Residuals clause
A residuals clause lets a party freely use general ideas and know-how its people remember from the other side’s confidential information.
What it means
A residuals clause is a carve-out from a confidentiality obligation. It lets the recipient use “residuals,” meaning ideas, concepts, techniques and know-how retained in the unaided memory of people who saw the confidential information. The reasoning is that people cannot erase what they learn, and companies do not want every future project challenged as a leak.
Suppose a small software company shares its architecture with a much larger partner while exploring an integration. With a residuals clause, the partner’s engineers could later build a similar feature from what they remember, as long as they do not go back to the documents or memorize them on purpose. The small company may then find misuse hard to prove, because the question becomes what was in someone’s head.
Residuals clauses are common in technology deals and are usually proposed by large companies that receive a lot of outside information. They strongly favor the recipient. Better-balanced versions exclude any license to patents and copyrights, exclude specific material like source code, customer lists and pricing, and define “unaided memory” so it does not cover deliberate memorization.
What to watch for
- Check whether the contract has a residuals clause at all, since it can be buried in a confidentiality section or NDA.
- Look at how “unaided memory” is defined and whether intentional memorization is excluded.
- Confirm the clause does not grant any license under patents, copyrights or other IP.
- See whether categories such as source code, financial data, customer lists and trade secrets are excluded from residuals.
- Consider whether the flow of information is one-sided, since even a mutual residuals clause mostly benefits whichever party receives more.
Example clause
Nothing in this Agreement restricts either party from using Residuals for any purpose, where “Residuals” means general ideas, concepts and know-how retained in the unaided memory of its personnel who had access to Confidential Information. This section does not grant any license under the other party’s patents or copyrights and does not apply to source code or customer data.
Each side can reuse general ideas its people remember from the deal, but not the other side’s patents, copyrighted material, code or customer data.