Conflicts of Interest: Rules to Know Thomas D. Long NOSSAMAN LLP 2014 Legal Affairs Seminar February 23 25, 2014 Palm Springs, California MAKING IT HAPPEN.
Outline California Rules of Professional Conduct ABA Model Rules California Political Reform Act California Government Code 1090 2
CA Rules of Professional Conduct California Rule 3-310 provides: (C) A member [of the Bar] shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; (3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter. 3
CA Rule 3-310(C)(1) Informed written consent required from both clients before accepting representation of more than one client in a matter in which the interests of the clients potentially conflict Examples: Attorney represents multiple defendants in litigation 4
CA Rule 3-310(C)(2) Informed written consent required from both clients before accepting or continuing representation of more than one client in a matter in which the interests of the clients actually conflict Examples: Agency counsel represents both parties in negotiating an intergovernmental agreement Agency brings CEQA action against another agency; both agencies are represented by the same firm 5
CA Rule 3-310(C)(3) If attorney represents a client in a matter adverse to another party, and the attorney is asked by the other party to work on an unrelated matter, informed written consent is required from both clients before the attorney may accept the new client. Examples: Attorney represents public agency in public works procurements; attorney s firm represents contractors in employment matters; contractor client bids on the public agency project What happens when two state agencies have adverse positions? 6
CA Rule 3-310(E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment. 7
ABA Model Rules Rule 1.7 Conflict of Interest: Current Clients (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. 8
ABA Model Rules (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believe that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and writing. (4) each affected client gives informed consent, confirmed in 9
ABA Model Rules Rule 1.9 Duties to Former Clients (a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing. (b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client. (1) whose interests are materially adverse to that person; and (2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless the former client gives informed consent, confirmed in writing. 10
ABA Model Rules (c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter: (1) use the information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or (2) reveal information relating to the representation except as these Rules would permit or require with respect to a client. 11
Conflicts of Interest Under California Political Reform Act Enforced by the Fair Political Practices Commission (FPPC) No public official at any level of state or local government shall: Make, participate in making, or use official position to influence A governmental decision In which official has an economic interest. 12
Eight Step Analysis Under PRA FPPC s eight STEP CONFLICT OF INTEREST ANALYSIS STEP 1: Are you a public official? GC 82048: (a) "Public official" means every member, officer, employee or consultant of a state or local government agency. (b) [various exclusions apply] 13
Eight Step Analysis Under PRA STEP 2: Are you involved in a decision? Yes when acting in official capacity and exercising judgment Voting, appointing, making contract, committing agency to course of action Negotiating, advising the decision maker (written or oral advice), report, research, investigation Trying to influence own or another government agency No when actions are only clerical or manual Is execution of a contract as to form a decision? 14
Eight Step Analysis Under PRA STEP 3: Do you or an immediate family member or a business in which you are a 10% or more owner have a financial or economic interest in the decision? Spouse, domestic partner, child = immediate family Examples: Investment of more than $2,000 Employment Real property worth more than $2,000 Income source of greater than $500 Gifts exceeding $420 in a year (increases with inflation)financial effect on your finances or those of your family (>$250) 15
Eight Step Analysis Under PRA STEP 4: Is the financial or economic interest direct or indirect? (Note: Only the direct economic interests really matter.) Direct financial or economic interest if: Your investment, income source, or gift is the subject of the decision You are employed by or are an officer or partner in business that is the subject of the decision You own real property within 500 feet of the subject of the decision Any financial effect on your personal finances or those of your immediate family 16
Eight Step Analysis Under PRA STEP 5: Is the financial or economic interest material? A direct interest in investments, income source, or gift is material A direct interest in employment is material A direct interest in real estate is material If the financial effect on your personal finances is $250 or more, in a calendar year (not indexed for inflation), then material 17
Eight Step Analysis Under PRA STEP 6: Is it reasonably foreseeable that there will be a material financial or economic effect? One penny rule applies to decisions involving direct sources of income STEP 7: Does the economic interest effect apply to the public generally or to the individual? For income, gifts, or personal financial gain: over 5,000 people or 10% of the individuals in the jurisdiction STEP 8: Is participation legally required? Rule of necessity: allows public body with a duty to act to do so despite a conflict of interest. 18
Resolving Conflicts Under PRA WHAT TO DO IF YOU HAVE A CONFLICT OF INTEREST UNDER THE PRA Publicly declare conflict Refrain from participating in the decision Leave the room Note: These measures are not available to avoid a Government Code 1090 problem 19
Effect of Violation of PRA Individual Can be prosecuted for a misdemeanor and fined greater of $10,000 or three times amount official profited Can be sued in court by district attorney or FPPC for up to 3 times amount official profited Can be administratively fined by FPPC up to $5,000 per violation 20
Government Code 1090 Stats. 1851, ch. 136, 1, p. 522 General Rules A public official or employee may not make a contract in which he or she is financially interested. Applies to virtually all state and local officers, employees, & multimember bodies, whether elected or appointed. No Disclosure and Disqualification by a Board Member Can Save the Contract When the prohibition applies, the agency may not enter into the contract in question if only one member of the agency governing board has a financial interest in the contract. The financially interested board member is conclusively presumed to be involved in making his or her agency s contracts regardless of actually participating in the making of the contract. 21
GC 1090 (cont.) THE RULE AS APPLIED TO A MULTI- MEMBER BODY Members of bodies with contracting power are conclusively presumed to participate in the making of all contracts under the body s jurisdiction. If a Member of a multi-member body with contracting power has a financial interest in a contract, under Gov. Code 1090 the contract cannot be made even if the member has disqualified himself or herself from participating in the contract. 22
GC 1090 (cont.) MAKING THE CONTRACT The prohibition against making a contract in which an official has an economic interest applies to: Preliminary discussion; Negotiations; Reasoning; Planning and solicitation of bids; Voting on the contract itself; Participating in a decision to modify, extend, or renegotiate a contract. As long as the contract is not executed before the financial interest is discovered, no violation occurs. Note: Does not apply to approving permits, licenses or regulations. 23
GC 1090 (cont.) FINANCIAL INTEREST 1963 amendment limited statute to financial interests No definition of financial interest broadly interpreted in case law. 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 GC 1090 will be found. Financial interests include (non-exhaustive): Creditor-debtor relationship (i.e. official loans money to company, which then tries to do business with agency); Community and separate property of spouse; Primary shareholder in contracting party. 24
GC 1090 (cont.) EXCEPTIONS If an official has a remote interest, the official must disclose and disqualify from any participation and permit remaining members to decide all issues. Remote Interests under GC 1091 include: Official (with 10% or greater ownership interest in law firm, stock brokerage firm, insurance firm, or real estate firm that represents the contracting party) will not receive compensation as a result of the contract; Official is a supplier of goods or services to contracting party; Official is a landlord or tenant of contracting party; Official is an officer or employee of a non-profit corporation that is a contracting party. 25
GC 1090 (cont.) Non-interests under Gov. Code 1091.5 may require disclosure but do not require disqualification. Non-interests include: Official (with less than 10% ownership interest in law firm, stock brokerage firm, insurance firm, or real estate firm that represents the contracting party) will not receive compensation as a result of the contract; Ownership of 3% or less of the shares of a corporation, and total annual income received from corporation stock dividends is less than 5% of overall annual income from all sources, and all other income received from corporation is less than 5% of overall annual income; Rule of necessity allows decisions to be made despite conflicts of interest. 26
GC 1090 (cont.) PENALTIES AND REMEDIES Contract entered into in violation of GC 1090 is void. Official must disgorge any profit gained from contract. Criminal and civil consequences: felony and fines Parties not returned to pre-contract status. Agency may keep gain. 27
Some Cases and Opinions (GC 1090) 1. Can city attorney engage a law firm to represent the city in litigation, if contract provides for contingency fee to be shared with the city attorney? 2. Can city engage attorney as bond counsel if attorney represents the largest landowner in an improvement district? 3. Can city attorney create joint powers agencies which then contract for legal services with a firm in which the defendant had a financial interest? 4. Can county enter into a contract with a business owned by a supervisor s son, where the supervisor holds a promissory note secured by the business? 5. Can city enter into development agreement where city council member s spouse is a partner in a law firm that represents the developer on matters unrelated to the contract? 6. Can city staff member participate in negotiating a development agreement where her spouse is employed by a consulting firm that provides outreach services to developer on a yearly retainer? 7. Can city council enter into a contract with a law firm to represent the city in litigation at no cost to the city, if a city councilmember is a partner in the firm? 28
Some Cases and Opinions (GC 1090) 1. Campagna v. City of Sanger (1996) 42 Cal.App.4 th 533. City attorney engaged law firm to represent the city in litigation, with a contingency fee shared with the city attorney. Section 1090 violated because [city attorney] was acting in his official capacity as city attorney... when he negotiated the agreement with [second firm] regarding the amount he would receive if [city agreed to retain the services of the [second firm]. 29
Some Cases and Opinions (GC 1090) 2. 46 Ops.Atty.Gen. 75, 76 (1965): Attorney who represented the largest landowner in an improvement district does not violate section 1090 when the district subsequently engages the attorney as bond counsel for a bond financing by the improvement district and where the legal fees are paid from the assessments. The attorney s financial interest was indirect and thus not a violation of section 1090. 30
Some Cases and Opinions (GC 1090) 3. People v. Gnass (2002) 101 Cal.App.4th 1271. Defendant, as a city attorney, created joint powers agencies which contracted for legal services with a firm in which the defendant had a financial interest. As city attorney, Gnass simply provided advice and did not have authority to bind the city to any contracts. At the time the joint powers agencies were created, they had not yet formally procured legal services. The Court concluded that Gnass was acting in his official capacity because Gnass was counsel for both the city and the joint powers agencies. The Court also held that the City Attorney made the agreements in question within the meaning of Section 1090. An official (or a public employee) may be convicted of a violation no matter whether he actually participated personally in the execution of the questioned contract, if it is established that he had the opportunity to, and did influence execution directly or indirectly to promote his personal interests. In fact, no criminal sanctions were imposed since the grand jury had not been given proper instructions on willfulness. [see next slide for more recent case] 31
Some Cases and Opinions (GC 1090) People v. Christiansen, 13 DJDAR 6976 (2013): court of appeal in Los Angeles (2 nd Appellate District) reversed a criminal conviction of a former high level employee of the Beverly Hills School District, based on contracts she had "steered," though not to herself or family, after she became a consultant. The court held that "at least for purposes of criminal liability under section 1090, an independent contractor is not an employee. [Gnass case was in 5 th District.] 32
Some Cases and Opinions (GC 1090) 4. Moody v. Shuffleton (1928) 203 Cal. 100. Section 1090 violated by contract with printing business owned by supervisor s son, where supervisor had indirect interest in the business through a secured loan. 33
Some Cases and Opinions (GC 1090) 5. 78 Ops.Cal.Atty.Gen. 230 (1995). Councilmember has financial interest in a development agreement where the council member s spouse was a partner in a law firm that represented the developer on unrelated matters. [Although may be considered non-interest or remote if disclosed.] 34
Some Cases and Opinions (GC 1090) 6. 85 Ops.Cal.Atty.Gen. 34 (2002). Staff member of city may not participate in negotiating development agreement where her spouse is employed by a consulting firm that provides outreach services to developer on a yearly retainer, even though spouse has no ownership interest in firm, will not work on the city s project, and his income will not be affected by the outcome. 35
Some Cases and Opinions (GC 1090) 7. 86 Ops.Cal.Atty.Gen. 138 (2003). City may not enter into contract for law firm to represent the city in litigation at no expense to the city if city councilmember is a partner in the firm. City s interests may diverge from law firm, including settlement incentives. Indirect economic gain to law firm from success in litigation would result in increased value of councilmember s interest in the firm. 36
Recent Legislation AB 1090 signed into law on October 8, 2013 gave the FPPC authority to advise on and bring enforcement actions related to GC 1090, concurrent with AG authority. County Counsels take the view that advice from FPPC will not immunize an individual. Individual cannot rely on advice given by agency attorney no matter how erroneous, and sue for malpractice as a matter of public policy (Chapman v. Superior Court (2005) 130 Cal App.4th 261). 37
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