Michael Judin | Partner | Judin Combrinck Inc | mail me |
A Non-Disclosure Agreement (NDA) creates a protected space in which parties can exchange commercially sensitive information. Yet a few apparently innocuous words dealing with information retained in “unaided memory” may materially reduce that protection. In extreme cases, they may undermine the commercial purpose of the NDA itself.
An article by Wyrick Robbins published on JD Supra draws attention to the often-overlooked “residuals” clause. It highlights the risks and benefits of this provision. The article explains that the provision may protect a recipient’s personnel from having to “unlearn” general knowledge, concepts, skills or ideas. However, an excessively broad clause may weaken confidentiality obligations and place trade-secret protection at risk.
A residuals clause generally allows recipients to use, and sometimes disclose, confidential information retained in their employees’ or representatives’ unaided memory. The commercial justification is understandable because human beings cannot neatly erase everything they have learned during a project. This may include a negotiation, due-diligence exercise, joint venture, technology project or prospective acquisition.
When memory becomes a risk
The problem is that memory does not recognise the legal boundaries contained in an NDA. A person may remember a general business principle. However, they may also remember a pricing model, product roadmap, customer requirement, manufacturing process or algorithm. They may also remember a negotiating strategy or commercially valuable solution developed by the disclosing party.
For the recipient, a carefully drafted residuals clause can provide reasonable protection against claims. Such claims may arise because employees have gained experience or improved their general skills. Without such protection, recipients may fear that future development resembling something discussed during the project could expose them to allegations. Specifically, they could face allegations of misuse.
For the disclosing party, however, the clause can become a contractual permission slip to use the information the NDA protects. The danger is particularly acute when the clause contains no restriction on competitive use or exclusion for highly sensitive information. Furthermore, the clause may contain no prohibition against deliberately memorising information before returning or destroying documents.
What the law protects
The South African position makes careful drafting especially important. Our courts recognise the protection of confidential information and trade secrets through contractual undertakings and restraint proceedings. They also recognise protection through the common law relating to unlawful competition. However, the protectability of particular information remains a factual enquiry.
South African courts have identified several characteristics when considering whether information warrants protection. These include whether the information is useful in a trade or industry and whether it is genuinely secret. Courts also consider whether the information is publicly available or known only to a restricted group. Furthermore, they consider whether it possesses economic value. Merely placing the word “confidential” on every document does not necessarily convert ordinary knowledge into a protectable trade secret. Nor does it necessarily convert public information into a protectable trade secret.
A broadly drafted residuals clause may therefore create a serious evidential and contractual difficulty. The information may be commercially valuable and genuinely confidential. Even so, the recipient may argue that its subsequent use was expressly authorised. It may argue that the information was remembered rather than copied from a document.
Defining unaided memory
The parties should never accept the expression “unaided memory” without definition. They should address whether notes, presentations, emails, recordings, electronic repositories or discussions with colleagues have assisted memory. Furthermore, they should determine who bears the burden of establishing that the information was retained without assistance.
The clause should also distinguish between general skills and the disclosing party’s proprietary information. An employee’s increased commercial experience is fundamentally different from remembering a customer list, confidential formula or source code. Similarly, it differs from remembering a security credential, strategic plan, supplier arrangement or pricing structure.
Where parties cannot avoid a residuals clause, the disclosing party should consider excluding intentional memorisation and competitive use. It should also consider excluding customer and supplier information, financial models, source code, technical specifications, algorithms and inventions. Furthermore, it should exclude other information identified as exceptionally sensitive. The clause should also state expressly that it grants no licence or other right under any intellectual-property right. These rights include any patent, copyright, design or trademark.
Avoiding conflicting protections
A residuals clause should not override restrictions on solicitation, circumvention or competition contained elsewhere in the agreement. Parties should read the NDA as an integrated commercial instrument. A residuals exception that conflicts with the agreement’s principal obligations may generate uncertainty when urgent enforcement is required.
Personal information requires separate attention. Where confidential material includes personal information, the parties remain subject to the Protection of Personal Information Act. The Act regulates lawful and compatible further processing. It also requires appropriate safeguards to protect the integrity and confidentiality of personal information. An NDA cannot simply authorise conduct that would otherwise be inconsistent with those statutory obligations.
South African organisations should therefore classify information before disclosure and not rely entirely on a standard-form NDA. Highly sensitive information may require staged disclosure, limited access, clean teams, secure data rooms and document marking. Organisations should also keep records showing precisely what they provided, to whom they provided it and for what permitted purpose.
A substantive commercial risk
The lesson is not that parties should automatically reject every residuals clause. Instead, they should treat it as a substantive allocation of commercial risk. They should negotiate it with the same care as limitations of liability, intellectual-property ownership and restraint provisions.
An NDA is only as strong as its exceptions. Before agreeing that another party may use what its people remember, a South African business should consider the consequences. It should ask whether it is comfortable allowing them to remember and commercially exploit the information that matters most.
This article provides general information and does not constitute legal advice. Parties should consider each residuals clause in the context of the proposed transaction and the nature of the information. They should also consider their respective legal and commercial risks.
