A Study Concludes Mentioning “Trade Secrets” in Form 10-K Leads to More Cyber Breaches

screen-shot-2012-11-01-at-8-08-46-amA recently-published study* concluded that companies that mention the existence of trade secrets in their publicly filed Form 10-K disclosures are 30% more likely to become victims of cyber attacks. Among those companies, the probability of a cyber attack is even higher for younger firms, firms with fewer employees, and firms operating in less concentrated industries.

Considering that trade secrets consist of all forms and types of “financial, business, scientific, technical, economic, or engineering information” and, along with other types of intellectual property, may constitute more than 80% of a company’s value, their theft can severely damage the company’s value or even bring its demise.

The study analyzed a total of 39,992 10-Ks from about 7,500 companies. Of those, 12,542 mentioned trade secrets, and 591 became victims of a cyber breach.  The authors searched the companies’ Form 10-K disclosures for words such as “trade secrets” and “trade secrecy” and then analyzed the frequency of cyber breaches of such companies with those whose Form 10-K disclosures did not mention such words.  Those who mentioned the key phrases often did so in the context of listing what types of intellectual property they had in their portfolio and what measures they were taking to protect their trade secrets.  

According to the study, companies feel safe mentioning “trade secrets” in their public filings without revealing the nature of such trade secrets and, often, discuss the protection measures they take to protect this intellectual property, such as non-disclosure agreements with employees. However, according to the authors, even mentioning the existence of trade secrets increased the probability of a cyber attack by 30%. 

BOTTOM LINETrade secrets only have value as long as they stay secret, so once they come into a competitor’s hands or become publicly available, their value is often destroyed.  In light of the study, the companies may want to omit mentioning trade secrets in their public filings and press releases and reserve the discussion of their trade secrets protection measures for the confidential correspondence with their shareholders. 

*The study was done by Michael Ettredge and Yijun Li of the University of Kansas School of Business, and Feng Guo of the Iowa State University College of Business.

Leiza co-chairs Trade Secrets and Non-Competes Disputes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation.  She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.

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