing parties should be wary of including a “residuals” clause at all, and if included, the clause should be narrowly tailored based on the circumstances. This may include a limitation on intentional memorization of confidential information, a ban on competing uses, excluding use of certain highly confidential information, or specifically excluding any rights under any patents or copyrights, among other possible restrictions.

Key takeaway

Residuals clauses can be useful in some NDA negotiations, but they should be reviewed carefully because they may limit confidentiality obligations and affect trade secret protection if drafted too broadly.

For more general information on nondisclosure agreements, please start here.