Residual Information

I was floored when I read this account from Josh Koppelman. Josh talks about how Best Buy mistreated one of its portfolio companies in the most egregious way. Fortunately the company – or at least, the plaintiffs – prevailed.

I’ve always thought that people and companies don’t knowingly and willfully misappropriate, i.e., steal. That a company would do this (rather clumsily) was the eye-opening part to me.

We often speak to founders about confidentiality. It usually comes within the context of pitching investors or speaking to big companies without an non-disclosure agreement (NDA). And when to speak to them, what to talk about, etc. My view was that companies and individuals generally don’t act nefariously. And over all, you should be more open than not if you think it added to the discourse.

But the bigger risk was “educating the market” – giving people information or other insights inadvertently. That is, the people who get sensitive information may accidentally misuse it without intentionally doing so. There’s no nefarious intent – they just use it without knowing where they got it or who told them.

This happens all the time, I bet. When you have lots of meetings with a lot of information flow and brainstorming, it’s not unusual to not only not remember where you got a particular insight but to actually mistake it for your own. There are obviously huge gray areas of intent and motive here but hopefully you get the picture.

In legal terms, this concept is called “Residual Information.” It’s a typical carve-out in non-disclosure agreements: recipients of confidential information aren’t liable if they use the confidential information inadvertently and without remembering where they got it. This is obviously an exception that could swallow the whole rule. Thus it’s generally heavily negotiated.

I still think (possibly naively) that the “residual information” risk is the main risk. And that these incidents are fairly isolated. But it’s eye-opening to hear when stuff like this happens.

(By the way, it’s an unbelievable move of First Round Capital and NEA to continue funding this lawsuit. They effectively dug into their own pockets to do this.)