2021-01-06
In the modern era, it is very easy to find templates of legal contracts on the internet. Many small law firms or inexperienced individuals may build their contracts off of existing templates. However, these contracts often lead to legal disputes and challenges when they are not written properly. To properly prevent such disputes requires not only language proficiency but also legal proficiency. In this article, we discuss the differences between confidential information and proprietary information. We also explain residual clauses and their applicability.
(1) “Confidential Information” vs. “Proprietary Information”
Although often mistakenly used interchangeably, “confidential information” and “proprietary information” have their differences.
An NDA allows the disclosing and receiving party to disclose and receive “confidential information”, respectively.
If both parties disclose and receive confidential information under a single contract, it is a bilateral (mutual) NDA, whereas if only one party discloses, and the other only receives confidential information, the NDA is unilateral.
In either case, the receiving party’s key obligations are twofold: (a) it cannot disclose such confidential information without disclosing party’s approval; and (b) it can only use such confidential information for purposes permitted under the NDA.
However, an NDA sometimes uses the term “confidential information” or the term “proprietary information” interchangeably to define the information to be disclosed and protected. The two terms, although similar, are different. Confidential information is information that has been kept confidential by the disclosing party (so that it could also be a third party’s confidential information). Proprietary information dictates not only secrecy, but also economic values that have been reasonably protected by their owner. Unless otherwise specified, the term “confidential information” does not purport to have ownership. But the term “proprietary information” almost always declares ownership/property rights.
If the term “proprietary information” is used in the contract, it could give rise to trade secret misappropriation cause of action against the receiving party and any third party using such information without disclosing party’s approval. The major difference between the two lies in the consequences of an NDA violation when the receiving party breaches the permitted use clause under the NDA.
(2) Residual clause
Below is an example of a residual clause in an NDA:
“The receiving party may use and disclose “residuals,” and “residuals” means ideas, concepts, know how, in non-tangible form retained in the unaided memory of persons who have had access to confidential information not intentionally memorized for the purpose of maintaining and subsequently using or disclosing it.”
The key of the residual clause basically allows the receiving party to use and disclose confidential information if it is something: (a) non-tangible, and (b) has come into the memory of the person receiving such information who did not intentionally memorize it.
In other words, if any confidential information is conveyed pursuant to an NDA, and the receiving party did not deliberately memorize such information, it is not a violation even if the receiving party subsequently discloses it.
This is a way out for the receiving party who is accused of NDA violation by disclosing confidential information to any third party without the approval of the disclosing party. If the NDA is a mutual NDA, it protects both parties’ interests. But if it is a unilateral NDA, it helps the receiving party reduce exposures significantly in cases of disclosing confidential information unintentionally retained in the memory.
In the case of verbal communications, the disclosing party must immediately follow them up with written statements confirming conversation’s confidentiality protected by NDA in order to keep them confidential. Otherwise, the receiving party may have a case to rebut the disclosing party’s complaint for disclosure violations.
Residual clauses are generally viewed as beneficial for receiving parties and in some situations can be abused by them. This is why it is commonly advised for the disclosing party not to allow them. However, the receiving party might want to negotiate it to be included in an NDA. Therefore, the disclosing party must pay special attention to the residual clause and have it limited as much as possible as it provides an exception to the receiving party’s duty of confidentiality.
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