In 2012 there were more than 2,600 reported incidents of data breach, more than double the number in the previous year. That figure highlights just how fast the challenge of cyber security is growing, with concomitant exponential growth in the cost of cyber breaches to businesses.

On April 23, 2013, Mayer Brown hosted “Into the Breach, Managing Cyber Security Threats in the Digital Age,” featuring keynote speakers Richard Clarke, chairman and CEO of Good Harbor Security Risk Management LLC, and Mayer Brown partner Richard Ben-Veniste, whose presentation was titled “Cyber Security Threats—What They Mean for Homeland Security and Economic Growth.” Messrs. Clarke and Ben-Veniste described a business community and a nation that—even after some high-profile and costly security breaches—remain ill-prepared to face the scope of the threat. While most of the measures companies are taking today are voluntary, they predict that those steps will become mandatory in the near future as federal, state and local governments contend with a growing challenge.

Joining our keynoters were panelists Jake Olcott of Good Harbor, Jonathan Cooperman of ACE North America, Larry Collins of Zurich Services Corporation and Mayer Brown partners Rebecca S. Eisner, Archis A. Parasharami, Richard M. Rosenfeld, Jeffrey P. Taft and Howard W. Waltzman. The panelists highlighted several key trends we are likely to see in 2013 and beyond, as well as some of the most important steps companies can take to mitigate the risk of cyber threats. Following are a few highlights.

Cyber Security: The New Frontier of Class Actions and Government Investigations

Lawsuits based on cyber security breaches are sure to be part of the next wave of class action litigation in the US. As with other types of class action, few cyber security class actions will be litigated to a judgment in favor of the plaintiffs. Still, those that survive beyond the pleadings stage could give rise to a massively expensive e-discovery process, and that potential, combined with the potential damage to a company’s reputation from the allegations themselves (whether true or not)—will place corporations under enormous pressure to settle.

Moreover, class actions by private plaintiffs are only one of the potential litigation risks raised by cyber attacks; the government is watching too. At the federal level, the Department of Justice, the Federal Trade Commission and the Securities and Exchange Commission may investigate or bring actions against companies that do not adequately prepare for cyber security breaches. State attorneys general similarly may choose to intervene, as at least two state AGs did in the aftermath of deals web site LivingSocial’s recent admission that hackers had breached its security and made off with large volumes of personal information.

To mitigate the risks posed by cyber security breaches and the potential for class action lawsuits and/or government investigations, businesses need to adopt multi-pronged risk management strategies. In addition to technology solutions and insurance, key components of such a strategy include drafting appropriate privacy policies (including disclaimers and limits in contracts), selecting alternative dispute resolution mechanisms, such as arbitration, and implementing PR strategies that can help reduce or avoid reputational harm.

The New New Disclosure Requirement: Here Comes the SEC

Corporate policies governing cyber security risk can reduce a company’s exposure to charges from either the SEC or a litigant that a company “should have known” or “should have disclosed” its cyber security risks. Companies should view upfront disclosure as a preemptive strike that can limit their future liability and prevent the SEC and others from playing the “gotcha” game. The need for disclosure has increased in light of comments from new SEC chairman Mary Jo White that the SEC’s 2011 cyber security disclosure guidance is under review. This statement, coupled with recent events, is a clear signal to the business community that the SEC plans to take disclosure very seriously and that businesses need to establish cyber security policies and procedures and reasonably evaluate their risks, or risk enforcement action and litigation in the near future.

President Obama’s Executive Order and its Effect on Business

President Obama’s February 2013 Executive Order on Cyber Security seeks to collaboratively establish risk-based cyber security standards and to expand upon the Department of Defense’s cyber-threat information-sharing program. Yet our panelists asserted that the Executive Order’s information sharing component is inadequate because the order lacks liability protection, which means that many companies will be afraid to voluntarily share information. The panelists agreed that only Congress can provide the protections necessary to make an information-sharing regime effective at reducing cyber threats. What’s more, the order doesn’t provide companies with exemptions from privacy laws such as the Electronic Communications Privacy Act that are an impediment to information sharing, and that Congress must adopt these exemptions. Thus, assuming consensus can be reached on voluntary risk-based cyber security standards, the Executive Order was a good first step, but Congressional action is essential to enhance US cyber security.

However, the banking industry has been generally supportive of the Executive Order because the order recognizes the bank regulatory agencies’ past and ongoing contributions in this area. Banks and other financial services firms have a long history of being targeted by criminal enterprises and defending themselves from physical and cyber threats. The bank regulatory agencies, the Financial Services Sector Coordinating Council and the Financial Services Information Sharing and Analysis Center have played an important role in helping banks identify threats, protect critical infrastructure and share information about cyber threats.

Cyber Vulnerabilities – Identifying Legal Risk and Approaches for Risk Mitigation

Conducting a security assessment is the best way to determine whether and how a company is protecting its most valuable information assets. A security assessment, and implementation of reasonable security measures after undertaking the assessment, also provide some defensive protection not only around security threats, but also against follow-on claims and liability. Many laws and regulations dealing with data protection require that companies use reasonable efforts to protect the security of their data, consistent with the risks associated with the type of data. A security assessment can help in making the argument that a company has indeed taken reasonable efforts to protect its information.

A security assessment often requires contracting the services of a qualified consultant who can help gather business documents and validate technical processes. However, a security assessment should be run by a company’s legal department. Lawyers, working with the consultant and the business team, can help to ensure that the findings of the assessment are carefully captured and stated. Since perfect privacy and security compliance are not possible, a company must identify remediation steps in areas where it has determined the risk/benefit ratio is the greatest. It is also important in any assessment to ensure that the written record of the assessment does not contain inaccurate statements, speculation, or recommendations that are practically difficult to implement or are commercially unreasonable to attain. In overseeing the assessment, lawyers can interpret the legal standards and assist the consultant and business teams in putting together an attainable set of security practices and policies that will better protect the company’s valuable information assets.

Monitoring Third Parties and Supply Chain Vendors

Companies need to monitor third parties and companies in their supply chain as part of any security and privacy compliance program, as both of these represent major areas of vulnerability in security and privacy compliance. For the most-critical third-party vendors, security assessments should be performed, including an assessment of protocols vendors have in place for responding to a security breach. Critical vendors should also be considered in a company’s incident-response plan.

To ensure the ability to conduct assessments of such vendors and suppliers, a company should use a contract that requires the cooperation of the third party in ongoing security assessments, audits, and incident management, including security breaches. The contract should require the vendor to remediate known security vulnerabilities identified after an assessment, audit or security incident. The vendor should be required to notify the company immediately in the event of a known or suspected security incident, and should cooperate with the company in any resulting investigations, claims and government actions. Whether to notify individuals and government authorities should be a decision made by the company with respect to its data, not by the vendor. The contract should also allocate financial responsibility for notification costs, remediation of identified security failures, follow-on costs of investigations and settlements, resulting claims from third parties, and even credit monitoring and other similar consumer response actions, such as call centers to answer questions from individuals about the incident.