Protecting trade secrets has always been a critical priority for businesses. Still, the recently enacted cybersecurity disclosure rules from the U.S. Securities and Exchange Commission (SEC) add new layers of complexity. These regulations, which mandate the disclosure of material cybersecurity incidents, are more than just a compliance requirement—they highlight a critical intersection between cybersecurity and trade secret risk management.
The SEC's Cybersecurity Disclosure Rule: A Catalyst for Change
The SEC's new rule, effective December 18, 2023, demands that public companies disclose any material cybersecurity incident within four business days of the incident's determination of materiality. These regulations call for transparency, not only about incidents themselves but also about the processes companies have in place to manage cybersecurity risks and threats.
What does this mean for trade secret protection? Trade secrets — especially those considered "crown jewels" — are often the backbone of a company's competitive advantage. As cyber threats become increasingly advanced, businesses must understand that managing trade secret risks extends beyond intellectual property concerns and is now also a critical cybersecurity issue.
Why Trade Secrets Should Be Top of Mind
The new SEC requirements require companies to evaluate what constitutes a "material" breach. The compromise of high-value trade secrets could easily fit this definition. A company's inability to safeguard these secrets could lead to severe financial, operational, and reputational damage. The loss of trade secret rights — whether through cyberattacks or internal leaks — could trigger mandatory disclosures, undermining these secrets' competitive edge.
This situation highlights the importance of aligning trade secret protection with cybersecurity efforts. Companies must clearly understand their valuable intellectual assets and take "reasonable measures" to protect them. The challenge here is identifying and valuing these trade secrets and demonstrating that robust steps were taken to secure them, mainly when material breaches occur.
The Role of 8-K Filings in Trade Secret Protection
A vital aspect of the SEC's rule is the 8-K filing requirement. Public companies must file a disclosure within four business days if a material cybersecurity incident occurs. But what if that incident involves trade secrets? The answer is nuanced.
The SEC defines materiality as the potential for damage to a company's reputation or competitiveness. Trade secrets, by their nature, often provide a unique competitive advantage. If those secrets are compromised, companies could face serious challenges, not just from competitors but also in complying with SEC regulations. The disclosure of such incidents via 8-K filings could raise awareness among potential threat actors, exposing companies to further risks.
A Call for Proactive Trade Secret Risk Management
The SEC's new rules push companies to integrate trade secret risk management into their broader cybersecurity frameworks. This rule means identifying your trade secrets, evaluating their potential impact on your business if compromised, and establishing robust processes for protecting them.
Companies must move beyond the outdated notion that disclosing trade secrets or their value is risky. Instead, they need to adopt a proactive approach to trade secret protection integrated with their cybersecurity policies and meet the demands of the SEC's new rules.
In light of these changes, businesses should start paying closer attention to their trade secret asset risk management practices, breaking down silos between cybersecurity and intellectual property management. This proactive stance could help businesses avoid reputational damage and the legal risks associated with non-compliance.
The Bottom Line: Trade Secrets in the Crosshairs of Cybersecurity
As businesses grapple with the SEC's cybersecurity disclosure rule, the need for vigilant trade secret protection has never been more urgent. His approach is not only a cyber issue but about intellectual property and its financial advantages.
Businesses must strengthen their trade secret protection protocols because they must notify the public of any material violations. This phase entails determining which trade secrets are the most crucial, ranking them according to importance, and ensuring their security.
Since trade secrets are often a company's most valuable assets, effective risk management is a prudent business practice essential to survival in the current legal environment.
To learn more about the strategies companies should adopt, check out our previous blogs, "Trade Secrets and Confidential Information: The Overlooked IP Assets" and "What Are the Risks of Skipping a Trade Secret Audit?" These articles explore the foundational aspects of trade secret management and explain why a proactive audit can save businesses from severe long-term repercussions.
In conclusion, the SEC's cybersecurity disclosure rules compel businesses to rethink their trade secret protection strategies. The risks of failing to act are too significant—not only in compliance but also in safeguarding the assets that make companies competitive.
