Residuals clauses in NDAs: what they mean when AI is involved

What is a residuals clause in an NDA?#

A residuals clause is an NDA provision that lets the receiving party use general knowledge, ideas and techniques its personnel retain in unaided memory after seeing the other side's confidential information. It exists because people cannot unlearn what they read, and technology companies wanted their engineers free to keep working without a confidentiality claim following every idea.

The clause turns on the phrase unaided memory, meaning information remembered without intentionally memorizing it for later use and without referring back to the documents. Information that qualifies is called residuals, and the receiving party may use it for any purpose, often expressly including the development of competing products.

Most versions keep some limits. They grant no license under patents or copyrights, they do not permit disclosing the source of the information or specific figures, and some exclude categories such as source code, financial information or personal data.

A sample residuals clause, read phrase by phrase#

The illustrative clause below shows the common structure. It is a drafting example for discussion, not recommended language.

Illustrative clause: Recipient may use for any purpose the Residuals resulting from access to Discloser's Confidential Information. Residuals means information in non-tangible form retained in the unaided memory of Recipient's Representatives who had access to the Confidential Information. Memory is unaided if the person has not intentionally memorized the information for the purpose of retaining it and does not refer to any record of it. This section grants no license under Discloser's patents or copyrights and does not permit disclosure of the source of the Residuals.

Why AI makes residuals clauses riskier for data suppliers#

AI makes residuals clauses riskier because operational records are valuable precisely as information, and a trained model keeps patterns from that information without keeping a document. A buyer's engineers who examine evaluation samples also form judgments about structure, field definitions and edge cases that a residuals clause may free them to reuse.

Most residuals clauses refer to the memory of individuals, and many lawyers read them as limited to people. Even so, the drafting rarely says so, and Representatives is sometimes defined very broadly. Ambiguity is the risk: whether a model's retained patterns count as residuals is a dispute no supplier wants to have.

There is also a trade secret angle. Under the Defend Trade Secrets Act, information is a trade secret only if its owner has taken reasonable measures to keep it secret, and federal guidance lists confidentiality agreements and need-to-know access among those measures. Signing away use restrictions before sharing detailed records can make that showing harder, which is why counsel often resist residuals clauses around anything that resembles a trade secret.

Strike, narrow or exclude: three negotiating positions#

The residuals clause AI question usually ends in one of three positions, and data suppliers should open with the first.

An AI exclusion can be short. Illustrative wording: Residuals do not include any information stored, encoded or retained in any software, machine learning model, model weights, embeddings, vector index, dataset or other automated system, and do not include any data, samples or records provided under this Agreement.

Checklist: reviewing an NDA before sharing data samples#

Review the NDA as if the samples were the final dataset, because for confidentiality purposes they often are. A short list catches most problems.

• 1Search the draft for residuals, unaided memory, general knowledge and retained in memory; the language sometimes sits inside a section titled Exceptions.
• 2Check whether Representatives includes affiliates, contractors, consultants or non-human systems.
• 3Confirm that samples and evaluation data are Confidential Information whether or not they are marked.
• 4Add a use restriction: evaluation only, with no training, tuning or retention in any model or index.
• 5Require deletion of samples and anything derived from them at the end of evaluation, with written confirmation.
• 6Make sure confidentiality for data outlasts the evaluation and any license negotiation that follows.
• 7Add precedence language so a later license agreement and the NDA do not contradict each other.

Residuals in your own client NDAs cut the other way#

Residuals clauses in your existing client NDAs do not give you rights to license client information. Some companies assume that a residuals clause in an NDA with a client lets them reuse what their team learned on the engagement. That reading rarely holds, because residuals clauses protect individual know-how, not the transfer of client records to a third party.

When client NDAs come up in a rights review, the real questions are whether the records you want to license contain the client's confidential information at all and, if they do, whether it can be removed. A residuals clause is not a route around either question.

Illustrative: a software company redlines a buyer's standard NDA#

Illustrative: a fictional B2B software company with years of Jira issues, GitHub pull requests and Zendesk tickets is asked to share a small evaluation sample with a prospective buyer. The buyer sends its standard mutual NDA, which includes a residuals clause covering its Representatives, defined to include affiliates and service providers.

The company's general counsel strikes the clause. The buyer's counsel replies that the template is used across many vendors and proposes a narrow version instead. The parties settle on residuals limited to named individuals, a carve-out for all data and samples, an express exclusion for any model, embedding or index, and deletion of the sample with written confirmation after evaluation. Only then is the sample shared.

How SourceX treats confidentiality before data moves#

SourceX keeps the initial fit check to metadata, so no records are exposed while confidentiality terms are still being negotiated. When a buyer needs samples, they move only after the supplier approves the terms that govern them, in line with the Approval step of the SourceX five-step transaction.

Permitted use, including evaluation-only limits and deletion duties, is recorded in the SourceX Evidence Packet, so the supplier and the buyer work from the same written record of what samples may be used for.