Beware! Residual information clauses in your confidentiality agreements

NDAs are tools that CEOs, inventors, entrepreneurs, and business owners typically use when they need to share trade secrets, proprietary or other types of confidential information with third parties, but want the third party to maintain confidentiality Their information does not use it without permission.

In these agreements, the party disclosing the confidential information shall be referred to as the "disclosing party" and the party receiving the confidential information shall be referred to as the "receiving party". The NDA is generally designed to favor the disclosing party to protect its confidential information, unless it is a mutual agreement in which the benefits of the agreement apply equally to both parties.

Recently, I have been exposed to confidentiality agreements by my clients to include Residual Information Clauses that undermine the confidentiality agreements and raise questions when it comes to finding the delicate balance between the true spirit of NDA and our human nature to remember, learn, and improve.

Residuals, by definition, means leftover, that is, something left after you have finished handling or doing something.

In the world of confidentiality agreements, scraps are those pieces of information that are kept in the memory of the recipient of confidential information long after completion of the project or business transaction. It is information that remains in human memory over time and is naturally preserved and is not given to "projection" from the mind of the recipient.

Please note: A classic residual clause on behalf of the recipient states that "residual information" is not included in the confidentiality obligations!

This can be explained differently if, for example, through the process of working with the IP (the intellectual property) of the distributor party and other confidential information, the receiving party learns from the disclosed intellectual property, recites it and / or makes improvements or general developments in its own work, They shall have the right to use the residual information without violating the terms of the NDA.

The prevailing concept behind the residual information section is that we all learn by doing and cannot, and should not, require people to try to "divide" their brains when it comes to different sources of knowledge.

The range of what will be considered "residual" can vary widely in definition and may include:

• Confidential information stored only in memory without the use of external means (ie, no notes, documents, or anything but what was stored in the brain).

• Confidentially stored confidential information (meaning not intentionally stored in memory) with no intention of stealing.

• Confidential information stored in memory without the use of external means after a certain time has elapsed after termination of the contract.

• General information that is stored in memory and does not include information that has been marked as confidential.

• Confidential general information that is stored in memory without external assistance and does not include certain types of confidential information or specific ideas (such as customer data or designs).

• Confidential general information, which can only be applied to specific uses (i.e., without the use of competition).

Is a residual clause a trade secret license?

Some argue that the residual information section completely defies the purpose of the NDA agreement.

On the other hand, there are those who argue that this section has a place, as long as one understands its meanings and uses it fairly. In the end, the use of this section depends entirely on whether you are giving the information or receiving.

Here's an example of the residual information section within the NDA:

In 2003, the federal court in Lexington, Kentucky, made a decision on this matter when it ruled that the disclosing party had revealed itself when they signed a series of confidentiality agreements, many of which included a blunt language about permitting the use of residual information. The plaintiff claimed that there was a contract between them whereby the defendant (the receiving party) was required to maintain absolute secrecy, but the court found that the signed confidentiality agreements included a very clear language that was in effect a license to use a trade secret.

As in most cases in court cases, the details are lengthy and complex, but ultimately the answer seems to be that a residual information clause in a confidentiality agreement does not automatically constitute a license to use a trade secret - but it can be inadvertently if it is not carefully phrased by an experienced attorney.

Who uses residual sections?

Residual clauses are very sought after by the parties that receive information in NDA agreements and are the ones who often initiate them.

A reasonable residual clause will allow the receiving party to use general concepts, while a very broad section will give the recipient the possibility of using more specific ideas, as in the case mentioned above. If you are performing the discovery and the recipient offers a residual clause, read the text carefully to ensure that specific ideas are still well protected.

If you are negotiating with a receiving party that is a much larger company than you, it is best to do your best to avoid signing a confidentiality agreement with a residual clause. The residual clause will clearly benefit the other party, and therefore was offered in the first place.

If you do not have sufficient leverage to completely remove the residual clause, at least negotiate to limit it.

It is expressly stated in the residual clause that it does not grant any license or rights under copyright or patent (unless, of course, that is your intention).

The residual clause should only be restricted to the information that is stored by the recipient without using "external means". That means the other party cannot use your confidential information if it needs to write comments or edit any written record. Maintain the right to prevent this type of unauthorized use.

You can also try to negotiate the wording of the article so that at least the subject of trade secrets comes out of the scope of residual clauses. This will prevent you from the most significant damage.

If the residual clause must remain in order for the agreement to proceed, you may also consider prohibiting the receiving party from working on similar projects or competing for a certain period of time after completion of the projects. Make sure that time is enough to protect your interests.

Disclose as little information as possible, while performing the work. It may seem like something obvious, but you will be surprised how many language or keyboard leaps occur.

Make sure that employees, partners, and third parties are aware of the residual clause so that they know how to be extra careful with the information and shared documentation.

If all else fails, and you are offered an unfair or too broad residual clause and / or your business survival depends on sensitive confidential information, this could be a good reason for you to stay away from the deal altogether.

If the NDA may put your IP at risk or the recipient gets aggressive, especially if it's a potential competitor or employee for industry competitors, then it's best to move on and start over with someone else.

Rules of Thumb for the Receiving side in using residual clauses

As the receiving party, residual clauses usually prefer your interests.

Naturally, you want to include in the agreement a residual clause as wide as possible. However, in fairness to business, it is appropriate to be realistic when drafting your residual clause and not to ask for the free use of confidential information which will negate the purpose and spirit of the confidentiality agreement.

The bottom line

Despite their controversial nature, it is likely that sections of remains will remain. There is a lot of ambiguity and countless residual clauses, so it is difficult to set specific rules.

When dealing with the possibility of signing a confidentiality agreement with a residual clause, remember the above rules of thumb and that this is a fine balance between two very competing interests.

If you want to protect your business relationship, as well as the bottom line, be fair but tough and always, always read the wording of the clause very carefully!