Managing Confidential Relationships in Intellectual Property Transactions: Use Restrictions, Residual Knowledge Clauses, and Trade Secrets

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Confidential information is a very important and frequently misunderstood area of software license and development relationships. Often, the concept of confidential information, which is intended to protect pre-existing sensitive or proprietary information of one party to a cooperative relationship, is confused with intellectual property ownership, which is intended to protect products and processes which may be jointly developed during a future or defined cooperative relationship. This confusion turns agreement negotiation into a tedious process. The use of terminology such as "residuals clauses" and "use restrictions" generates both confusion and frustration during negotiations. Many parties misunderstand, and erroneously believe the terms are to govern intellectual property ownership concerns, when they actually are supposed to govern confidential communications between developer and customer. Traditionally, concepts of intellectual property ownership and confidential information are viewed as polar opposites by developers and customers, making inclusion of either in an agreement a difficult proposition generally-and even more so when one side to a negotiation misunderstands what the clauses are supposed to govern. When understood properly, however, the two clauses can work together to meet the confidentiality expectations of the parties in a relationship involving intellectual property.

Customers often request that a software developer not use any information obtained during its project on other initiatives, especially on competing customers' projects.1 In practice, this use restriction can be mistakenly applied to confidential information when the intended restriction is for the intellectual property developed under the agreement. Because the customer's confidential information is generally protected under the confidentiality relationship, any further attempt to define a restriction may be confusing and repetitive.2 The confidentiality provisions of a standard agreement prohibit disclosure of a customer's existing confidential information to any third party.3 A use restriction, on the other hand, prohibits a developer from using the information or knowledge obtained during a project, depending on the scope of the restriction, for other projects. The distinction between the confidential relationship and the intellectual property ownership must govern this phase of negotiations. A prohibition against the use of knowledge based on confidential information will eventually bottle-neck a developer's processes and retard progress. Since developers base their custom development work on references to a customer's existing confidential information, even if they return the confidential information at the end of the project, they retain certain knowledge that may be based in part on the client's confidential information and that cannot be removed from their memory. A restriction on the use of this retained knowledge would unfairly limit what projects and customers a developer could work on, and with, in the future.

Below are some samples5 of use restrictions. Sample (1) is a use restriction on confidential information, sample (2) is a use restriction on confidential information and any general knowledge obtained via the relationship,6 and sample (3) is a use restriction on intellectual property:

(1) Each Party may disclose Confidential Information to the other during the course of performing services under this agreement and any applicable Statement of Work. Each Party agrees to (a) hold in strict confidence all Confidential Information of the other Party, (b) use such Confidential Information solely to perform or to exercise its rights under this Agreement, and (c) not to transfer, display, convey or otherwise disclose or make available all or any part of such Confidential Information to any third party. Each Party shall take all measures necessary to protect against the disclosure or use of the Confidential Information as it takes to protect its own proprietary or confidential information (but in any case no less than reasonable measures). …