California Supreme Court Decision Provides Guidance for Identifying and Avoiding Section 1090 Conflicts in Public Contracting and Procurement

This client alert discusses an important new decision from the California Supreme Court, People v. Superior Court (2017) 3 Cal.5th 230 (Sahlolbei).  The decision addresses the standards for applying Government Code section 1090 conflict of interest prohibitions to contracts made by a public entity’s independent contractors, consultants and advisors.  Section 1090 is one of California’s governmental conflict of interest statutes.  Broadly stated, it prohibits conflicts of interest in government contracting by a public entity’s employees and officers.  Violations of section 1090 can result in substantial civil liability including restitution of all public moneys paid under the tainted contract, and if the conflict of interest is knowing and willful, then criminal liability may apply.1

Prior to the Sahlolbei decision, the California courts were split on the standards for applying section 1090 to contracts by independent contractors.  The Sahlolbei decision provides clear guidance on the following common issues arising in public contracting and procurement:

• Who comes within the scope of section 1090?
• Are corporations subject to section 1090?
• What are examples of potential section 1090 scrutiny in public works construction and procurement?
• May proof of financial interests be implied?
• When does section 1090 not apply?

The Facts of Sahlolbei.

Sahlolbei involved a criminal prosecution under section 1090.  The prosecution alleged that the CEO of a public hospital asked one of its influential surgeons to assist in recruiting physicians for the hospital medical staff.  The prosecution alleged the surgeon then recruited an anesthesiologist and profited from the resulting employment contract (through payments akin to kick-backs.)  The trial court dismissed the section 1090 charge and the court of appeal affirmed, both courts holding that criminal liability under section 1090 applied only to public employees and officers and not to independent contractors.  Both courts relied on a prior decision involving public works construction. The California Supreme Court reversed.

Key Takeaways.

The following are some key takeaways from the Sahlolbei decision:

Who Comes Within the Scope of Section 1090?  Sahlolbei stated broadly that: “independent contractors come within the scope of section 1090 when they have duties to engage in or advise on public contracting that they are expected to carry out on the government’s behalf.”  This is a new standard and a break from prior case decisions.  The practical effect of Sahlolbei is to expand the pool of independent contractors whose contracts are subject to section 1090 review.

Are Corporations Subject to Section 1090?  Yes.  Sahlolbei approves of cases applying section 1090 to corporate consultants.

What are Examples of Potential Section 1090 Liability in Public Works Construction and Procurement?  Sahlolbei discusses several example cases:

• Advisors and Program Managers.  An independent contractor who advised a school district on a bond measure for school construction, and then won a project management contract for administration of the construction program funded by the bond, would be subject to section 1090 review.2
• Designers and Planners.  A designer or planner serving a public entity as a consultant and who plans a construction project, and then acts as the contractor carrying out the project, would be subject to section 1090 review.3  Potential liability in this instance could arise from section 1090 and in some instances specific design build contracting legislation.4
• Construction Contractors.  A construction contractor or consultant who performs preconstruction services, assisting a public entity with plans, specifications and project planning, but then bids or proposes on the subsequent (and separate) construction contract, would be subject to section 1090 review.5   In these case decisions, the projects were lease-leaseback transactions where the contractor reviewed plans and specifications for the school district, but then proposed on the lease-leaseback contract, but the court’s rationale could extend this rule beyond lease-leaseback cases.6
• Service on Boards or Oversight Committees.  Service on oversight committees regarding a public works construction project, but then participating in the subsequent bidding either as a contractor or a subcontractor.7
• Management Consultants.  A waste management consultant employed by a city who recommended and received a franchise to operate the waste management system for the public entity as part of a cost reduction measure.8

Can Proof of a Financial Interests Be Implied?  Yes.  The court stated:  “Moreover, prohibited financial interests are not limited to express agreements for benefit and need not be proven by direct evidence.  Rather, forbidden interests extend to expectations of benefit by express or implied agreement and may be inferred from the circumstances.”

When Does Section 1090 Not Apply?  Finally, the Sahlolbei decision also provides some standards for when section 1090 does not apply.

• Advisors and Independent Contractors Not Involved in Public Contracting.  The court made clear that not all independent contractors are covered by section 1090:  “section 1090 liability extends only to independent contractors who can be said to have been entrusted with transacting on behalf of the government.”
• Renegotiating the Advisor/Independent Contractor’s Own Contract.  The decision identifies instances where advisors/independent contractors subject to section 1090 will be involved in the making of public contracts in which they benefit, but will not be liable because they were not acting in their official capacities.9  For example, an attorney may negotiate a fee contract with the public entity, acting in her or his own capacity, which is permitted.10  City firefighters may negotiate a contract with the city for sale of equipment they designed.11  This is distinguished, however, from changing “hats” from advisor about a project to contractor on the same project.12

Conclusion.

The Sahlolbei decision suggests the courts will find more contracts subject to section 1090 review, particularly in the case of contracts made by or with independent contractors having prior or existing relationships with a public project or procurement.  This will be an evolving set of issues for years to come.

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FOOTNOTES

1 Section 1097.

2 Reversing Christiansen.

3 3 Cal.5th at 238, approving Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, 301 (Davis); McGee v. Balfour Betty Construction, LLC (2016) 247 Cal.App.4th 235, 249 (McGee).  Also see California Taxpayers Action Network v. Taber Construction, Inc. (2017) 12 Cal.App.5th 115 (Taber) decided shortly before Sahlolbei and not mentioned in the Sahlolbei opinion.

4 Examples:  Education Code §81703(c)(2)(A)(“An architectural firm, engineering firm, construction manager, contractor, subcontractor, consultant, or individual retained by the governing board of the community college district directly or indirectly before the award of the project to assist in the planning of the project, including, but not necessarily limited to, the development criteria or preparation of the request for proposal, shall not be eligible to participate in the competition with the design-build entity or to perform work on the project as a subcontractor.”); but see Public Contract Code §22162(c) suggesting but not requiring the determination of a prohibited conflict (” The local agency shall develop guidelines for a standard organizational conflict-of-interest policy, consistent with applicable law, regarding the ability of a person or entity, that performs services for the local agency relating to the solicitation of a design-build project, to submit a proposal as a design-build entity, or to join a design-build team.”)

5 Approving Davis– and McGee.  Also see Taber.

6 Davis, supra; McGee, supra.; Taber, supra.

7 3 Cal.5th at 239, approving Stigall v. City of Taft (1962) 58 Cal.2d 565, 571 (Stigall).

8 Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1125

9 3 Cal.5th at 246.

10 3 Cal.5th at 246 (citing Campagna v. City of Sanger (1996), 42 Cal.App.4th, 533, 539-540.

11 80 Ops.Cal.Atty.Gen. 41, 41 (1997) [“[C]ity firefighters who have developed a firefighting protective device may sell the device to the city’s fire department without violating . . . section 1090 if they contract with the city solely in their private capacities.”].)

12 McGee and Davis.  Also see Taber.