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HomeMy WebLinkAbout01-524 ReistRoger S. Reist, Esquire Shirk, Reist, Wagenseller and Mecum Attorneys at Law P. O. Box 1552 Lancaster, PA 17608 -1552 Dear Mr. Reist: ADVICE OF COUNSEL March 8, 2001 01 -524 Re: Conflict; Use of Authority of Office; Public Official /Employee; Employee of Local Tax Collection Bureau; Computer Software System Developed By Bureau Employee for Bureau Use; Governmental Property; Proposal to Market Software Commercially; Private Pecuniary Benefit. This responds to your letter of February 5, 2001, by which you requested advice from the State Ethics Commission. Issue: Whether the Public Official and Employee Ethics Act ( "Ethics Act "), 65 Pa. .S. §1101 et seq., presents any prohibition or restrictions upon an employee of a local tax collection bureau as to marketing a computer software system where: 1) the bureau employee developed the software system specifically for bureau use with bureau funds; and 2) the bureau employee may receive compensation for the commercial utilization of the software through various venturing proposals. Facts: As counsel for a local tax collection bureau comprised of participating school districts and municipalities ( "Bureau "), you request an advisory on behalf of a Bureau employee ( "Bureau Employee "). The Bureau Employee, through funding from the Bureau, has developed a software system for processing taxpayer information and returns. You state that there may be potential opportunities for commercial application of the software system with some modification to its original design. The extent of the software system's commercial application would depend upon additional design development by the Bureau Employee. You describe two "venturing proposals" to market the software. The venturing proposals as set forth under separate headings may be fairly summarized as follows. 1) Use of new tax - exempt Section 501(c)(3) organization, structured as a "supporting organization" and a new for - profit subsidiary. Reist, 01 -524 March 8, 2001 Page 2 This first venturing proposal would involve the formation of a new tax - exempt Section 501(c)(3) organization, structured as a "supporting organization," whose purpose would be restricted to supporting the purposes and programs of the Bureau. The tax - exempt organization would apply for status as a supporting organization for federal tax purposes. You state that status as a supporting organization would entitle it to be treated as a public charity as opposed to a private foundation, allowing it to operate free of a great number of restrictions and prohibitions applicable to a private foundation, including the prohibition against owning more than a de minimus interest in a for - profit business. You note that a public charity may own 100% of a for - profit business or a for - profit entity. The tax - exempt organization would either be the sole shareholder of a newly formed for - profit corporation or a member of a limited liability company ( "LLC "). The for - profit corporation /LLC would then license and exploit the software system developed by the Bureau Employee. Profits from the for - profit corporation /LLC would be paid to the tax - exempt organization, which would either distribute some or all of the money to the Bureau or apply it to one or more programs that would benefit the Bureau. The board of the tax - exempt organization would include at large directors, one or more executive officers of the Bureau and several members of the Bureau's governing board. You state that the Bureau's governing board members would typically make up less than a majority of the tax - exempt organization's board so that the tax - exempt organization could maintain its autonomy from the Bureau. The board of the for - profit corporation /LLC would be elected by the tax - exempt organization. Although the activities of the for - profit corporation /LLC would periodically be reported to the tax - exempt organization's board, its day -to -day operations would not be managed by that board. You state that the arrangement described in the foregoing venturing proposal would require the filing of a federal Form 1023 (application for recognition of tax exemption). The tax - exempt organization would also have to file information annually on Form 990. Finally, the for - profit corporation /LLC would be required to file state and federal income tax returns. (2) Entry of the Bureau and newly- formed for - profit entity into a software licensing agreement The second venturing proposal would involve the formation and ownership, in whole or in part, of a for - profit corporation or LLC by the Bureau Employee. Once the for - profit corporation /LLC would be formed, it would enter into an agreement with the Bureau under which the Bureau would grant authorization to market, sub - license and otherwise exploit the software in exchange for license fees paid to the Bureau. You presume that these license fees would be tied to sub - license fees or royalties that end -users would pay to the for - profit corporation /LLC for the use of the software. The agreement between the for - profit corporation /LLC and the Bureau might address particular matters such as the termination of the agreement in the event of the Bureau Employee's death, disability, or disassociation with the for - profit corporation /LLC; the right of the for - profit corporation /LLC to modify or enhance the software; the right of the Bureau to use enhancements; and the sharing of license fees attributable to enhancements. Another aspect of this venturing proposal might involve an employment agreement between the Bureau Employee and the for - profit entity establishing the Bureau Employee's compensation and rights in the core software and in any enhancements. Reist, 01 -524 March 8, 2001 Page 3 You state that the second venturing proposal could entail several agreements, but would otherwise be far simpler than the first venturing proposal. As to both venturing proposals described above, you state that there would be no payment of public monies to the Bureau Employee. You further state that said venturing proposals would be subject to full disclosure and approval of an agreement between the Bureau and the Bureau Employee. Noting that that no measures have been taken to implement any privatization activities, you ask for an advisory as to the propriety of the proposed arrangements under the Ethics Act. Discussion: It is initially noted that pursuant to Sections 1107(10) and 1107(11) of the Ethics Act, 65 Pa.C.S. § §1107(10), (11), advisories are issued to the requestor based upon the facts which the requestor has submitted. In issuing the advisory based upon the facts which the requestor has submitted, the Commission does not engage in an independent investigation of the facts, nor does it speculate as to facts which have not been submitted. It is the burden of the requestor to truthfully disclose all of the material facts relevant to the inquiry. 65 Pa.C.S. §1107(10), (11). An advisory only affords a defense to the extent the requestor has truthfully disclosed all of the material facts. The local tax collection bureau employee ( "Bureau Employee ") is a public employee as that term is defined in the Ethics Act, and hence the Bureau Employee is subject to the provisions of that Act. Section 1103(a) of the Ethics Act provides: $1103. Restricted activities. (a) Conflict of interest. - -No public official or public employee shall engage in conduct that constitutes a conflict of interest. 65 Pa.C.S. §1103(a). The following terms are defined in the Ethics Act as follows: $1102. Definitions. "Conflict" or "conflict of interest." Use by a public official or public employee of the authority of his office or employment or any confidential information received through his holding public office or employment for the private pecuniary benefit of himself, a member of his immediate family or a business with which he or a member of his immediate family is associated. The term does not include an action having a de minimis economic impact or which affects to the same degree a class consisting of the general public or a subclass consisting of an industry, occupation or other group which includes the public official or public employee, a member of his immediate family or a business with which he or a member of his immediate family is associated. "Authority of office or employment." The actual power provided by law, the exercise of which is necessary to the performance of duties and responsibilities unique to a particular public office or position of public employment. "Business." Any corporation, partnership, sole proprietorship, firm, enterprise, franchise, association, Reist, 01 -524 March 8, 2001 Page 4 organization, self - employed individual, holding company, joint stock company, receivership, trust or any legal entity organized for profit. "Business with which he is associated." Any business in which the person or a member of the person's immediate family is a director, officer, owner, employee or has a financial interest. "Financial interest." Any financial interest in a legal entity engaged in business for profit which comprises more than 5% of the equity of the business or more than 5% of the assets of the economic interest in indebtedness. 65 Pa.C.S. §1102. In applying the above provisions of the Ethics Act to the instant matter, you are advised that Section 1103(a) of the Ethics Act does not prohibit a public official /public employee from having outside business activities or employment; however, the public official /public employee may not use the authority of his public position or confidential information obtained by being in that position for the advancement of his own private pecuniary benefit or that of a business with which he is associated. Pancoe, Opinion 89- 011. Examples of conduct that would be prohibited under Section 1103(a) would include: (1) the pursuit of a private business opportunity in the course of public action, Metrick, Order No. 1037; (2) the use of governmental facilities, such as governmental telephones, postage, staff, equipment, research materials, or other property, or the use of governmental personnel, to conduct private business activities, Freind, Order No. 800; Pancoe, supra; and (3) the participation in an official capacity as to matters involving the business with which the public official /public employee is associated in his private capacity, such as the review /selection of its bids or proposals, Gorman, Order No. 1041. Having established the above general principles, the propriety of the venturing proposals as set forth in your request shall now be addressed. It is initially noted that both venturing proposals involve the exploitation of a software system developed specifically for Bureau use by a Bureau employee, presumably during Bureau time, utilizing Bureau funds. Given these facts, the software system is the property of the Bureau. Pursuant to Section 1103(a) of the Ethics Act, the Bureau Employee would be prohibited from using governmental property for a private pecuniary benefit. With regard to the first venturing proposal involving the tax - exempt Section 501 (c)(3) organization and its for - profit subsidiary, you state, "Profits from the subsidiary would be paid to the foundation, which would then either distribute some or al [sic] the money to the Bureau or apply it to one or more programs which benefit the Bureau." (Emphasis added). You further state that under the arrangements, there would be no payment of public monies to the Bureau Employee. This suggests that as to the first arrangement, monies may flow to the Bureau Employee. If the Bureau Employee would receive a financial benefit under such an arrangement, either directly or indirectly, he or she would have a conflict of interest and could not pursue such a venture under Section 1103(a) of the Ethics Act. See, Brocious, Order 1151 (where the Commission held that a PennDOT employee violated Section 3(a) of the Ethics Act when he participated in the building of a side dozer on Commonwealth time using Commonwealth resources, and then applied for and received a patent for the side dozer, which patent was issued to a business with which he was associated). As to the second venturing proposal, the Bureau Employee would clearly have a conflict because such would involve the payment of license or sub - license fees, royalties, Reist, 01 -524 March 8, 2001 Page 5 or compensation to the Bureau Employee or the for - profit entity, a business with which he or she, as owner, would be associated. The above conclusions are consistent with Commission precedent that a public official or public employee may not, by virtue of his public position, use the authority of office for a private pecuniary benefit. See, Sickles, Order 901 (where the Commission found that a food service director for a school district violated Section 3(a) of the Ethics Law by using "premium points" accrued through school district purchase orders which she placed with a particular vendor to purchase a wicker furniture set for herself); Trotta, Opinion 85 -002 (where the Commission noted that Section 3(a) of the Ethics Law would prohibit a public official /employee responsible for the award of a purchase contract from partaking in the benefit of a discount program offered by the successful bidder, especially where the decision maker would be aware of such a program in advance of the decision to award the contract); and Stefanko, Opinion 90 -015 (where the Commission held that frequent flyer credits earned by school directors and employees in connection with official travel, paid for by the school district, are due to the school district; utilization of such credits by school directors and employees for personal travel constitutes a use of authority of office for a private pecuniary benefit, contrary to Section 3(a) of the Ethics Law). The propriety of the proposed conduct has only been addressed under the Ethics Act; the applicability of any other statute, code, ordinance, regulation or other code of conduct other than the Ethics Act has not been considered in that they do not involve an interpretation of the Ethics Act. Specifically not addressed herein is the applicability of the respective municipal code. Conclusion: The local tax collection bureau employee ( "Bureau Employee ") is a public employee subject to the provisions of the Public Official and Employee Ethics Act ("Ethics Act "), 65 Pa.C.S. §1101 et seq. The software system developed by the Bureau Employee is property of the local tax collection bureau "Bureau "). Pursuant to Section 1103(a) of the Ethics Act, the Bureau Employee would be prohibited from using governmental property for a private pecuniary benefit. As to the first of two venturing proposals to market the software system, if monies flow to the Bureau Employee, either directly or indirectly, he could not pursue such a venture in that he would receive a financial benefit contrary to Section 1103(a) of the Ethics Act. As to the second venturing proposal, the Bureau Employee would be receiving a private pecuniary benefit contrary to Section 1103(a) of the Ethics Act because such would involve the payment of license or sub - license fees, royalties, or compensation to the Bureau Employee or the for - profit entity, a business with which he or she, as owner, would be associated as to the software system developed for the Bureau. Lastly, the propriety of the proposed conduct has only been addressed under the Ethics Act. Pursuant to Section 1107(11), an Advice is a complete defense in any enforcement proceeding initiated by the Commission, and evidence of good faith conduct in any other civil or criminal proceeding, provided the requestor has disclosed truthfully all the material facts and committed the acts complained of in reliance on the Advice given. This letter is a public record and will be made available as such. Finally, if you disagree with this Advice or if you have any reason to challenge same, you may appeal the Advice to the full Commission. A personal appearance before the Commission will be scheduled and a formal Opinion will be issued by the Commission. Reist, 01 -524 March 8, 2001 Page 6 Any such appeal must be in writing and must be actually received at the Commission within thirty (30) days of the date of this Advice pursuant to 51 Pa. Code §13.2 (h). The appeal may be received at the Commission by hand delivery, United States mail, delivery service, or by FAX transmission (717 -787- 0806). Failure to file such an appeal at the Commission within thirty (30) days may result in the dismissal of the appeal. Sincerely, Vincent J. Dopko Chief Counsel