California's Contract-Oriented Conflict of Interest Provision

Yesterday's blog post discussed the law giving California's Fair Political Practices Commission (FPPC) authority over §1090 of the state code, which deals with contract-related conflicts of interest and applies to both local and state officials. Knowing little about this section, which stands outside the state's ethics code (known as the Political Reform Act), I did a little research into it. It's an interesting provision that has received some interesting interpretations. Here is §1090:

Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.

No Contract Where There's a Conflict
The language that stands out is "by any body or board of which they are members." This refers to the making of contracts. But one wonders how this language is applied. According to the relevant section of an ethics training course on the Attorney General's website, "If a member of a multi-member body with contracting power has a financial interest in a contract, section 1090 generally provides that the contract cannot be made even if the member has disqualified himself or herself from actually participating in the contract."

At first blush, this seems ridiculous. If an interested council member has withdrawn from participation, why shouldn't the rest of a city council go ahead and deal with the contract matter? And if the entire council has to withdraw, why should the interested member have to withdraw individually?

But when you think about it more, it can be a problem for a body to become involved in the approval of a contract where a member has a financial interest. One, if they approve the contract, it can be seen as favoring their colleague; and if the conflcted official is in the minority party or faction, rejecting the contract can be seen as punishing an opponent.

Two, the members are placed in a conflicted position, because it is hard for someone to reject a colleague, even when another contractor may be preferable. And when the colleague is an opponent, it is hard to decide between hurting an opponent that provides the best services and doing what is best for the community.

Three, when multiple members have financial interests in contracts that are approved by the body, it can look like there is an understanding that the members will help each other, possibly at the public's expense and certainly with the public's money. In fact, such an understanding might actually exist.

Thus, at second blush, it is surprising that it is not common for a body with a conflicted member to let another body or office handle the matter instead. And when the official or an immediate family member or business is involved, it is best that, as in California, no contract can be made at all. Officials should not be doing business with their agency or, if they are high-level officials, with their government.

The Definition of "Contract"
The training materials state that "contract" has been interpreted to include not only formal contracts, but also oral contracts and contracts made outside the formal processes. "Contract" also includes grants.

A 2012 essay on §1090 by attorney Grover Trask says that "contract" also includes development agreements, subdivision improvement agreements, the payment of spousal expenses, and civil service appointments.

I believe that it is unfair to government officials to have the word "contract" interpreted so broadly. Grants are not usually considered contracts. They are generally not treated as contracts, do not go through the same processes, and are not dealt with by the same individuals and bodies. Section 1090 should be changed to make it more clear what is included.

The Definition of "Financial Interest"
Equally problematic is the definition of "financial interest." It has been very broadly defined by court decisions. According to the ethics training materials, "courts have continually reiterated that no matter how twisted and winding the trail may be, if the connection between the financial interest of the official and the contract can be made, a violation of section 1090 will be found."

This language is derived from a 1934 California Supreme Court opinion, People v. Deysher, 2 Cal.2d 141, 146: “However devious and winding the chain may be which connects the officer with the forbidden contract, if it can be followed and the connection made, the contract is void.”

According to the ethics training materials, financial interests have often been defined in terms of relationships. The relationships include:

• Attorney, agent or broker of a contracting party;
• Employer or employee of a contracting party;
  
• Supplier of services or goods to a contracting party;
• Landlord or tenant of a contracting party; and
• Officer or employee of a nonprofit corporation that is a contracting party.

"Financial interest" has also been interpreted to include the community property and separate property interests of an official’s spouse.

The unusual entries in this list are supplier and tenant. There's a good argument to be made for including a supply relationship, although in some cases it might be so minimal as to not require withdrawal (there does appear to be a waiver process for "remote interest exceptions," which will hopefully be done by the FPPC and include de minimis violations). But if an official pays a fair market rent for an apartment or office, there is no reason this relationship alone should require withdrawal. Large landlords have no real relationship with their tenants, but they often seek benefits from a local government, especially with respect to development projects and housing subsidies.

Again, it would be best to define "financial interest" in §1090, so that officials are given clearer guidance. It should especially be made clear that spousal interests are included.

The Definition of Participation
The ethics training materials include a good definition of participation:

An official participates in the making of a contract if the official is involved with its preparation at any stage in the process. The contract-making process begins at the time the idea for the contract is conceived and continues through the actual execution of the contract. That means that planning, determining the scope of the contract, drafting plans and specifications, setting contract terms, evaluating applicants, and negotiating are all included.

This too should be added to §1090.

Two Serious Limitations of §1090
As §1090 has been interpreted, there is no violation when the contract is not executed. That is, if the official's attempt to use her position to get a contract for herself or for someone with whom she has a special relationship is unsuccessful, she's off the hook. This is unusual and, I think, undesirable. An official's success or failure to misuse her office should not be relevant to whether or not she has violated an ethics provision.

Consider this scenario. The law firm that represents a council member's business is seeking to represent a city agency. The official knows that the council majority prefers another law firm, which employs the council president's brother (this is not a violation of §1090). So the official tells his company's law firm that he will try his best to get it the contract, knowing that he will fail, but that his attempt will likely get his business a discount for legal services. In any event, the attempt will undermine public trust, because it will appear that he is trying to use his position to give his company's law firm preferential treatment. And yet there is no violation, because the council president's brother will win the contract instead.

This scenario shows two serious limitations of §1090.

Enforcement
Possibly the most problematic aspect of §1090 is its enforcement. It's great news that the FPPC will now have authority to not only provide advice, which is essential to such a complex rule, but also to enforce the rule. In the past it has been enforced by district attorneys and the state's Attorney General through the criminal justice system. A violation of §1090 is a felony.

I don't know if this means the end of criminal enforcement, but I do hope it does. But even if this is so, the penalties will be, as the ethics training materials call them, "harsh." Any contract made in violation of §1090 is void. In addition, "the government can get its money back without having to restore any of the benefits received under the contract. The fact that the contract is fair, or even highly advantageous to the government, is irrelevant."

This isn't all. A person found to have violated §1090 is also forever disqualified from holding any public office in California.

Application of Enforcement Rules to a Real-Life Scenario
Today's New York Times reported that when he was a council member, a New York City mayoral candidate's wife was given a job by a hospital in his district. He successfully advocated for a grant to the hospital of $5.7 million.

Assuming the facts are true, this situation, had it occurred in California, would clearly be a violation of §1090. A court could order that the mayoral candidate pay the city up to $5.7 million, and if he were elected mayor before being found in violation, he would have to leave office and never serve again in the state. He could also be found to have committed a felony, and be fined and even serve time in prison.

This seems unduly harsh.

Robert Wechsler
Director of Research-Retired, City Ethics

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