ARTICLE DETAIL

April 25, 2017

Not a Trade Secret

In U.S. v Jennifer Salgado & Jenny’s Tax Service, (No. 1:16-CV-03186-SMJ, Mar. 24, 2017) the U.S. District Court for the Eastern District of Washington (the “Court”) held that a taxpayer’s client list and client identifying data were not trade secrets under Washington state law but that because the clients had a reasonable expectation of privacy that information could not be put into the record without redaction.

The Internal Revenue Service (“IRS”) alleged that Salgado, a Washington state resident, through her sole proprietorship, Jenny’s Tax Service, prepared and filed hundreds of false or fraudulent federal tax returns in violation of federal law. The U.S. brought an action seeking injunctive relief under Code Sec. 7407 (action to enjoin tax return preparers) and Code Sec. 7408 (actions to enjoin conduct related to tax shelters and reportable transactions) against Salgado that would prevent her from acting as a tax return preparer for persons other than herself.

Salgado sought a protective order from the Court limiting IRS’s ability to file her unredacted client lists and client personal identifying information into the public record because they are “a trade secret that is commercially valuable in that it is not known to competitors or the general public.” IRS opposed the motion and argued that Salgado did not demonstrate that good cause existed justifying a protective order in this case and that such an order would be unduly burdensome on IRS.

Federal Rules of Civil Procedure (“FRCP”) 5.2 provides, unless a Court orders otherwise, in an electronic or paper filing with the Court that contains an individual’s social security number (SSN), taxpayer-identification number (TIN), or birth date, or a financial-account number, a party or nonparty making the filing may include only:

  1. The last four digits of the SSN and TIN;
  2. The year of the individual’s birth; and
  3. The last four digits of the financial-account number.

FRCP 26(c) governs the issuance of protective orders in civil matters. Courts may issue “an order to protect a party or persons from annoyance, embarrassment, oppression, or undue burden or expense” for good cause shown. (FRCP 26(c)(1))

Salgado argued that neither rule provided sufficient protection because the client lists are trade secrets.

Under Washington state law, compilations of customer information may be a trade secret. Such a determination is factual in nature in accordance with Washington Court decisions. However, trade secret protection is not generally available under several circumstances.
Without much analysis, the Court agreed with IRS’s position that the information was either publicly available or protected by Rule 5.2. Accordingly, the information Salgado sought to protect was not a trade secret and her motion for a protective order was denied in that respect.

However, the Court then ordered the parties to confer and submit a joint statement for the Court’s consideration and approval, regarding redactions necessary to protect the reasonable privacy concerns of Salgado’ clients. The Court said that, while FRCP 5.2 establishes the floor regarding the redactions parties must make when filing documents in federal court, it is well within the Court’s discretion to order additional protections when necessary. The Court said it was concerned that Salgado’s clients likely and reasonably expected that, by turning to Salgado for help in filing tax returns, their information, particularly personal identifying information, would not become publicly available. The Court stated that it expected that the parties’ agreement would result in public filings with all personal identifying information redacted such that a specific client could not be recognized.

The lesson to be learned from Salgado is that while a court may not find certain information protectable as a trade secret, a court may feel that protection of private interests may require something more than is indicated in the Federal Rules of Civil Procedure. Nevertheless, state law should be consulted to determine if a trade secret actually exists.

For questions regarding issues arising in tax audits and the confidentiality of information in them contact a PK Law business and tax attorney. To contact a PK Law Corporate and Real Estate Attorney click here or a PK Law Tax Attorney click here. For additional information contact information@pklaw.com.

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