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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Virginia Federal Court Dismisses Trade Secrets Misappropriation Claim Based on Power Brokering and Tax Expertise

Posted in Restrictive Covenants, Trade Secrets

On May 30, 2013, a federal judge in Virginia dismissed a tax consultant’s trade secrets misappropriation claim against its telecomm customers, ruling that the consultant’s alleged relationships with tax authorities, tax-law ‘accounting system,’ and its ability to negotiate property tax discounts do not constitute statutory trade secrets.  Cablecom Tax Services, Inc. v. Shenandoah Telecomms. Co. et al., No. 5:12-cv-69-MFU-JGW (W.D. Va. 5/30/13).

The court gave the consultant another chance to allege a misappropriation claim, but made clear that its already-pled trade secrets are not protectable.

Cablecom Tax Services, d/b/a Property Tax Accounting,[1] allegedly signed agreements with Shenandoah Valley telecomm companies (“Shentel”) under which Cablecom would prepare Shentel’s property and sales tax returns for the 2011 tax year.  Cablecom prepared those returns and obtained substantial tax discounts for Shentel, it alleged, but Shentel refused to pay.  In addition to alleging breach of contract, quantum meruit, and fraud claims, Cablecom alleged the following trade secrets that were protectable under the Virginia Uniform Trade Secrets Act:

Its ‘valuable relationships with taxing authorities,…accounting system uniquely suited to the telecommunications industry that is generally accepted by the various taxing authorities, and … knowledge, formulas and processes for the compilation and use of information provided and to be provided by [Cablecom’s] customers in reducing [their] ad valorem and sales tax liability.’

Tax officials, tax laws and regulations, and applying those laws and regs to customers’ financial data could not be trade secrets, the court held.  All those alleged secrets were public information, or ‘reasonably ascertainable’ by legitimate means.  Though the court noted that the application of tax laws to Shentel’s business may require some accounting expertise, and successfully negotiating tax discounts may necessitate familiarity with tax officials, it nevertheless found that such expertise and familiarity come ‘nowhere close’ to protectable trade secrets.

This case appears to be different from those social-networking cases we previously blogged on, including Twitter and MySpace cases, which indicate that an accountholder’s online friendships or relationships could constitute a protectable proprietary asset.  Those cases involve the private sector, where customer lists and relationships are among a business’s most valuable proprietary assets, and legally so.  This case, on the other hand, involves alleged public sector contacts.  Although not explicitly stated, the court may have premised its decision on the fact that private companies cannot legally monetize their relationships with the government.  Such could be tantamount to, or at least approach, improper political influence. 

We will check the court’s docket in the near future to determine the status of Cablecom’s re-attempted trade secrets claim, if any.


[1]There appears to be a significant issue over who is the real party in interest.  The court dismissed the amended complaint because it was unclear from the pertinent record whether ‘Property Tax Accounting’ was a proper assumed name of ‘Cablecom Tax Services, Inc.,’ and in turn, whether Cablecom was a properly organized and/or maintained corporate entity.  Like its currently dismissed trade secrets claim, plaintiff has 14 days to set the record straight on that issue.