Government Conflict of Interest Rules: The Underdiscussed Threat

Episode Summary

If you hold a government position and you also work for a private company, you may be a “dual-hatted” employee that is exposed to federal, state and local government conflict-of-interest rules. In this episode of “The Lobby Bar,” hosts Charlie Ricciardelli and Tyler Rosen unpack a variety of topics surrounding these rules, including recusal requirements, lobbying prohibitions and the states with the most restrictive and complex rules. They also provide an outlook on why companies should be preclearing employees prior to hiring them, to ensure no conflict of interest issues arise during their employment.

Voiceover (00:00):
From Skadden, you're listening to The Lobby Bar, a political law podcast where we strive to make political law accessible and host Charlie Ricciardelli and Tyler Rosen, deliver practical insights on the compliance challenges and regulatory developments that matter to legal, compliance, and government affairs professionals across all industries.

Charlie Ricciardelli (00:22):
Hello, I'm Charlie Ricciardelli.

Tyler Rosen (00:24):
And I'm Tyler Rosen.

Charlie Ricciardelli (00:26):
We are partners in the Political Law Compliance Investigations Group at Skadden, Arps here in Washington, D.C., and welcome to another episode of “The Lobby Bar.” It is March, and so I assume Tyler's got a fun gimmick up his sleeve along the lines of our Valentine's Day episode. So what's our gimmick today?

Tyler Rosen (00:42):
No gimmick.

Charlie Ricciardelli (00:42):
No gimmick.

Tyler Rosen (00:43):
No gimmick this episode. We're just going to talk about a topic that is so important and so under-discussed. It needs no gimmick. It's just enough. It stands totally on its own and it's going to make for, I think, good podcast content today.

Charlie Ricciardelli (00:57):
Okay.

Tyler Rosen (00:57):
That's right. We're talking about government conflict of interest rules. And actually, it occurred to me this morning as we're getting ready for this, that actually we could have done a gimmick. I was thinking we could do a St. Patrick's Day special, specifically on Irish lobby law, which neither of us are qualified to talk about, but we could find somebody who was. But I think we'll probably save that for a very special episode at some point in the future with very special guests who actually are qualified to talk international lobby laws.

Charlie Ricciardelli (01:22):
Yeah. Just to say it, you and I may have a different sort of mindset of what a special St. Patty's Day episode would entail, but fair enough. But yes, looking forward to talking about international lobbying with some of our colleagues when we can find a time to pry them away from their day jobs.

Tyler Rosen (01:37):
That's right. Okay. So with that, that being said, what do we mean by government conflict of interest rules, Charlie?

Charlie Ricciardelli (01:42):
So you want to actually define what we're talking about? That seems like-

Tyler Rosen (01:45):
I thought it would be helpful to sort of scope in what we're doing today.

Charlie Ricciardelli (01:48):
Okay. When we're talking about these government conflict of interest rules, essentially we're talking about a body of law at the federal, state and local level that essentially govern the interactions of public officials who have private interests simultaneously. I think the easiest way to think about this is their rules governing dual-hatted employees from a company's perspective, meaning dual-hatted, not in the sort of financial services sense, you use that term, but you're dual-hatted because you have private employment, you're working for your private company, and you also now have a government position. You're on the city council, you've been appointed to some board.

(02:24):
These conflict of interest rules lay out what you can and can't do, essentially vis-a-vis your private employer or the financial interest that you have. So they're obviously to prevent self-dealing, right? Government officials from acting with their government hats on, making public government decisions that benefit them personally, that benefit their employers. And so it's these rules, and as we're going to see, they come in a lot of different flavors and they're meant to govern that issue and govern those interactions.

Tyler Rosen (02:54):
Yeah. So I think you probably won't get into the cousin of the conflict of interest rules, which are the post-employment restrictions. We could do a whole other podcast someday on those. Sometimes people talk about them as revolving door rules. I don't know. We may or may not talk about rules about going into government because you see those sometimes as well.

Charlie Ricciardelli (03:11):
Well, I think that's right. And listen, just to say it, this is outside the scope of what we're going to talk about today, but conflict of interest rules in general —and we talk about this a lot in our training sessions and our seminars, etc. — when we speak, conflicts of interest is a really, really broad umbrella that includes, really, anti-corruption, pay-to-play laws, post-employment, really anything where there's a concern of getting a favorable government decision in exchange for or as a result of some improper activity. Here, we're really zeroing in on, again, to borrow this phrase, the dual-hatted employee problem where you've got somebody in your company is going into or has a government role.

Tyler Rosen (03:47):
Yep.

Charlie Ricciardelli (03:47):
All right. Well, let's tick through, I guess, what these things are. We've defined them. What do they do? How do they operate? As I mentioned, they come in lots of different shapes and sizes. Tyler, do you want to kick off and go through some of the more typical ones that we see?

Tyler Rosen (03:59):
Yeah. So I mean, as Charlie said, they do vary across jurisdictions, but there's some general trends that you see in these rules and starting with some of the most common restrictions, probably the most common one, and one that I hope would be at least somewhat intuitive to people thinking about somebody having a dual-hatted role is that typically a person who's employed by, or has a financial interest in, a company is required to recuse from decisions involving that company. I mean, that makes sense. It's sort of the most quintessential conflict that you could have, a self-dealing situation where you participate in awarding a contract or approving a zoning decision or whatever it is that has direct financial impact on your employer or a business that you own or otherwise have an affiliation with.

(04:47):
Even in a jurisdiction that didn't have an explicit recusal requirement, it's usually advisable to recuse just from a common law conflict of interest or a general anti-fraud provision or self-dealing type of regime. So that's really sort of common. I think one thing that's maybe not always intuitive is what is the scope of that recusal requirement? So sure, you can't cast a vote if you're on a board, but typically it would mean a full recusal, meaning you can't participate in the deliberations or really any stage in the process leading up to a decision that affects your company.

Charlie Ricciardelli (05:19):
Yeah, I think that's right. That's one version of this sort of nuanced scope question, but there's another angle to the scope of those restrictions that you need to think about as well. What are the decisions that are really in play? And I think the low-hanging fruit, it's easy to say, "Well, you can't sit on a board and decide whether your company gets a contract." I mean, that's fairly obvious, but there may be other-

Tyler Rosen (05:41):
You'd be surprised, Charlie.

Charlie Ricciardelli (05:42):
Fair enough. Should be. Should's doing a lot of work for me in that sentence.

Tyler Rosen (05:46):
Should be fairly obvious. Yeah.

Charlie Ricciardelli (05:48):
But there are other decisions, right? The impact of which is a little bit more diluted, I would say. It may or may not cross the line depending on the jurisdiction. You may in fact be able to weigh in on a decision that does impact your company if it really only impacts the company as a member of a class of companies or an entire industry. Where you see this play out, frankly, most cleanly is typically it doesn't apply to legislators. I mean, if you are a state legislator or you're in Congress, you're taking votes on bills, is not necessarily going to trigger these conflict of interest rules or require you to recuse just because the impact of that legislation affects your private employer. But as you zero in and are making decisions with a little bit more focus, that's when these laws can surface and come into play.

Tyler Rosen (06:35):
That's right. Now, the other side of the coin and the next type of restriction that we wanted to talk about would be a recusal on the other side. So, if you're wearing your government hat, you can't participate in decisions that are specifically targeted to benefit your employer. But, on the flip side, if you are working for your employer, you typically cannot be involved in lobbying your own agency. Again, sort of intuitive, if you're wearing two hats and you're sort of taking them off, putting them on, taking them off, putting them on, it doesn't work. And it also can raise potential issues about confidential government information that you obtain through your government service. If you know about an opportunity only because of your role in the government, using that knowledge to benefit the company is going to be a violation in a lot of places.

(07:20):
Typically, it's very common for there to be a prohibition on interacting with your own agency on behalf of your private employer. It can also be possible that there are broader lobbying restrictions. When you serve as a government official, there are some states where you're not allowed to do any lobbying in that jurisdiction. In Ohio, for instance, generally you're not allowed to lobby any other agency in the jurisdiction where you're serving.

(07:43):
So these considerations come up most often if the person who's seeking the government role either is in a government affairs type of position or does government sales or otherwise is interacting with government as part of their day job, it really potentially raises the stakes on their being able to serve in a government position like this because it can impinge on their ability to do their job.

Charlie Ricciardelli (08:04):
Another common variation that we see of these types of restrictions really is holding hands in a way with the recusal requirement, which is a prohibition on a public official using his or her public office for the financial gain of their employer. Another hopefully-should-be-intuitive provision with some potential traps for the unwary essentially. And by the way, we're shorthanding this a little bit or saying, or focusing, I should say, on your employer. With this provision, typically the way it reads is you can't use your public position for the private gain of any nongovernmental entity. The idea being you shouldn't be able to trade on your government position for the benefit of some private entity, whether it's your employer or not, but it most commonly comes up in the context of doing something that may benefit your employer.

(08:52):
So examples of this, again, perhaps intuitive, perhaps not, is one of your employees who has a government role shouldn't be out there helping you set up meetings with other components of the government using his or her government title, "Oh, I'm the commissioner of X. You should definitely come meet with my company, my employer." And it can be certainly broader than that, but that's sort of the linchpin concern — are you doing something using the trappings of your public office, your connections, your title, whatever it may be, to help your employer or some other private entity?

Tyler Rosen (09:25):
Right. And not to pick on Ohio again here, or not to just rely on Ohio again, but they take this provision and interpret it very broadly. And there's a whole scaffolding of law built around it. The notion of using your public office for private gain extends to participating in decisions that affect your employer's business competition. So they're concerned that you could use your office to hurt a business rival. There's even some guidance that using the relationships that you develop through government, if you interact with someone in your government role and then you deal with them in your private sector role, that that could create a conflict of interest and sort of leveraging the government relationship just for the purpose of relationship building is enough to create a problem.

Charlie Ricciardelli (10:11):
The last two restrictions that we'll talk about, zero in a little bit more:, companies that have contracts and are doing business with government entities. The first one is you'll find provisions out there that say, "Well, it's fine for your employee to have this public position, but he or she cannot derive any financial gain from the contracts that your company has with the government." And so this is often one of the more complex provisions to figure out how you're going to contend with it. I mean, essentially what they're trying to do is they're trying to cut off any compensation that is tied compensation for this person who is an official in that jurisdiction, that's tied to the work your company is doing for the government to avoid that conflict. So this may require you to take certain steps as making sure the person isn't working even behind the scenes on that government contract.

(11:02):
This has been interpreted in some jurisdictions as well, listen, if this person's getting paid and part of their job is working on the state contract, well, of course, they're getting a financial benefit from that contract. It can even be broader. I mean, for partnerships like law firms, sometimes you have to wall people off from certain types of compensation or you have to put them on essentially a flat compensation structure as opposed to participating in partnership profits if you are doing business with the government. That's something that frankly our firm contends with in certain instances. So it really takes a little bit of doing to understand first, what's the scope of this and B, what type of surgery are we going to do either in terms of how this individual is compensated and what their duties are to make sure that we remain in compliance with those restrictions.

(11:47):
The final one, and at risk of burying the lede, if you're dozing off, and hopefully not if you're driving while listening to this, this is the part to pay attention to because I think at least in my view, this is the most important one of these provisions or flavors of these provisions for those of you that do state and local in particular government business, is there are jurisdictions out there that will prohibit a company from doing business with agencies, jurisdictions if they have employees who are public officials in those jurisdictions.

(12:21):
The problem here is the intuitive response is like, "Well, as long as Jane isn't participating, as long as Jane recuses or Jack isn't involved and they're not overseeing the process, it should be fine." Well, it should be, but it's not, at least in these jurisdictions or this handful of them, right? Recusal in many instances doesn't work. California has a notoriously difficult conflict statute in Government Code Section 1090 where if you have an employee who's a member of a board … with very, very narrow exceptions, if you have an employee who's a member of a board in California, you're out of luck. You can't do business with that board, with that person in that position, whether they recuse or not.

(12:59):
There are other versions of this. Some of them are equally pernicious. Some of them, frankly, arguably more so. Virginia has a really difficult rule, somewhat surprisingly, for state legislators. If you have an employee who's a state legislator, it actually can knock you out of government contracts with the state and all localities. It's a very strictly interpreted conflict of interest provision. And that one really frankly sneaks up on people. It snuck up on me because as I mentioned earlier, the legislators tend not to be the most scrutinized when it comes to conflicts given the nature of their role. So I think the takeaway to some degree is these rules can be fairly counterintuitive and can have really dramatic impacts.

Tyler Rosen (13:43):
Yeah. And actually Alabama has something not so dissimilar where there's a prohibition on contracting with your own agency, but then beyond that, there's a default prohibition on your employer contracting with any state agency or local agency. There's an exception for certain competitively big contracts and professional services contracts, but to use that exception, those contracts actually need to be filed by the official, by your employee who's serving in the government role, actually needs to be filed with the Alabama Ethics Commission. So it requires the company to keep tabs on where it's potentially being awarded an Alabama contract and then getting that to the employee so they can file it with the state. So it's a real challenge, especially for a larger company.

Charlie Ricciardelli (14:25):
But before we move on, and I do want to move on and talk about some of the practical effects and how to deal with this, and it's a little bit different, but closely related in this conflict world. It's very common when you have an employee who takes a government position, whether elected or appointed, for them to have to go through some amount of financial disclosure; file some public, not always public, but often public statement of their holdings, who they're employed by in some level of detail. And the reason for this is really twofold in my view.

(14:57):
One, that public disclosure is the old saying, sunlight is the best disinfectant. There's an interest in informing the public about what government officials, what types of interests government officials hold. So the public can draw their own conclusions about their activities and whether they're acting in the best interest of the people.

(15:14):
So it's a sunlight, it's a transparency motivation, but it also helps the ethics regulators inform the public official about how to best comply with all of the rules that we've just talked about. How do you know what you have to recuse from unless you're out there and you go through, "Okay, well, here are my financial interests." And oftentimes you can work hand in glove or the employee/official can work hand in glove with the ethics regulators to come to some sort of an agreement, "Hey, here are all my holdings. I'll recuse from this. I don't need to recuse from this, etc." And so it can actually be a useful exercise for both the company, the employee and the government.

(15:53):
But one thing to keep in mind, there's always a but, right? There's always a potential downside. Sounds great. Oh, disclosure. Yeah, no problem. And oftentimes it is, but it can be burdensome. And there's some sneaky downsides to this. One, it can be challenging for the employee, for one of your senior executives to go through, and especially for highly compensated high net worth individuals who have a lot of holdings, it's just a lot of work to get through that. And there can be complicated disclosures, rules about trusts, etc. And the official may not be that jazzed, I think is the technical term, about putting that out in the public sphere.

(16:27):
The company, especially for executives who have a lot of money tied up in company assets, interests, even if they're not their employer — for example, if they hold private equity or hedge fund interests, this can become a challenging issue for those companies, for the private equity fund sponsors, for an employer that don't want the information about their holdings, about their compensation structure, about severance packages. They don't want that to be disclosed. So it becomes a bit of a dance to make sure that you're complying with that, but trying to avail yourself of exceptions or approaches where you can keep some of that sort of secret sauce out of the public realm. And sometimes it's possible and sometimes it's not, but certainly something to be aware of to the extent you have folks going through that process.

(17:14):
So before we get to “so what?,” which I promise we'll talk about, how do we deal with this? Tyler mentioned, and I agree with this, that these are under-discussed, these rules. And I think in some instances, we've been surprised that these are going unaddressed. I don't know, Tyler, if you have a view. I mean, these aren't the easiest things in the world to deal with for a couple of reasons. Maybe that's the idea. But why, in your opinion, are these under-discussed at this point?

Tyler Rosen (17:40):
Yeah. I think you sort of hit the nail or you tapped the nail on the head. Let me sort of drive it at home. It's their heart. I mean, I think it's daunting for a company to try to fully get its arms around these issues. There's some amount of volume to these requests. It's not every day that people are going into the government, but for a large company, you have folks wanting to serve on the local zoning board or run for their city council or school board, or get appointed to a commission for a governor. There's lots of cases where this comes up. There's a fair amount of this going on for a lot of companies.

(18:13):
They also require some amount of usually bespoke research when it comes to these conflicts of interest because just as we said at the beginning, the rules do vary across jurisdictions. And a one-size-fits-all approach of, we're going to look at the role, we're going to think about, gee, does this create a conflict of interest? How would we feel about having to defend this publicly? That is part of the analysis, but it's not all of the analysis. And it requires going in and actually looking at what the law is.

(18:38):
And then actually, once you know what the law is, it is actually, I think, fairly challenging sometimes to apply it to the facts. We actually, and Charlie specifically had us go down this road a few years ago of trying to memorialize the conflict of interest rules into a chart format. If you work with us, you know we've got gift charts and pay to play charts and campaign finance charts and lobby charts. And I think we do a good job of converting those laws into a digestible chart format that are fairly easy to apply. Okay, who's the covered donor? What's the limit?, etc. And you can sort of solve it without going too deep on the facts and analysis based on what's in the chart.

(19:15):
When you do that exercise for the conflict of interest rules, you end up with a lot of questions that you still need to figure out. You need to figure out what exactly does this government board do? Are they participating in the types of decisions that would create a conflict? What exactly is the role of the individual sometimes within the company? So there's a fair amount of work that goes into that.

(19:32):
And then sometimes it can result, frankly, in bad answers. As Charlie said, there are some laws where it will trigger a ban on government business. You don't want to have a ban on government business, but you also, sometimes, there's a discomfort in telling folks that government position that you've been appointed to and are really excited about, well guess what? You can't do it. That's an awkward conversation. In an extreme realm, it could create labor law issues if people are feeling that they're being unfairly restricted in their ability to perform public service. So it's thorny, all of which is to say it's a lot of work and it's thorny.

Charlie Ricciardelli (20:07):
Yeah. Listen, let me not push back, but take maybe a rosier view of this because I agree with everything you said, but I do think that there is some element of, as in many things in our space, and I'm thinking really about pay-to-play in terms of political contributions. And I'll explain why I say that in a moment. I think it may seem more daunting at the outset than it does turn out to be. When we inform a new client, for example, that they're going to have to implement some form of a pre-clearance requirement for some cross-section of their employees to seek prior approval before making a personal political contribution, their eyes go wide and they're like, "Well, how can we do that? Why are we doing that?" That's going to be a ton of work also.

(20:51):
At the end of the day, it ends up being not as intrusive or not as problematic as people think because people aren't really making as many political contributions as they may initially suspect. People understand the fact that we're only doing this because we need to continue to do state and local business. It's the lifeblood of our company, for example. So you get there.

(21:11):
Similarly here, and you said this, Tyler, and I agree. I mean, the volume can be high, but it's not as high as you think. People are not necessarily running for city council every other day. So I think once you get that system in place, you explain why you're doing it and the very limited purpose, which is only to protect the company's ability to do business. You get that buy-in, it solves, in my view, your labor law issue.

Tyler Rosen (21:37):
I agree with that.

Charlie Ricciardelli (21:37):
As long as you're fairly applying that, right? I mean, every jurisdiction we've looked at, there are carve-outs from these labor restrictions on interfering with outside activities for things that are related to the company being able to continue to function. So it's doable, but yeah, I agree. It's not, at first blush, at least it seems, challenging to get your arms around.

Tyler Rosen (21:57):
Yeah, I totally agree with that. But I think we could talk in the “so what?” about how to solve for a lot of these things, but I do think it's a real concern. I think the other reason it's maybe not as discussed as it should be, if you look at it from a narrow lens of legal liability, legal liability here is in almost every case just on the official. It's your employee who is going into government service, who has a legal obligation to avoid conflicts of interest.

(22:23):
And so if you look at it just from that lens of who's potentially paying the fine if this is violated or who's getting prosecuted, it's not the company, it's the individual. However, that's, I think, a really shortsighted view because of the collateral consequences of this, which could be knocking yourself out of government business, it could be really significant reputational harm. It's not enough to say "this is the employee's issue, so we're just going to let them solve it."

Charlie Ricciardelli (22:48):
Right. And sometimes it's not, right? I mean, sometimes there's direct legal liability.

Tyler Rosen (22:52):
There are some cases, yeah.

Charlie Ricciardelli (22:53):
Yeah. The contracts may be voidable, and then you may find that in a different part of the code, you may just look at the conflict of interest law, and Tyler's right, the legal liability for violating that rests with the official/employee. But if you look at the procurement code, you may find that any contract made in violation of a conflict can be voidable. And, by the way, and we deal with this in other contexts, the agency can just walk away, right? It's their choice to do business with you or not. And if it turns out that you had an employee who was somehow involved or it was otherwise in violation of a conflict provision, there's a nonzero chance that as a discretionary matter or prudential matter, the agency's going to say, "You know what? We don't need this kind of trouble. We've got to live in this world too, so we're just going to go across the street and do our business elsewhere." So those collateral consequences are real in this context.

(23:40):
And the risk of this, the attention this gets varies obviously, but this is also one of those areas where your opponents, your competitors can certainly use this as a sword. They lose a bid and then they get wind that you have an employee somewhere in this agency or in that jurisdiction. They may be able to make hay of that. So just another reason that these are important to control. And I think we're close to when we like to wrap these up. And the good news is the “so what?” is kind of short, but so I mean, so what? What do we do about this?

Tyler Rosen (24:10):
Yeah. Well, so I think the punchline, which we've kind of alluded to already, is it's something that companies ought to be pre-clearing. And most companies already probably have a mechanism for pre-clearing it, which is an outside business activities policy. Just as you wouldn't let somebody go and be a director of a competitor and have a process for review to make sure that that's not the case, it really is a good idea to include government service as one of the things that's vetted through that process.

(24:36):
And then once it is part of the process, once people are having to raise their hand and say, "I need approval before going and taking this government position," it's important to have an infrastructure for analyzing it. And that's both looking at the gut check, is this a conflict of interest? Is this just going to look terrible if this person does it?

(24:54):
But it is also a legal analysis. And working with your council on getting those rules, we have bushels of local conflict of interest rules sitting around here. Now, fortunately in digital format now, they used to be in paper. So it's something that you want to get your arms around and then really apply. Think about once we get these rules, what kind of rules of the road do you need to put in for somebody to serve in this position, assuming they can, and is it something that everybody can live with?

Charlie Ricciardelli (25:22):
I think that's a key point and we have to resist our natural inclination to be kind of like doomsayers. 95 times out of 100, maybe more, you get to a place where this ends up being okay with a but, right? “OK, but you have to do X, Y, and Z.” It is rare. And frankly, I think I've only come across it in, I don't know, the 15 years that I've been doing this particular work, maybe three instances, four instances where it was a non-starter where the person couldn't take the position. And that's not to say that it's not important to look at because the guardrails are key, right? You need to make sure that they know what they can and cannot do, but most of the time you're going to be able to get to a yes, you just need to, as we repeat ad nauseum, vet this stuff on the front end, just like a lot of the other things that we deal with.

(26:08):
And by the way, the last thing I think I would close with is you can also work with the ethics officials in many cases. Not all cases. They tend to be more helpful for more senior positions in the government. But if there's a process, engage in that process, engage with the ethics officials earlier, sooner rather than later, because their view will be important. There may be waivers that are available. A lot of these conflict of interest rules will have a waiver provision that you can work out with the ethics folks. So again, there are ways to do this, but I think the key as in many, if not all things that we deal with, have a system in place to deal with that on the front end, make sure folks know to raise their hand to vet whether they're going to do this, whether it's elected or appointed.

(26:52):
By the way, if they're running for elected office, it's important to get it on the front end so that you can make sure it's not going to cause a pay-to-play issue when they contribute to their own campaign, as we've talked about. You got to tell them not to use company resources in connection with their campaign. So there are a number of good reasons to vet this stuff on the front end.

(27:09):
So I think with that, we'll close and we'll get back to work trying to think of a fun gimmick for our next episode. But once again, thank you all for joining us. If you enjoyed this, please like, subscribe, tell your friends, and we will see you soon back at “The Lobby Bar.”

Tyler Rosen (27:24):
And feel free to send us questions or topics you'd like to see us talk about on here. No promises that we'll do it, but we're always open to feedback. And please do keep spreading the word about “The Lobby Bar.”

Charlie Ricciardelli (27:36):
Absolutely. Thanks everybody for listening.

Voiceover (27:39):
Thank you for joining us for today's episode of The Lobby Bar, a political law podcast. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.com.