Government Code Section 1090, Prohibiting Conflicts of Interest, Is Now Even More of a Hazard For The Unwary

California Government Code Section 1090 (“Section 1090”) – which prohibits public officials and public employees from “making” public contracts in which they have a financial interest – is notoriously vague, broad, and malleable. The California Legislature recently aggravated those troublesome qualities by expanding Section 1090 to capture not just the public officials and employees in question, but the co-workers or third parties who assist them. For the unwary, the consequence can be heavy fines and even criminal convictions.

Section 1090 provides that California’s elected and appointed public officials and public employees may not be “financially interested” in “any contract made by them in their official capacity.” California courts have interpreted these terms broadly, making it dangerously easy to violate the statute without even knowing it. First, “making” a public contract doesn’t just mean proposing or voting on it. A public official or public employee who participates in discussions, planning, or negotiations surrounding a contract may be found to have “made” it.

Second, courts define “financial interest” very broadly to encompass both direct and indirect benefits to the public official or employee. Though Section 1090 has a series of exceptions, they are complex, vaguely written, and widely misunderstood.

Third, and most troublingly, Section 1090 does not require bad intent for a conviction or a fine. A public official, public agency, or employee may violate the statute if they act knowingly – that is, knowing about their financial interest and knowing what they are doing in connection with the contract – even if they don’t realize that their conduct is prohibited. In fact, because of that low general intent requirement, California courts have rejected the defense of “advice of counsel” or that they obtained prior approval from an attorney. In other words, a California official or employee might violate Section 1090 even if the public entity they work for, and its attorneys, told them that their conduct was lawful and not a violation of Section1090.

Section 1090 has potentially catastrophic consequences. A court may find that a contract formed in violation of Section 1090 is void, disrupting public business and depriving the contracting party of the benefits of the contract. Moreover, District Attorneys across California vigorously prosecute Section 1090 violations as felonies, carrying potential jail time and personal and financial ruin.

Because Section 1090 is already such a dangerous trap for the unwary, it is alarming that the California Legislature chose to expand it. Effective January 1, 2015, Senate Bill 952 added aiding and abetting liability to the statute, prohibiting any individual from aiding or abetting, in other words, assisting a public official or employee in violating the statute. The Legislature took action after a California Court of Appeal, in an unpublished decision, ruled that Section 1090 did not carry aiding and abetting liability.

This newly revised section 1090 substantially expands the number of people at risk under Section 1090’s broad and flexible terms. For instance, now a public official’s colleagues — such as fellow city Council members, city attorneys, and legal counsel — could violate Section 1090 if they promote or vote upon a public contract knowing that their colleague has a financial interest in it. Similarly, private individuals may be liable for their role in a contract “made” by a public official. A private company in which a public official has a financial interest could conceivably be criminally liable if the public official unlawfully participates in a public contract with that company.

Potential aiders and abettors are in a somewhat better position than the conflicted official or employee. Under California law, prosecutors must prove that an aider and abettor knew that the perpetrator intended to commit the crime and intended to assist the person in committing the crime. Though California courts have offered conflicting explanations of the aiding and abetting intent requirement, under any definition, aiders and abettors must have some sort of bad intent, and can’t be prosecuted for stumbling unknowingly into a conflict.

Even with that restriction, the newly revised Section 1090 broadens the conflict of interest risks to public employees, public officials, and and private entities that contract with public entities. The best way to manage this risk is to consult an attorney familiar with section 1090, and to have that attorney prepare an effective training program on conflict of interest rules with well-crafted compliance programs.

Ken White

Ken White is a founding partner of Brown White & Osborn LLP. He focuses on criminal defense and civil litigation, and particularly on white collar crime and First Amendment issues. He is a contributor to the Brown White & Osborn LLP blog.
Ken White