A residual clause is a contractual provision allowing a party to use confidential information received without violating any confidentiality obligations. Keep reading to find out how!
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Table of Contents
What Is A Residual Clause
A residual clause is a contractual provision typically found in non-disclosure agreements where a party receiving confidential information may use or disclose the same without violating the terms of the agreement.
In other words, a residual clause provides that a person that obtains confidential information and “learns” the information, concept, or idea will be able to use it to the extent it is in their unaided memory.
A residual clause is not something new and has been used in confidentiality agreements for a long time now.
However, companies that are looking to protect their trade secrets and sensitive internal information should be very careful when agreeing to residual provisions.
With a residual clause, you are essentially allowing the recipient of your confidential information to use it without violating any confidentiality obligations to the extent the information was retained by the recipient’s unaided memory.
Keep reading as I will further break down the implications of a residual clause and tell you how it works.
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How Does A Residual Clause Work
A residual clause is a contractual provision typically found in non-disclosure agreements where the receiving party is relieved from confidentiality obligations it is able to use or share the information from memory.
Let’s look at an example to see how the residual clause works.
Let’s assume that a car manufacturer has developed a unique method for producing its engines allowing it to significantly reduce its production costs.
The car manufacturer will need to enter into an agreement with another construction company so it can build the required production line.
The parties sign a non-disclosure agreement where the construction company is required to maintain the car manufacturer’s information confidential.
However, the NDA includes a residual clause saying that the construction company’s employees and its agents can use confidential ideas and concepts they learned in the course of the relationship.
Now, since the construction company employees can reproduce the car manufacturer’s production concept by heart using their unaided memory, they can sign contracts with the car manufacturer’s competitors and replicate the same production concept for them without violating the non-disclosure agreement.
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How To Minimize Risk of Residual Clause
There are a number of ways a party can reduce the risk of sharing confidential information or trade secrets with another party in such a way that the disclosing party may use it without violating the terms of their confidentiality agreement.
Fundamentally, the way you can protect yourself is to ensure that the non-disclosure agreement is drafted in such a way that you either avoid the inclusion of a residual clause or limit its scope.
The first thing you should assess is the nature of the information that you are looking to share with a third party.
The more the information is sensitive, the more you should avoid including a residual clause.
The next thing is to ensure that you properly define the meaning of “confidential information” so it captures all the information you need to be protected.
You should also avoid including legend requirements where parties are required to mark documents or information as “confidential” or make oral statements to protect the information being shared.
If you are going to keep the residual clause, try to reduce its scope to specific types of confidential information so your trade secrets remain protected.
Make sure that information that is used by a person using his or her unaided memory can only be used in very specific circumstances.
Make sure no license is granted on the use of any confidential information and have the third parties bind anyone accessing or using the information to confidentiality obligations.
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Residual Clause On Copyrights And Patents
Companies should never accept residual clauses relating to copyrighted material or patents.
By providing rights to copyrighted material or patent under a residual clause, you are essentially allowing another party to potentially freely use your intellectual property rights.
When dealing with copyrights and patents, you should consider proper licensing agreements to be put in place where you clearly define the licensee’s rights and obligations.
As such, any residual clause should expressly exclude any rights under any patents or copyrights to avoid any unintended legal challenges.
If a party is requesting residual rights on copyrighted material or patents, you must ensure that you truly understand the consequences of such a clause before granting it.
Companies looking to monetize their intellectual property rights and protect it from unauthorized reproduction should simply avoid any form of residual provisions in their agreements.
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Takeaways
So there you have it folks!
What does a residual clause mean in contracts?
In a nutshell, a residual clause is a contractual provision allowing a party receiving confidential information from another to use it without violating the confidentiality agreement.
Residual provisions have existed for a long time and have gained in popularity in recent years in commercial transactions.
Typically, the residual provision states that a person receiving confidential information may use or share that information if it’s done using his or her unaided memory.
In other words, if you share sensitive information that another party “learns” in good faith, that person will be able to use that information from memory going forward.
If you are dealing with a residual clause in an NDA or need advice on how to limit your risk, be sure to speak to a qualified contract lawyer.
Good luck!
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