Allows parties to use general knowledge, skills, and experience retained in unaided memory after exposure to confidential information. One of the most heavily negotiated NDA provisions.
Complex / High Risk
Purpose
A residuals clause permits the receiving party to retain and use "residual knowledge" - information that remains in the unaided memories of their personnel after exposure to confidential information. This clause is highly controversial because it can effectively create a massive loophole in confidentiality protection.
Common Usage Scenarios
Technology Licensing: Software and technology companies often request residuals clauses to protect their employees from inadvertent infringement when developing future products
Consulting Engagements: Consultants working across multiple clients in similar industries may need protection for retained general expertise
Employee Mobility: Companies concerned about restricting employee career opportunities may include residuals provisions
Due Diligence: Parties reviewing potential acquisitions may want to ensure their future business activities aren't constrained by what they learn
Key Considerations
Scope: What types of information are subject to residuals rights? All confidential information or just certain categories?
Unaided Memory: The clause typically requires information to be retained in "unaided memory" without reference to documents or notes
Trade Secrets: Does the clause carve out trade secrets and other highly sensitive information?
Source Code: Technology companies should consider whether source code is excluded from residuals rights
Intentional Memorization: Well-drafted clauses prohibit intentional memorization of confidential information
Residual Knowledge
Notwithstanding any other provision of this Agreement, either party may use Residual Knowledge for any purpose, including without limitation use in development, manufacture, promotion, sale, and maintenance of its products and services.
"Residual Knowledge" means ideas, concepts, know-how, and techniques that are retained in the unaided memories of Representatives of the Receiving Party who have had access to Confidential Information, provided that:
(a) Such Representatives have not intentionally memorized such Confidential Information for the purpose of retaining and subsequently using or disclosing it; and
(b) Such Residual Knowledge does not include any verbatim copying of Confidential Information, trade secrets, or source code.
Basic Version: This version provides a reasonable balance by excluding trade secrets and source code, and prohibiting intentional memorization. Suitable for most commercial relationships.
Residual Knowledge Rights
Nothing in this Agreement shall restrict either party's right to use or disclose any Residual Knowledge.
"Residual Knowledge" means information in non-tangible form that may be retained in the unaided memory of the Receiving Party's Representatives who have had access to the Disclosing Party's Confidential Information, but only to the extent that:
(a) The Representative has not intentionally memorized Confidential Information for the purpose of circumventing this Agreement;
(b) The Residual Knowledge does not include trade secrets as defined under applicable law;
(c) The Residual Knowledge does not include source code, algorithms, or detailed technical specifications;
(d) The Residual Knowledge does not include customer lists, pricing information, or business strategies;
(e) The use of such Residual Knowledge does not breach any fiduciary duty or other legal obligation; and
(f) The Receiving Party has not created any notes, documents, or other records containing Confidential Information that would refresh the Representative's memory.
For the avoidance of doubt, this provision does not grant any license under any patent, copyright, or other intellectual property right.
Standard Version: This more protective version includes multiple carve-outs for sensitive information categories and requires that no written records have been created that could refresh memory.
Residual Rights
The Receiving Party may freely use and disclose any Residual Information for any purpose whatsoever, including without limitation developing and marketing products or services that compete with those of the Disclosing Party.
"Residual Information" means any ideas, concepts, know-how, techniques, or any other information of any kind whatsoever that is retained in the unaided memories of the Receiving Party's employees, agents, or contractors who have had access to Confidential Information, without reference to written or other tangible materials containing Confidential Information.
The Receiving Party shall have no obligation to limit or restrict the assignment of such employees, agents, or contractors, and neither the Receiving Party nor any such personnel shall be required to take any action to avoid retention of Residual Information.
For clarity, nothing in this Agreement shall prevent any person who has had access to Confidential Information from working on projects that involve subject matter similar to that discussed or viewed as part of this engagement.
This Section shall survive termination of this Agreement indefinitely.
Warning - Highly Aggressive: This version essentially creates a massive exception that could swallow the entire NDA. It permits competitive use, imposes no duty to limit memorization, and survives indefinitely. Strongly discourage disclosing parties from accepting this language.
1
Push Back if You're the Discloser: If you're sharing confidential information, you generally want to resist or significantly limit residuals clauses. Argue that modern NDA practice doesn't require such provisions and that careful handling of confidential information should prevent inadvertent retention.
2
Carve Out Trade Secrets: At minimum, ensure that trade secrets as defined under the Defend Trade Secrets Act or applicable state law are expressly excluded from any residuals rights.
3
Exclude Core Business Information: Negotiate to exclude source code, algorithms, customer lists, pricing data, financial projections, and business strategies from the residuals definition.
4
Prohibit Intentional Memorization: Any acceptable residuals clause must include a prohibition on intentional memorization designed to circumvent confidentiality obligations.
5
Limit Personnel: Try to limit residuals rights to specific individuals who genuinely need exposure to confidential information, rather than all "Representatives."
6
Consider Access Controls: If you must accept a residuals clause, negotiate for access controls that limit the number of people exposed to your most sensitive information.
No Trade Secret Carve-Out
If the residuals clause doesn't expressly exclude trade secrets, it could allow the receiving party to use your most valuable proprietary information with impunity. This is a deal-breaker for most disclosing parties.
Permits Competitive Use
Language explicitly allowing the receiving party to develop competing products using residual knowledge is extremely aggressive. This effectively permits industrial espionage with a thin legal veneer.
No Anti-Memorization Requirement
Without a prohibition on intentional memorization, the receiving party could systematically review and memorize your confidential information, then claim it was merely "retained" in unaided memory.
Indefinite Survival
Residuals clauses that survive "indefinitely" or "in perpetuity" after NDA termination create permanent exceptions to your confidentiality protections.
Includes Source Code
If you're sharing software source code, ensure the residuals clause expressly excludes it. Source code can be reconstructed from memory by skilled developers, creating significant IP risk.
Broad "Representatives" Definition
If "Representatives" includes contractors, advisors, or other third parties in addition to employees, the residuals exception becomes extremely broad and difficult to police.