The pros and cons of a mutual nondisclosure agreement

Entering into a business relationship with an individual or a company often raises concerns about the disclosure of information that each party would like to keep private. A mutual nondisclosure agreement (NDA) can help alleviate these concerns, but such an agreement needs to be carefully considered.

Overview of nondisclosure agreements

A nondisclosure agreement—also sometimes referred to as a confidentiality agreement, secrecy agreement, or proprietary information agreement—can be used between a business entity and an individual, between individuals, or between business entities. In some cases, especially in joint business ventures, three or more parties may be involved.

A standard nondisclosure agreement is used when one party gives a second party access to information that the first wants to keep private. In many cases, the second party is often an employee or independent contractor who needs to access that private information to perform some service for the first party.

If only one party will be disclosing such information, a unilateral nondisclosure agreement is used. If both parties will be disclosing private information to each other, they use a mutual nondisclosure agreement.

The information to be kept secret can include assets such as:

• trade secrets
• intellectual property
• customer and prospect lists and information
• product formulas and specifications
• information about products in development
• computer code
• marketing and business plans
• financial information
• contractual agreements with other companies
• any other type of proprietary information

Relationship to other types of agreements

A mutual NDA is often accompanied by one or more other types of agreements, such as the following:

• Noncompete agreement. This document or contract clause, which prohibits one party from competing with another party, is most often used to prevent employees from obtaining confidential information from the employer and using it to go into a competing business.
• Noncircumvention agreement. Such a document limits one party to using information obtained from another party only for the purposes of the business relationship between them. For example, brokers commonly use noncircumvention agreements to prevent their clients from cutting them out and dealing directly with each other.

The above may be separate agreements or combined into a single document.

Advantages of a mutual nondisclosure agreement

Obviously, the part of a mutual NDA that limits the other party is intended to protect confidential information. The mutual aspect—protecting both parties—also allows the parties to move ahead in pursuing a common goal, without either having to fear that confidential information will be disclosed to third parties. Such an agreement can offer protection during the early phase of project planning, as well as during the operation of the endeavor.

A mutual NDA might also be useful in a situation where a party is reluctant to sign a one-sided unilateral agreement. Even if the information sharing is one-sided, a mutual agreement may be perceived as more equitable. Making the agreement mutual can also be an advantage if there is a possibility the relationship will eventually require mutual sharing of information.

Disadvantages of a mutual nondisclosure agreement

One of the main difficulties with a mutual NDA is its complexity, which can make the document rather lengthy. The exact terms of a mutual NDA are determined by the nature of the business, the types of confidential information involved, and the nature of the relationship of the parties. Special care also needs to be taken if the relationship between the parties involves the sale of securities, such as in a merger, since complex state and federal securities laws may need to be considered.

Being a party to a mutual nondisclosure agreement can also inhibit or limit your company's ability to further its own independent endeavors, engage in other joint business ventures, or obtain financing. For any of these matters, you should carefully review the mutual NDA to be sure that none of the related confidential information is used by your company in its independent operations or divulged to a third party. This can include the disclosure of financial information that may be required from potential investors and lenders.

Preparation of a mutual nondisclosure agreement is complex and should be done with the assistance of an attorney or download a mutual non-disclosure agreement template.