Does Your Non-Disclosure Agreement Have a Residuals Clause?

By August 28, 2016Contracts
man signing a non disclosure agreement

If you don’t know the answer, you’re not reading your non-disclosure agreement (“NDA”) closely enough. By disclosing confidential information under an NDA that has a residuals clause, you may be allowing the recipient to use your confidential information to compete against you.

It used to be that residuals clauses were rare, used only by a few companies that wielded a lot of power (such as Microsoft). However, it’s now pretty common to see a residuals clause in the NDAs of small companies, too.

Residuals clauses can take different forms, but the following clause is a fairly common form that has been used by Microsoft:

Neither of us can control the incoming information the other will disclose to us in the course of working together, or what our representatives will remember, even without notes or other aids. We agree that use of information in representatives’ unaided memories in the development or deployment of our respective products or services does not create liability under this agreement or trade secret law, and we agreement to limit what we disclose to the other accordingly.

This residuals clause, which seems to make sense, could give the recipient unrestricted use of your confidential information, as long as the use based on the recipient’s unaided memory. Some residuals clauses are even more aggressive.

You should carefully review every NDA before you sign it, even if the NDA appears to contain standard boilerplate. Depending on the type of information that you intend to disclose, a residuals clause may present you with more business risk than you intend to accept.

Bob Muraski is a business attorney based in Bellingham, Washington.