Cryptomnesia, “Residuals Clauses” and Badly Drafted NDAs

Lately most of the stuff I’ve written about has been related in one way or another to cryptocurrency, so I thought it was time to take a break and write about something else.*

*The fact that Cryptomnesia starts with “crypto” is a coincidence. Mostly.

Introduction

I review a lot of confidentiality and non-disclosure agreements as part of my practice. And I do mean a LOT. So many, in fact, that I was asked to be a guinea pig in an experiment testing the resilience of lawyers’ egos after getting their butts kicked by AI software when analyzing NDAs. I even posted a free NDA template on my website because it seemed silly to charge people for a contract that is really nothing more than a written promise to keep a secret.

Even if genetic engineering isn’t (always) involved, lawyers do seem to have a tendency to make things more difficult than they need to be. For example, I have had the pleasure of actually reading an NDA (which is at its core nothing more than a written promise to keep a secret) that went on for 12 pages (I kid you not). This is the longest one I’ve ever seen, although I’m sure there are much worse out there.


But even that 12-page monstrosity was a good value compared to the most useless NDA I have ever laid my genetically engineered eyes upon. Not surprisingly (to me at least), it was due to something called a “residuals clause.” To understand the reasoning behind residuals clauses, those of you with normal human minds (the kind that have adapted to use things like logic and reason to make sense of the world) should first understand something called “cryptomnesia.”

What is “Cryptomnesia?”

Based solely on the word roots crypto (Greek for “coin covered in dung”) and amnesia (Greek for “overused plot device”), it would be entirely reasonable (but completely wrong) to conclude that Cryptomnesia means one or more of the following:

  • inability to remember one’s private keys 😳
  • inability to remember one’s trading history when filing taxes 😅
  • inability to remember one’s (alleged) authorship of the Bitcoin whitepaper in the middle of a speech** (ZING!) 🤬

**Okay, THAT was my last crypto reference. I’m absolutely certain. Mostly.

“Cryptomnesia,” besides being very hard to say without sounding like you have a speech impediment, is (properly) defined as follows:

Also known as “unintentional plagiarism,” it basically means you published someone else’s stuff as your own because you sincerely believed that you came up with the idea (even though you didn’t). To better understand how this works in the context of an NDA, consider the following hypothetical:

  1. C. Tom Nesia, a software developer, has just signed an NDA prior to interviewing with Alberta Einstein.
  2. The NDA provides that no confidential information disclosed by Alberta may be used or shared by Tom.
  3. During the interview, Alberta describes several key features of her latest project—a blockchain network powered entirely by hopium.***
  4. Unfortunately for Tom, he doesn’t get the job, but he still enjoyed learning about the Mathematically Impossible Rate of Return (MIRoR) Blockchain Network.
  5. Months later, Tom is developing his own blockchain network—powered by ennui and despair—but he is struggling to come up with a feature that makes it truly unique and marketable.
  6. He decides to take a break and check the progress on one of the “blockchain for good” projects he supports.
  7. He is disappointed to learn that it has pivoted to an online crypto casino and sugar dating service.
  8. Bookmarking the website in disgust, Tom suddenly experiences an epiphany—as if rising from the depths of the repressed joy locked away in the darkest corners of his psyche, he knows “exactly” what is missing from his Edge Lord Blockchain Network.
  9. He immediately gets to work programming in that missing feature and the next thing you know ELBN tokens are being minted at a rate of way more than is rational or justifiable for this (or any) project to have. Per second.
  10. Although it is true that the missing feature was in his memory the whole time, it wasn’t there prior to his interview with Alberta, since she described it to him as a key feature of the MIRoR Blockchain Network, which he had promised not to use or disclose when he signed the NDA.
  11. Oops.

***Hopefully by now you would have figured out that the whole “I’m not going to write about cryptocurrency” ain’t gonna happen. Mostly.

Note that although Tom clearly violated the terms of the NDA by including in his own blockchain network a feature that Alberta had shown him during a confidential interview, he didn’t ”copy” anything by taking photos or recording any audio or video during the interview. Plus, he wasn’t trying to be dishonest, because he sincerely believed that he came up with the idea himself, i.e, a textbook case of cryptomnesia.


So, let’s assume that Tom goes on to make millions of dollars and employ hundreds of edge lords (and edge ladies). Should Alberta (who due to absent-mindedness completely forgot about the MIRoR project altogether just moments after telling Tom to “hit the bricks”) be allowed to get injunctive relief (i.e., shut down Tom’s project)?

Enter the Residuals Clause

If a residuals clause had been in the NDA signed by Tom, the answer would likely be “no.” That’s because a “residuals clause” is effectively a get out of jail free card for people in Tom’s situation. Even thought he violated the NDA by using confidential information for his own benefit, a residuals clause carves out an exception if the information was general in nature (in this case a “feature” vs. source code), it came entirely from residual memory and did not involve anything recorded or copied.

Seems Fair, Right?

Maybe in this extreme cryptomnesia hypothetical it seems fair, but personally, I find all residuals clauses to be contrary to the whole purpose of an NDA, which is a written promise to keep a secret. Most NDAs already include lots of exceptions, e.g., where the law compels disclosure or where the information disclosed was already widely available. But the residuals clause goes much further, effectively acting as a hedge in case something really good turns up in the confidential information that can be memorized by the recipient.


Residuals clauses can obviously be drafted to be quite limited in scope, so they only apply to something like the cryptomnesia hypothetical given above. But even when properly drafted, I’ve always felt that they undermine the entire point of an NDA in the first place. But not all of them are properly drafted—not even close—as the following example from a real NDA I reviewed for one of my clients just a few days ago clearly demonstrates…

Nothing in this Agreement prevents Recipient from using, for any purpose and without compensating Discloser, information retained in the memory of the Recipient’s Personnel who have had access to Confidential Information.

An Attorney Who Should Be Hanging His or Her Head in Shame If They Actually Charged Their Client for This

In other words, as long as confidential information is “retained in the memory” (not otherwise defined)of anyone who works for the recipient, the recipient can use it for any purpose without violating the NDA, regardless of intent, regardless of sensitivity and regardless of how it is used. On its face, this residuals clause would allow a company to send in an employee to discuss a possible “collaboration” with a competitor, that employee could memorize important business intelligence and critically sensitive information, and then use it to put the competitor out of business. Isn’t the whole point of an NDA to prevent this exact thing from happening?

Conclusion

Almost without exception, and regardless of how carefully they are drafted, I advise my clients to refuse to sign any NDA that includes a residuals clause. This is true even when NDAs are “mutual.” On paper, it appears fine, but in practice, collaborations where an NDA is used almost always involve one party obtaining confidential information from the other party and not the other way around. So in practice, they are rarely mutual. After seeing the residuals clause mentioned above, I don’t expect my advice to my clients to be changing anytime soon.


Do you agree or disagree? Please comment below and share this with anyone whom you think might benefit from it.