Category: Government Contracting

South Carolina’s Pay-To-Play Law

South Carolina restricts campaign contributions by a contractor to a candidate who participated in awarding the contract. South Carolina Code  §8-13-1342 provides:

No person who has been awarded a contract with the State, a county, a municipality, or a political subdivision thereof, other than contracts awarded through competitive bidding practices, may make a contribution after the awarding of the contract or invest in a financial venture in which a public official has an interest if that official was in a position to act on the contract’s award. No public official or public employee may solicit campaign contributions or investments in exchange for the prior award of a contract or the promise of a contract with the State, a county, a municipality, or a political subdivision thereof.

Ohio’s Pay-To-Play Law

On January 2, 2007, then Ohio Governor Taft signed into law Substitute House Bill 694, enacting changes to Ohio’s pay-to-play laws. The new law places restrictions on many political contributors who currently hold, or are competing for, a contract with the state or local government. The new law also extends these prohibitions to many local political subdivisions that were not covered under previous versions of the law, including county commissioners, city council members, township trustees, school board members, and other local boards, commissions, task/ forces, and other authorities.

The law is currently subject to litigation.

Ohio’s pay-to-play laws are primarily in R.C. 3517.13, are triggered when

  1. a partner or owner of an LLC, LLP or partnership, or an individual who owns 20% or more of the shares of a corporation contributes over $1,000; or
  2. if those business owners, their spouses, children, and the company’s affiliated political action committee (“PAC”) cumulatively contribute over $2,000 over the course of two years.

See:

Connecticut’s Pay-to-Play Law

Connecticut’s law imposes a contribution and solicitation ban on state contractors, prospective state contractors, and their principals. A few, but not all, of the principals now covered under the law are as follows:

  • Members of the company’s Board of Directors;
  • Individuals owning 5% or more of the company’s stock;
  • Individuals at the company living or working in Connecticut with the title of president, treasurer, or executive vice president;
  • Spouses, civil union partners, and dependent children (age 18 or older and living at home) of the above; and
  • A political committee established or controlled by an individual described above or by the state contractor or prospective state contractor.

On December 19, 2008, the U.S. District Court for the District of Connecticut upheld Connecticut’s  pay-to-play law. The court found the pay-to-play and accompanying lobbying contribution and solicitation bans to be narrowly tailored to prevent corruption or the appearance of corruption, which, the court said, was significant given Connecticut’s recent history with corruption at the highest levels of state government. Green Party of Connecticut v. Garfield, No. 3:06cv1030 (D. Conn. Dec. 19, 2008).

On December 7, 2005, the Connecticut General Assembly passed “An Act Concerning Comprehensive Campaign Finance Reform for State-Wide Constitutional and General Assembly Offices.” The law, codified at Conn. Gen. Stat. § 9-600, et seq., became effective on December 31, 2006 (formerly codified at 9-333).

§ 9-612(f) prohibits investment services firms with state contracts from contributing to the campaigns for the State Treasurer.

§ 9-612(g) places limitations on campaign contributions by state contractors.

New Jersey’s Pay-to-Play Law

New Jersey enacted the Campaign Contributions and Expenditure Reporting Act, N.J.S.A. 19:44A-20.13 et seq. (“Chapter 51”) to limit abuses of pay-to-play.

Among other things, Chapter 51 prohibits a State agency from awarding a State contract whose value exceeds $17,500 to a business entity that contributed more than $300 to the Governor, a candidate for Governor, or any State or county political party committee in the preceding 18 months.

On January 15, 2009, the New Jersey Supreme Court issued a unanimous opinion upholding the constitutionality of Chapter 51 and rejecting arguments that it violated free speech and free association constitutional rights. In the Matter of the Appeal by Earle Asphalt Company, ____ N.J. ____ (2009).

Chapter 51 also provides that a company that makes a contribution that would otherwise render it ineligible to receive State contracts will retain its eligibility so long as it receives reimbursement of the contribution within 30 days of making it. In the Earle Asphalt case, the president of a company made a $1,500 contribution to a county political party committee. Upon realizing that the contribution would render the company ineligible for State contracts, the president requested that the contribution be returned. Although he made that request 20 days after the contribution, he did not receive the reimbursement until 41 days after the contribution. The Supreme Court rejected the company’s argument that it should not be disqualified from receiving State contracts because it had attempted to obtain return of the contribution within the 30-day window. Instead, the Court, employing a strict and literal interpretation of the provision, concluded that the company was not entitled to the exemption because it did not receive the reimbursement within 30 days of making the contribution.

The lesson from the Earle Asphalt decision is that failure to comply with the provisions of a pay-to-play law could result in crippling financial consequences to a company that depends on public contracts if the company’s breach results in it being disqualified from receiving those contracts.

States With Pay-to-Play Laws

Twelve states have some variant of a pay-to-play law: California, Connecticut, Hawaii, Kentucky, Maryland, New Jersey, New Mexico, Ohio, Pennsylvania, South Carolina, Rhode Island, and West Virginia.

Regardless of where you are doing business, if it entails contracting with, attempting to contract with or otherwise providing goods or services to a governmental entity, you need to analyze whether your company and its employees are in any way limited with regard to making political contributions as a result of the business relationship with the government.

Registration Disclosure for Illinois Entity Registration

Illinois has a new business entity registration for procurement law in place to counteract “pay-to-play” in state contracting.

As part of the registration process, you must register the company as well as any “affiliated entity” and any “affiliated person.” Both of these terms are defined in Section 50-37 of Illinois Procurement Code.

“Affiliated person” means
(i) any person with any ownership interest or distributive share of the bidding or contracting business entity in excess of 7.5%,
(ii) executive employees of the bidding or contracting business entity, and
(iii) the spouse and minor children of any such persons.

“Affiliated entity” means
(i) any subsidiary of the bidding or contracting business entity,
(ii) any member of the same unitary business group,
(iii) any organization recognized by the United States Internal Revenue Service as a tax‑exempt organization described in Section 501(c) of the Internal Revenue Code of 1986 (or any successor provision of federal tax law) established by the bidding or contracting business entity, any affiliated entity of that business entity, or any affiliated person of that business entity, or
(iv) any political committee for which the bidding or contracting business entity, or any 501(c) organization described in item (iii) related to that business entity, is the sponsoring entity.

Illinois Business Entity Registration for Procurement

On January 1, 2009, two “pay-to-play” measures went into effect in Illinois.

Public Act 95-971 (.pdf) requires any business whose state contracts and/or bids on state contracts exceed $50,000 annually (“Covered Entity”) to register with the Board by January 31, 2009. The registration includes the Covered Entity’s name and address; the name and address of the Covered Entity’s parents, subsidiaries and affiliates (“Affiliated Entities”); and the name and address of any person who is an executive employee of, or who has an ownership interest exceeding 7.5% of, the Covered Entity, and the spouses and minor children of those persons (“Affiliated Persons”). Any business not currently a Covered Entity must register with the Board prior to submitting a bid whose value would cause the business to become a Covered Entity.

Upon registering, a Covered Entity will receive from the Board a certificate of registration. Within ten days of receiving the certificate, the Covered Entity must provide a copy to each of its Affiliated Entities and Affiliated Persons.

By April 1, 2009, the Covered Entity must provide a copy to the chief procurement officer of each agency with which the Covered Entity has a contract or to which the Covered Entity has submitted a bid. The Covered Entity must notify any political committee to which it contributes that it is registered with the Board; likewise, an Affiliated Entity and Affiliated Person must notify any political entity to which it (or he or she) contributes that it is affiliated with a Covered Entity.

Public Act 95-971 prohibits Covered Entities from making political contributions to statewide elected officials (Governor, Lieutenant Governor, Attorney General, Secretary of State, Comptroller, and Treasurer), and to declared candidates for those offices, if the officeholder is responsible for awarding a contract held or sought by the Covered Entity. The same prohibition applies to the Covered Entity’s Affiliated Entities and Affiliated Persons. The prohibitions extend for the duration of the officeholder’s term,or for a period of two years following the termination of the contract, whichever is longer.

Executive Order 3 (.pdf) imposes additional restrictions on Covered Entities that contract or bid with state agencies under the Governor’s authority. Those Covered Entities are prohibited from making political contributions not only to the particular statewide officeholder (and declared candidates for the office) responsible for awarding the relevant contract, but also to: (i) all other statewide elected officeholders and declared candidates for those offices; (ii) all members of the General Assembly and declared candidates for the General Assembly; and (iii) all political committees of a party’s state central committee represented by a statewide elected officer or member of the General Assembly. In addition, Executive Order 3 prohibits Covered Entities from making political contributions and from soliciting contributions or engaging lobbyists to solicit or make contributions.

Surprisingly, now-former-governor Rod Blagojevich signed the August, 2008 Executive Order #3 (.pdf).

You should also take a look at the Illinois State Board of Elections emergency regulations for this registration process. (.pdf)

Here is the Business Entity Registration Form (a fillable .pdf)

Violation Reporting under the Federal Acquisition Regulations

Government contractors have new reporting requirements under the Federal Acquisition Regulations. Beginning December 12, 2008, contractors and subcontractors performing federal contracts—irrespective of monetary value or duration—will be legally obligated to disclose to the relevant federal agency’s Office of Inspector General credible evidence of

  • federal criminal law violations involving fraud, conflict of interest, bribery or gratuities;
  • violations of the civil False Claims Act; or
  • significant overpayment on the contract.

Contractors should not automatically disclose every potential violation. “Credible evidence” implies that you have the opportunity to conduct a preliminary internal investigation of the facts before determining whether or not disclosure is necessary.

Government contractors should not be caught by surprise when the rule becomes effective on December 12, 2008. They should consider the following questions before they are confronted with reported violations relating to the contract:

  • Who will determine whether disclosure under the FAR is required?
  • How should disclosure be made to the agency OIG?
  • Who should make the disclosure?
  • How will the resulting government investigation be managed?
  • How will public relations consequences be handled?

You should also consider legal consequences of mandatory reporting, including the effect of disclosure on the preservation of attorney-client privilege, self-incrimination, preservation of company defenses to government claims, and maintenance of coverage under applicable insurance policies.

See my prior blog posts:

Update to the Federal Acquisition Regulations

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) have agreed on a final rule amending the Federal Acquisition Regulation (FAR) to amplify the requirements for a contractor code of business ethics and conduct, an internal control system, and disclosure to the Government of certain violations of criminal law, violations of the civil False Claims Act, or significant overpayments.

On November 12, 2008 the Department of Defense published amendments to the Federal Acquisition Regulation: Federal Register Volume 73, No.219 page 67064 -67093. Key is the amendment to 52.203-13 that enlarges the requirements for a contractor’s code of business ethics and conduct.

Under 52.203-13(c)(2)(F) requires:

Timely disclosure, in writing, to the agency OIG, with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of any Government contract performed by the Contractor or a subcontractor thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 U.S.C. or a violation of the civil False Claims Act (31 U.S.C. 3729-3733).

These amendments go into effect on December 12, 2008.