Government Liability Update

Conflict-of-Interest Statute Did Not Prevent Independent Contractor from Participating in Both Preconstruction Services and Construction

In California Taxpayers Network v. Taber Construction, Inc., published November 27, 2019, the First District Court of Appeal, Division 2 affirmed summary judgment in favor of the defendant contractor in a lawsuit brought under Government Code section 1090.  A school district intended to hire a firm to complete a project to modernize the HVAC for multiple schools.  The project would be performed in two stages.  In the first stage, the firm would enter into a preconstruction services agreement to work with district staff, the program manager, and the architect to provide a guaranteed maximum price for the project.  In the second stage, the district would enter into a lease/leaseback agreement with the contractor.  After the contractor entered into the preconstruction services agreement and then the lease/leaseback agreement, the taxpayers group alleged that the contractor had violated section 1090 because its agreements in the first stage precluded it from entering into the contract in the second stage.

The court of appeal ruled that the trial court properly rejected that interpretation of section 1090.  An independent contractor may violate section 1090, but only if it was entrusted with acting on behalf of the government.  For instance, a person who was hired as an officer or employee with the responsibility of contracting on behalf of an entity and then rehired as an independent contractor with the same responsibilities would be subject to section 1090.  But participation in the preconstruction services agreement phase did not preclude the contractor from entering into the lease/leaseback agreement in the second phase.  The contractor was not hired to engage in or advise on public contracting on behalf of the school district.  The district did not hire the contractor to choose a firm to perform the second phase contract; it hired the contractor to perform both phases.  That did not violate section 1090.

Conflict-Of-Interest Statute and Competitive-Bidding Statutes Apply to Personal Services Contracts between Public Entities and Independent Contractors

In Strategic Concepts, LLC v. Beverly Hills Unified School District, published May 10, 2018, the Second District Court of Appeal, Division 6 reversed a judgment, entered after jury trial, that awarded the plaintiff LLC millions in damages for breach of contract. A district employee who administered the planning, construction, and maintenance of the District's school facilities persuaded District officials to change her position from employee to consultant.  She entered into a contract with the District under which her duties remained the same, but her $113,000 salary was replaced by a $130 per hour rate with a maximum compensation of $170,000 per year.  The maximum was not enforced, and the LLC she formed was paid $1.3 million per year in two consecutive years.  The contract was replaced by another one with no limit on compensation.  She pushed through a bond measure that named her company as a consultant, with no other bids taken.  The District then took the position that the contract was void under Government Code section 1090, which forbids conflicts of interest.  The LLC's founder was prosecuted for a criminal violation of section 1090 and found guilty, but her conviction was reversed on appeal, with the court ruling that for purposes of criminal law section 1090 does not apply to independent contractors.  The LLC and its founder sued the District.  The District cross-complained, asserting section 1090 and violation of the competitive-bidding statutes at Government Code section 4525 et seq.  The trial court granted nonsuit on the section 1090 claim, concluding the statute did not apply.  The founder withdrew as plaintiff, leaving the LLC.  The court instructed the jury that section 1090 did not apply.

The appellate court concluded that section 1090 did apply.  In People v. Superior Court (Sahlobei) (2017) 3 Cal.5th 230, the California Supreme Court held that the term "employees" in section 1090 included independent contractors with duties similar to public employees.  The trial court therefore erred in granting nonsuit on the section 1090 claim.  The trial court also failed to give the District's requested instruction on the competitive bidding statutes.  That was also error.  Finally, because the contract with the LLC included a termination-for-convenience clause, if the LLC can prove breach of contract on remand, its damages are limited to compensation for services performed and expenses incurred to the date of termination, lost profits for 120 days after termination, and the equivalent of three months' payment.

Taxpayer Status Gives Plaintiffs Standing to Assert Conflict of Interest Challenge to Public Entity Transaction

In San Diegans for Open Government v. Public Facilities Financing Authority of the City of San Diego, published November 9, 2017, the Fourth District Court of Appeal, Div. 1 reversed dismissal of the plaintiff organization's action challenging municipal ordinance authorizing issuance of bonds to refinance the defendant authority and defendant city's obligations concerning building of a baseball park. The plaintiff organization alleged that it is a nonprofit taxpayers association and that at least one member is a resident of the defendant city.  It alleged that one or more members of the financing team that participated in preparing the bonds had a financial interest in the bonds' sale, giving rise to a conflict of interest under Government Code section 1090.  Government Code section 1092 prescribes that a contract made in violation of section 1090 may be avoided at the instance of "any party" except the officer interested in the contract.  The trial court dismissed the action for lack of standing, ruling that the plaintiff was not a party to the contract and so could not bring a section 1092 action.

The appellate court disagreed.  In light of the broad deterrent purpose of section 1090, intended to prevent contracts that violate the statute regardless of the subjective intent of those who entered into them, the court interpreted the term "any party" was interpreted to mean any litigant with an interest in the contract sufficient to confer standing.  That includes taxpayers of the municipality that entered into the transaction.  The court disagreed with the holding in San Bernardino County v. Superior Court (2015) 239 Cal.App.4th 679 that taxpayer status is insufficient to confer standing.  The result in San Bernardino County was distinguishable because the contract in the case was validated by a court judgment before the challenge took place, and so could not be avoided.

City Councilmembers' Vote on a City Contract Is Not Protected Activity under the Anti-SLAPP Statute

In City of Montebello v. Vasquez, published May 30, 2014, the Second District Court of Appeal, Division 1, affirmed denial of a special motion to strike under the Anti-SLAPP statute, Code of Civil  Procedure section 425.16, brought by city council members and a city official in response to a lawsuit filed by the city plaintiff seeking declaratory relief for alleged violations of Government Code section 1090 (prohibiting city officers and employees from having a financial interest in contracts they make in their official capacity).  The action arose out of the defendants' approval of a city contract granting a company an exclusive right to provide commercial waste hauling services.  The city alleged that the defendants voted to approve the contract with the expectation that the company would contribute to their present or future election campaigns.  The defendants filed the Anti-SLAPP motion on the grounds that they were being sued for protected activity, and that the city could ot establish a probability of prevailing on the merits.

The appellate court rejected the city's argument that its lawsuit was exempt from Anti-SLAPP because the public enforcement exemption under the statute applied.  Acknowledging a split in authority on the issue, the court sided with the authority that the statute applies only to enforcement actions brought in the name of the state.  But the court concluded that the challenged activity, committing the defendants' legislative power to the approval of a city contract, was not protected speech within the meaning of the Anti-SLAPP statute.  The vote did not implicate the defendants' right to free speech or convey any symbolic message.  Holding otherwise would apply the Anti-SLAPP suit to any challenge to any legislative decision.  The same applied to the city official defendant who negotiated the contract.  The court noted that it did not hold that a governmental act may never constitute protected speech.

Lawsuits Alleging Intentional Misconduct by Public Officials Are Subject to the Government Claims Act

In Gong v. City of Rosemead, published May 20, 2014, the Second District Court of Appeal, Division Five, affirmed dismissal after demurrer of a lawsuit against a city for the alleged intentional misconduct of the city's former mayor.  The plaintiff, a developer, alleged that the mayor extracted thousands of dollars in "loans" from the developer without repayment, retaliated against her by preventing approval of her project when she refused to pay more and refused his sexual overtures, assaulted her, and threatened her life.  The basis for the demurrer was that the timely claims for damages that the plaintiff submitted concerned only delays on and failure to approve the development project.  They did not fairly reflect the allegations of intentional misconduct that formed the basis for the lawsuit.

The plaintiff argued that Government Code section 815.3 exempts from the Government Claims Act lawsuits alleging intentional misconduct by elected officials.  The court rejected this interpretation.  It ruled that the statute merely requires that plaintiffs look first to an elected official defendant found liable for intentional misconduct to satisfy the judgment against the official, and only afterward look to the entity for additional compensation.  Lawsuits alleging intentional misconduct are subject to the Government Claims Act's procedural requirements and immunities.  The court also ruled that the plaintiff's lawsuit against the public entity for promissory estoppel in regard to the development failed, because Government Code section 818.4 immunizes public entities from liability regarding discretionary permitting decisions.

Neither Statute Nor Common Law Creates a Cause of Action for Damages arising out of Local Legislators' Conflicts of Interest

In All Towing Services LLC v. City of Orange, published October 22, 2013, the Fourth District Court of Appeal, Division Three, affirmed summary judgment in favor of a city and its city council members in a lawsuit brought by a towing company that was not awarded a city contract.  The towing company alleged that two councilmembers had conflicts of interest because they received campaign contributions of $250 or more from other bidders in an earlier election cycle.  The towing company alleged that under the Political Reform Act of 1974 (Gov. Code, section 810000 et seq.), these contributions amounted to a prohibited per se financial interest in the awarding of the contract.  The company also alleged that the councilmembers and city violated a general "common law conflict of interest" prohibition, giving rise to damages.

The appellate court ruled that the campaign contributions did not create a conflict of interest under the PRA.  It criticized dictum otherwise in another appellate decision, Breakzone Billiards v. City of Torrance (2000) 81 Cal.App.4th 1205, as incompletely reasoned and contrary to the statutory language.  The PRA expressly excludes from the definition of "financial interest" the receipt of campaign contributions.  

The appellate court also rejected the concept of a common law cause of action for damages based on conflict of interest.  Neither the PRA nor Government Code section 1090 et seq (which provides that public contracts in which public officials are interested are void, and that offending officials may be subject to criminal penalties and barred from office) support a cause of action for damages.  Any such cause of action should be created by the legislature if it is necessary.