Residuals Clause FAQ

Retained memory (or residual knowledge) refers to general ideas, concepts, techniques, and know-how that naturally remain in a person's memory after exposure to confidential information, without intentional memorization or reference to notes.

What typically qualifies as residuals:

• General understanding of an approach or methodology
• Awareness that a particular technique works (or doesn't)
• High-level concepts about system architecture
• General impressions about market positioning
• Knowledge of industry best practices learned in context

What is NOT residuals:

• Verbatim code, specifications, or formulas
• Specific customer lists or pricing matrices
• Detailed technical drawings or schematics
• Information intentionally memorized to circumvent confidentiality
• Anything requiring reference to documents or notes

The core distinction: Residuals are what a skilled professional naturally absorbs from experience versus what requires deliberate retention or documentation.

Residuals clauses reflect practical realities about how humans learn and work:

The practical argument:

• You can't "unknow" general concepts you've learned
• It's impossible to separate general professional growth from specific confidential exposures
• Employees shouldn't be paralyzed by fear of using any skill developed at prior employers

The business argument:

• Talent mobility drives innovation across the industry
• Companies benefit from hiring experienced people who learned elsewhere
• Overly restrictive NDAs can make hiring impossible
• California's strong employee mobility policies favor this approach

The leverage argument:

• Large tech companies receiving information often require residuals clauses
• Startups seeking partnerships or investment may need to accept them
• It's become an industry norm in Silicon Valley and spreading to other tech hubs

The legal argument:

• Without a residuals clause, the right to use retained knowledge is uncertain
• Making it explicit provides certainty for both parties
• Courts have generally upheld carefully drafted residuals clauses

"Unaided memory" is the key limitation in residuals clauses. It means:

What's prohibited (not unaided):

• Consulting notes taken during NDA-covered discussions
• Referring to copies of confidential documents
• Accessing saved emails or presentations
• Reviewing photos of whiteboards or diagrams
• Using any written or electronic record of the information

What's permitted (unaided):

• Recalling concepts from pure memory
• Applying general techniques learned from experience
• Using skills developed while working with the information
• Remembering that a certain approach worked (without specifics)

Practical test: If someone would need to look something up to remember it accurately, using that looked-up information is NOT protected by residuals. Only what they can genuinely recall without aids qualifies.

Example: An engineer might remember "they used a clever caching approach that improved performance 10x" but not remember the specific algorithm. The general concept = residuals. The specific algorithm = confidential.

Residuals clauses emerged from and became standard in Silicon Valley for several interconnected reasons:

California's unique legal environment:

• California Business & Professions Code Section 16600 voids most non-competes
• Strong public policy favoring employee mobility
• Courts skeptical of restrictions that functionally limit where people can work
• Without residuals, NDAs could effectively become non-competes

Tech industry dynamics:

• Rapid talent movement between companies is the norm
• Engineers often work on similar problems at successive employers
• Cross-pollination of ideas drives innovation
• Companies are both disclosers AND receivers at different times

VC and M&A ecosystem:

• Investors want portfolio companies to be able to hire freely
• Acquirers want to integrate teams without liability overhang
• Due diligence often requires sharing sensitive information
• Residuals provisions facilitate deal flow

Current adoption: Major tech companies (Google, Microsoft, Meta, Amazon, Apple, most unicorns) routinely include or accept residuals clauses. It's now spreading to other industries and geographies.

You don't "have to" accept anything, but the practical reality depends on your leverage and goals:

When you have little choice:

• You're a startup seeking partnership with a major platform
• They're evaluating you for acquisition
• They're a potential investor conducting due diligence
• You need their technology/API access for your product

When you might push back:

• You're sharing truly unique trade secrets that define your business
• They're evaluating you but could easily become a competitor
• You have alternative partners/investors who don't require residuals
• The relationship is roughly equal (you're both sharing sensitive info)

Negotiation strategies:

• Accept residuals with narrow carve-outs for your most sensitive categories
• Require "no intentional memorization" language
• Add trade secret exclusions
• Limit to information actually reviewed (not everything shared)
• Request they identify personnel who accessed your information

Reality check: If a major tech company requires residuals as non-negotiable and you want the partnership, you'll likely need to accept some version.

Yes, residuals clauses are generally legal and enforceable when properly drafted. However, they have limits:

Courts have upheld residuals clauses that:

• Are clearly defined and limited in scope
• Require "unaided memory" (no reference to documents)
• Prohibit intentional memorization to circumvent confidentiality
• Exclude specific categories like source code or trade secrets
• Were negotiated between sophisticated commercial parties

Potential challenges:

• Overly broad residuals that effectively eliminate all confidentiality protections
• Residuals that explicitly cover trade secrets (may conflict with DTSA)
• Clauses that don't require "unaided memory" limitation
• Situations where "residuals" were actually detailed specifications

The practical enforcement issue: Proving whether someone used "unaided memory" versus consulted notes is extremely difficult. Residuals clauses work largely through voluntary compliance and the honor system.

Key case law: Courts have generally recognized that general ideas, concepts, and know-how retained in memory are different from specific trade secrets reproduced from documents.

Even with a residuals clause, you retain significant protections:

Protections that survive residuals:

• Specific information: Exact formulas, source code, customer lists, pricing - anything requiring reference to documents
• Trade secrets: Most residuals clauses carve out trade secrets entirely
• Documents and copies: They still must return/destroy all tangible materials
• Intentional memorization: Deliberately studying to memorize specifics is prohibited
• Written reproductions: Creating documentation from memory of confidential details is typically prohibited

Practical protections beyond the clause:

• Limit what you share - don't disclose your most sensitive secrets
• Use clean rooms with restricted access for critical information
• Track exactly who accessed what information
• Get specific non-competes from their team members (where enforceable)
• Include competitor restrictions on who can access information

Bottom line: Residuals allows them to use general concepts from memory. It does NOT allow them to copy, reproduce, or reference specific confidential details.

If you must accept a residuals clause, these carve-outs are critical:

Essential carve-outs:

• Trade secrets: "This Section shall not apply to trade secrets as defined under the Defend Trade Secrets Act or applicable state law."
• Source code: "Residuals shall not include source code, object code, or any software in any form."
• Intentional memorization prohibition: "Provided that such Representative has not intentionally memorized such information for the purpose of retaining and subsequently using or disclosing it."
• No written reproduction: "The Receiving Party shall not create any notes, summaries, or other written or electronic records based on Confidential Information."

Highly recommended carve-outs:

• Customer data and personally identifiable information
• Financial information and projections
• Pricing, costs, and margins
• Unreleased product roadmaps
• Patent applications and invention disclosures

Sample language: "This Section shall NOT apply to any information that (i) constitutes a trade secret, (ii) is source code or algorithms, (iii) is customer data or personally identifiable information, or (iv) is marked or designated as 'Highly Confidential - No Residuals.'"

Technically yes - that's the point of residuals clauses. But there are important nuances:

What residuals typically permits:

• Using general concepts learned to inform their own product development
• Knowing that certain approaches work (and pursuing similar approaches)
• Applying skills and techniques developed during exposure
• Making hiring decisions based on general industry knowledge gained

What residuals does NOT permit (even for competition):

• Copying your specific implementation
• Reproducing your trade secrets from documents
• Using your customer lists to solicit your clients
• Building products based on your specific specifications

Practical reality: If a large tech company evaluates your startup, accepts residuals, and then builds a competing product, the residuals clause makes it very hard to prove they used YOUR specific information versus independent development informed by general industry knowledge.

Protective measures:

• Consider whether the relationship is worth the risk before sharing
• Document your trade secrets and development timeline thoroughly
• Share less sensitive "teaser" information first before deep dives
• Request detailed access logs of who saw what information

This is one of the most practical challenges with residuals. Here's a framework:

Clear guidance to provide employees:

• Return all materials: Don't keep any copies, notes, or records of confidential information
• Don't try to memorize: Never deliberately study information to retain it
• General vs. specific: You can use general concepts; you cannot reproduce specific details
• When in doubt, ask: If unsure whether something is "residuals," consult legal before using

Training approach:

• Explain residuals at the start of any confidential evaluation project
• Document which employees had access to what information
• Conduct brief exit interviews when projects conclude
• Create walls between evaluation teams and competing product teams

Good questions employees should ask themselves:

• "Am I remembering a general approach or a specific implementation?"
• "Could I have learned this from public sources or general experience?"
• "Would I need to look something up to get the details right?"
• "Did I deliberately try to memorize this information?"

Employee mobility after exposure to confidential information is a common concern. Here's the analysis:

Your potential liability:

• Generally, you're responsible for employees' actions during their employment
• If they breach while employed (e.g., taking documents), you may be liable
• After they leave, your liability typically ends for their future actions
• But: their employment agreement should have survived confidentiality provisions

Protective measures:

• Ensure all employees who access confidential info sign personal NDAs
• Conduct thorough exit procedures including document return
• Remind departing employees of ongoing confidentiality obligations
• Document their acknowledgment that they've returned all materials

The residuals benefit: With a residuals clause, an employee using general knowledge at a new employer is explicitly permitted. This reduces your exposure - you're not liable for them applying skills and concepts they naturally retained.

Without residuals: Every departed employee becomes a liability time bomb. They might claim residuals rights exist at common law, but the legal uncertainty creates risk for everyone.

Some NDAs attempt to impose "personnel restrictions" - here's how to handle them:

Common personnel restriction provisions:

• Clean room requirements: Employees who reviewed confidential info can't work on competing products
• Time-limited restrictions: 6-12 month cooling-off before working on competing projects
• Full restrictions: Named individuals can never work on competitive efforts

Receiving party concerns:

• These effectively create partial non-competes for employees
• Your best engineers may be the ones evaluating technology
• Could cripple your product development capacity
• May not be enforceable in California (Section 16600)

Negotiation approaches:

• Time limits: "Restrictions shall not exceed 6 months from last access"
• Scope limits: "Restrictions apply only to substantially identical products"
• Personnel limits: "No more than 3 named individuals may be subject to restrictions"
• Reject entirely: "We will implement internal ethical walls but will not agree to binding personnel restrictions"

Best practice: If you accept any restrictions, limit them to key decision-makers who led the evaluation, not everyone who might have seen a demo.

This is an important intersection. The Defend Trade Secrets Act (DTSA) provides federal trade secret protection that interacts with residuals clauses:

Key principles:

• Trade secrets can be protected regardless of NDA terms
• A residuals clause cannot waive statutory trade secret protections (most are drafted to exclude trade secrets explicitly)
• What qualifies as a "trade secret" is a legal determination, not contractual

How they interact:

• Properly drafted residuals: Carve out trade secrets, so DTSA protection is preserved
• Overly broad residuals: If residuals purports to cover trade secrets, a court might ignore that portion
• In practice: Specific information meeting trade secret criteria (secret, commercially valuable, reasonably protected) remains protected regardless

Disclosing party protection: Always include explicit trade secret carve-outs: "Nothing in this Section shall affect the Disclosing Party's rights under the Defend Trade Secrets Act, state trade secret laws, or common law trade secret protections."

Receiving party note: Even if the NDA grants residuals rights, if what you "remember" qualifies as a trade secret under DTSA analysis, using it could still be misappropriation.