Tech Transfer eNews Blog

The pros and cons of a residual clause in an NDA

By David Schwartz
Published: January 21st, 2015

In his recent blog post, patent attorney Larry Schroepfer points out a certain clause that is being used increasingly in nondisclosure agreements: the “residuals” clause. This clause stipulates that if in the process of working with the other party’s intellectual property, the receiving party learns from that IP and makes some general development, it will have the right to use that development despite the nondisclosure and nonuse provisions of the confidentiality agreement.

“The argument is that we all learn by doing,” Schoepfer writes, “and people cannot and should not be forced to try to ‘segment’ their brains when it comes to what they know.”

Schoepfer uses his own career as an analogy, citing all the years of various, scattered knowledge he gained about contract drafting and structure. “I have no idea when I first decided to order the sections of a license agreement the way I do,” he writes. “If these insights had been made under a nondisclosure agreement, I don’t know how I could filter them out from future reuse.”

Despite his sympathy for the clause’s intentions, Schoepfer argues that is has some serious flaws, particularly in the area of technology and technical information, where the line between a general residual development and a specific development related to the IP becomes blurred. Here are five ways to safely navigate an agreement with a residual clause.

  1. Residuals should never, ever include rights under patents or copyrights. “It’s one thing to say that the other party can use your confidential information if it’s ‘general enough,'” writes Schoepfer. “It’s something else entirely to grant a patent or copyright license.”
  2. Residuals should only include information from someone’s “unaided memory.” Anyone using residual information should not be allowed to use or refer to any written or electronic documentation, including his or her own notes, e-mails or anything else.
  3. Include a clause prohibiting key personnel involved in the residual from working on a similar or competitive project. Either establish a defined period of time or prohibit competition indefinitely. “This may work with a mid- to -large-sized company, but small developers will likely resist it, basically because they don’t have people to spare,” says Schoepfer.
  4. Consider prohibiting the entire developer company from working on similar or competitive projects. If you decide to, treat the company like its personnel and prohibit it for a specific period of time or indefinitely. If the period is reasonably short, as in a year or less, the developer would be more likely to agree.
  5. If the technology is too sensitive, you may have no choice but to refuse to use them for the project. If the technology at hand is what your company’s whole business platform is based on, and the developer routinely does similar projects either for itself or your competitors, it may be best to back away from an agreement that includes a residual clause, Schoepfer says.

Source: Licensing Lawyer Blog

Posted under: Tech Transfer e-News

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