UnIntellectual Property (UnIP): Trade Secret for a Relationship

The United States District Court for the Western District of Virginia has ruled on a Rule 12(b)(6) motion to dismiss concerning an alleged trade secret.  The Plaintiff sued Defendant following a consulting relationship involving the preparation of and negotiation of taxes.  In particular, Defendant, Shentel, engaged Plaintiff, Property Tax Accounting “to prepare current or amended property tax returns and to negotiate values with tax authorities” for the various Shentel entities for the 2011 tax year.  Plaintiff sued after asserting that Defendant obtained substantial property tax reductions for them without payment, in breach of the consulting agreement.  Plaintiff also asserts other claims, including theft of trade secrets.
Plaintiff’s alleged trade secret is that its “has developed valuable relationships with taxing authorities, has developed an accounting system uniquely suited to the telecommunications industry that is generally accepted by the various taxing authorities, and has developed knowledge, formulas and processes for the compilation and use of information provided and to be provided by PTA’s customers in reducing PTA’s customer’s ad valorem and sales tax liability.”  The Court, applying the Virginia Uniform Trade Secrets Act, agreed to dismiss the alleged trade secret misappropriation count.  The Court first recognized that a relationship can not be the basis for a trade secret, since it is not information that derives independent economic value from not being generally known and which could be the subject of reasonable efforts to maintain secrecy.  As it relates to the alleged “accounting system” used by Plaintiff, no allegations in the Complaint demonstrated that any such system contained something other than the application of property tax laws and regulations to the telecommunications industry, which are not trade secret.
Further, the Court recognized that a trade secret, regardless of novelty, must be kept secret and not of public knowledge or general knowledge in the business.  Applying these principles, the Court, in the face of Plaintiff’s allegations that Defendant took financial information and recategorized it “to more accurately reflect true values, maximizing exemptions and by negotiating directly with the tax authorities to obtain compromises,” was unmoved.  In fact, the Court stated: “application of tax laws and regulations to a customer’s financial information and negotiating property tax discounts with tax officials does not constitute a trade secret. The property tax laws and regulations and identities of local tax officials are not secrets and are reasonably ascertainable by proper means. The application of tax laws and regulations to Shentel’s business may indeed involve accounting expertise and knowledge, and the negotiation of lower tax rates may indeed require some familiarity and contacts with local tax authorities. Nonetheless, the possession of knowledge about tax laws and regulations applicable to a telecommunications company and negotiation of lower tax rates for that company comes nowhere close to meeting the statutory requirements for a trade secret.”
The Court’s direct conclusions are most informative, and include:
1. Preparing tax returns and negotiating with tax authorities does not meet the statutory definition of a trade secret under Virginia law.
2. Property tax statutes and regulations are not secrets.
3. The identity of tax officials is not a secret.
4. Shentel’s financial information is not a secret to Shentel.
Ultimately, the Court held that “If indeed there is some secret method or process at issue here, it certainly has not been sufficiently pled.”  That statement seems to indicate that if there were some method or process, it may be a trade secret.  However, without identification of any such method or process (software or otherwise), no trade secret exists.
I, once again, wonder whether the trade secret misappropriation claim was added to the Complaint for shock effect, when the real issue seems to relate to a contract only.  Nevertheless, the existence of a relationship with an entity in furtherance of one’s job does not appear to qualify as a trade secret.

Cablecom Tax Servs., Inc. v. Shenandoah Telecommunications Co., 5:12CV069, 2013 WL 2382969 (W.D. Va. May 30, 2013).


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