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Beware Residuals Clauses when Disclosing Confidential Information


A residuals clause (also known as a residual information exception or residual rights clause) is a standard clause setting out an exception to the confidentiality obligations in an NDA or in agreements for things such as services, outsourcing, employment, intellectual property licensing, or custom manufacturing. 

Employees of a receiving party may, while carrying out the contracted-for activity, develop useful skills, techniques and know-how as a result of their access to the confidential information. The exception gives the receiving party the right to use or disclose any such (residual) knowledge gained during the course of the relevant matter or discussions and retained in the memory of its employees (i.e. unaided, without notes or records). They are therefore favourable to, and sought by, receiving parties whose rationale may be that it is unrealistic for such employees to be expected to forget such knowledge.

Disclosing parties will take quite a different view, typically saying that such a clause undermines the integrity of the undertaking of confidentiality, especially if the confidential information relates to for example, a potentially patentable inventive process; or business opportunity.

As a disclosing party, you should in the first instance, seek to delete the residuals clause from the draft agreement. Should that fail, there are various strategies, including that you should:

  • So far as you can, limit the information to that you only need to disclose and nothing else.
  • Ensure it is clear from the drafting that the residuals clause does not operate to grant a licence as to any of your intellectual property rights.
  • Attempt to limit the extent of the residuals clause, defining what constitutes ‘unaided’ memory to expressly exclude use of notes and intentional memorising.
  • Define specific types of information that are sensitive and seek special exclusions for them.
  • Cite and limit the individuals in the receiving party’s organisation who have access to the confidential information.

If you have any queries on either residuals clauses or confidentiality terms more widely, do get in touch with us.

 

This piece is an overview of the law and is not a substitute for legal advice suited to your specific circumstances.

19.10.20

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