Confidentiality (Non-Disclosure) Agreements can be an important agreement between parties who have something to keep secret. They should, not however, be taken lightly. Careless drafting can render them unenforceable when they’re needed;  and when used in the wrong situation, they can become a hindrance to an otherwise positive business relationship.

When Are Nondisclosure Agreements Appropriate?

Perhaps the most important consideration about nondisclosure agreements, or NDA’s, is to know when you actually need one.  Simply, an NDA is needed when both (a) there is a need to keep information confidential, and (b) that need outweighs other potential considerations.   For instance, when discussing a start-up idea to potential investors, some commenters argue that expecting a potential investor or partner to sign a confidentiality agreement is at best an annoyance, and at worst a potential liability to the investor.  Most seasoned investors (the best kind) would likely decline to sign the agreement and be repelled enough to reject your idea before even hearing it.  While some entrepreneurs with a start-up idea might want to protect their million-dollar idea from theft, some commenters argue that the chance of idea theft is so low, that the need for secrecy does not outweigh the other considerations, i.e. the need to get deals done.

Additionally, a nondisclosure agreement is not necessary when the information is likely to be already, or soon-to-be in public knowledge, or when an an NDA might actually hinder how well one party can do its job. For instance in 2008, Apple dropped the nondisclosure agreement it included in its contracts for third-party developers of iPhone apps. Developers claimed that the NDA prohibited so much communication that developers were unsure if they could even talk to each other about the developing interface. Because of the barrier to product development that the NDA caused, it was in Apple’s best interest to just not even have an NDA.

Of course, there are many times when having an NDA in place is a sound decision. The classic example is the employer/employee relationship where the employer wants to protect certain information from dissemination outside of the workplace. NDA’s are also appropriate between companies that are sharing information as a part of their business relationship when there are trade secrets involved or when dealing with other sensitive information like technology, biotechnical information, or telecommunication issues.

The important thing to remember is that an NDA is appropriate when a need to keep something secret outweighs other potential considerations such as harm to potential business relationships and impediments to business success.

If you have decided you need an NDA, check out What Should Be in a Non-Disclosure Agreement?