California recently expanded its pay-to-play law to prohibit a company seeking a license, permit, or non-competitively bid contract, along with certain of the company's affiliates, agents, and employees, from contributing more than $250 to a local elected official of the agency in question. This will include city councils and county boards of supervisors, and their committees. The new law extends the contribution ban from three to 12 months after a final award is made and requires broader disclosure from a company and its agents. The new law goes into effect January 1, 2023.
What is the current state of the law?
Under current law, a party or participant in an agency proceeding involving a license, permit, or non-competitively bid contract is prohibited from contributing more than $250 to an officer of that agency during the proceeding and for three months after a final decision is rendered. Additionally, an officer of that agency is prohibited from participating in a decision if he or she received a contribution exceeding $250 from a party or participant in the proceeding. However, because an "agency" is defined to exclude the legislature, state constitutional officers, city councils, and county boards of supervisors, the law has a narrow effect and tends to apply only when an elected official is appointed to serve on a local board or planning commission. The law also requires parties to disclose contributions made in the preceding 12 months to an officer of that agency.
How has the law changed?
There are three important changes.
First, the law repeals the exemption for local agencies whose members are directly elected by the voters. This change alone captures a broad swath of local proceedings before city councils and county boards, ranging from zoning variances and development permits to cable television franchises and professional license revocations.
Second, contributions will be prohibited for a longer period after a decision is rendered. Parties and participants to an agency proceeding will be prohibited from contributing more than $250 to an officer of that agency—and agency officers will be prohibited from accepting, soliciting, or directing such contributions—during the proceeding and for 12 months after a decision is rendered.
Third, the new law requires parties involved in a covered proceeding to disclose contributions of more than $250 made in the preceding 12 months in all federal, state, and local elections held in California —not just contributions made to agency officers.
Who does the law apply to?
Unchanged from existing law, the pay-to-play law applies to proceedings for a "license, permit, or other entitlement for use," which means all business, professional trade, and land use licenses, permits, and other entitlements for use, including entitlements for land use, franchises, and certain contracts. Competitively bid, labor, and personal employment contracts are not covered.
A covered "party" includes the entity that files an application for, or is the subject of, a proceeding involving a license, permit, or non-competitively bid contract. A covered "participant" is a person who actively supports or opposes a particular decision in a proceeding and who has a financial interest in the decision. When a privately held corporation is a party or participant in a proceeding, the majority shareholder of the corporation is also subject to the above prohibition and disclosure requirements.
In addition, a party's or principal's contributions are aggregated with those made by their "agents," meaning individuals or firms that represent a party or participant in a proceeding. If an individual agent is an employee or member of a law, architectural, engineering, or consulting firm, both the entity and the individual are considered agents.
What are the implications for a company's compliance program?
Violators are subject to fines and reputational harm. Accordingly, companies that seek to do or currently do business in California should track contributions made by the company and those made by covered individuals. Compliance protocols should be modified to account for changes in the new law. Covered employees and agents should be informed of the potential implications of making a prohibited personal contribution.
In addition to this state law covering local elected officials, many California cities and counties have adopted their own pay-to-play laws that may impose additional contribution restrictions and disclosure requirements. For example, earlier this year Los Angeles moved to ban contributions by developers and property owners. Pay-to-play laws are often a trap for the unwary, with serious consequences ranging from fines to disqualified bids, voided contracts, and reputational damage.
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