HomeMy WebLinkAbout01-524-S GrayRoger S. Reist, Esquire
Shirk, Reist, Wagenseller and Mecum
Attorneys at Law
P. O. Box 1552
Lancaster, PA 17608 -1552
Dear Attorneys Reist and Gray:
ADVICE OF COUNSEL
May 11, 2001
Kathleen A. Gray, Esquire
Barley, Snyder, Senft & Cohen, LLC
Attorneys at Law
126 East King Street
Lancaster, PA 17602 -2893
01 -524 -S
Re: Conflict; Use of Authority of Office; Public Official /Employee; Executive Director of
Local Tax Collection Bureau; Computer Software System Developed By Bureau
Executive Director for Bureau Use; Governmental Property; Development for
Third -Party Applications; Proposal to Market Software Commercially; Private
Pecuniary Benefit; Supplemental Advice.
This responds to your letters dated April 6, 2001, by which you requested
supplemental 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 the executive director
of a local tax collection bureau with regard to the marketing of a computer software
system where: (1) the executive director developed a software system during bureau
time and with bureau funds for bureau use in processing taxpayer information and
returns; (2) the executive director further developed and enhanced the software system
for other applications; (3) the executive director claims to have made such further
developments and enhancements in his private capacity on his own time; and (4) the
executive director, the bureau, and a consulting /software development company under
contract with the bureau all claim ownership interests in the software system.
Facts: Attorney Reist previously requested an advisory from the State Ethics
Commission by letter dated February 5, 2001. The Advice was requested on behalf of
Thomas Baum ( "Baum "), the Executive Director of the Lancaster County Tax Collection
Bureau ( "Bureau "), although neither Baum nor the Bureau were specifically identified at
that time.
Reist, Advice 01 -524 was issued on March 8, 2001, based upon the facts which
Attorney Reist submitted. The submitted facts were, in material part, as follows:
Reist -Gray, 01 -524 -S
May 11, 2001
Page 2
STATEMENT OF ISSUE FOR STATE ETHICS COMMISSION REVIEW
Employee of a local tax collection bureau (Bureau) comprised of
participating school districts and municipalities has developed a software
system for processing taxpayer information and returns. The program
was funded by the employer Bureau but with the primary intellectual
contribution of the Employee.
The system may have potential opportunities for commercial
application with some modification beyond the designed use for the
Bureau. The extent of those additional applications would be dependent
upon additional design development by the Employee with the potential
utilization of these applications . . . proposed as being marketed and
organized by some for - profit entity for either of the two strategies as
follows:
(1) Use of new tax - exempt Section 501(c)(3) organization,
structured as a "supporting organization" and a new for - profit
subsidiary.
Under this approach a new tax - exempt organization would be
formed whose sold [sic] purpose would be to support the purposes and
programs of the Bureau. That organization, in turn, would be the sole
shareholder (or member) of a newly- formed for - profit corporation (or LLC)
which would license and exploit the operational software which has been
developed for the Bureau over the past several years. For federal tax
purposes, the tax - exempt organization would apply for status as a
'supporting organization "...
The board of the foundation would include, in addition to at -large
directors, one or more of the executive officers of the Bureau, as well as
several members of its governing board (typically these latter individuals
would compose less than a majority of the foundation board so as to
maintain its autonomy from the Bureau). The board of the foundation
would elect the board of the for - profit subsidiary. Although its activities
would be periodically reported to the foundation board, its day -to -day
operations would not be managed by the foundation board. 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.
2. Entry of the Bureau and newly- formed for - profit entity
into a software licensing agreement.
Under this arrangement, a new for - profit organization (either a
corporation or a limited liability company) would be formed and owned, in
whole or in part, by Employee. That organization would enter an
agreement with the Bureau under which the Bureau would authorize the
new organization to market, sub - license and otherwise exploit the
software and would pay license fees to the Bureau. Presumably, these
fees would be tied to the sub - license fees or royalties received by the new
organization of [sic ] use of the software by end - users. The agreement
might be terminable in the event of Employee's death, disability or
disassociation with the new entity. The agreement might also address
other aspects of the arrangement, including the right of the new entity to
modify or enhance the software, the right of the Bureau to use those
Reist -Gray, 01 -524 -S
May 11, 2001
Page 3
enhancements and the sharing of license fees attributable to
enhancements. Finally, a possible feature of the arrangement would be
an employment agreement between Employee and the new entity setting
forth the nature of his compensation as well as his rights in the core
software and any enhancements... .
These arrangements do not entail the payment of public monies to
Employee and would be subject to full disclosure and approval of an
agreement between the Bureau and the Employee.
(Attachment to Reist Letter of February 5, 2001) (Note omitted).
Reist, Advice 01 -524 is incorporated herein by reference. In responding to the
above facts which Attorney Reist had originally submitted, Advice 01 -524 noted that both
of the above proposals involved the exploitation of a software system developed
specifically for Bureau use by a Bureau employee, presumably during Bureau time,
utilizing Bureau funds. The Advice determined that given these facts, the software
system would be the property of the Bureau, and 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 the two marketing proposals, the Advice
concluded that if monies would 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 marketing proposal, the Advice
concluded that 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 the Bureau Employee, as owner, would be
associated as to the software system developed for the Bureau.
On April 6, 2001, you submitted a joint request for a supplemental advisory. You
identified Baum as the Bureau employee whose conduct is in question. You submitted
additional facts and argument which may be fairly summarized as follows.
You claim that under copyright law, the Bureau, Baum, and Dulcian, Inc.
( "Dulcian "), a consulting /software development company under contract with the Bureau
as to a complete operational system or components, have all participated in the
development of the software system and have "separate potential co- ownership
interests ": (1) Dulcian for the core components; (2) the Bureau for the "portion" of the
system applicable to the Bureau tax processing functionality; and (3) Baum for the
aspect of the system that has the potential for third -party application, which aspect
Attorney Reist calls "New Product" and Attorney Gray characterizes as a "portion" of the
system. You contend that this aspect of the system has been developed by Baum as
"his independent intellectual property work product." (April 6, 2001, Letter of Reist at 1).
In addition to your own letters, you have submitted a copy of a letter dated April 6,
2001, from Attorney Bruce Wolstoncroft of Attorney Gray's firm. The letter is addressed
to Baum and sets forth Attorney Wolstoncroft's opinion as to Baum's interests in the
software system. While Attorney Wolstoncroft acknowledges that in the case of work
made for hire by an employee, the employer —not the employee —is considered to be the
author, he nevertheless concludes that Baum's duties as Executive Director did not
include developing software, and that Baum is therefore a co -owner of the copyright in
the software system that has been developed. It is the stated opinion of Attorney
Wolstoncroft that the Bureau, Dulcian, and Baum all have an ownership interest in the
software system, and that no party can license or sell the system to third parties without
the permission of the others. (April 6, 2001, letter of Wolstoncroft at 1).
You state that Baum has, to a great extent on his own time and in his personal
capacity without compensation, developed extensive, specialized knowledge and
Reist -Gray, 01 -524 -S
May 11, 2001
Page 4
expertise essential to adaptation of the existing software for other financial applications.
You state that this knowledge and expertise is expected by the Bureau to be of
substantial value in development of the software for other applications and is
independent of any ownership claims which Baum may have. The Bureau is of the view
that the enhanced software system can realistically only be commercially exploited
through marketing and development activities by Baum in his private capacity. Indeed,
Attorney Reist states: ". . . Mr. Baum's personal knowledge of the development and
operations of the entire software system is critical to both the Bureau's original
operations, as well as in the harvesting of the potential benefit of third -party application
and utilization." (April 6, 2001, Letter of Reist at 2).
You assert that the Bureau, Baum, and Dulcian, as the parties who have an
interest in the asset, must form a cooperative venture that recognizes the contributions of
each party and provides fair compensation to each. You state that neither the final form
of the cooperative venture nor the relative percentages of ownership in the software
have yet been determined. However, Baum and the Bureau hope to establish a
relationship, preferably through the application of the second proposal referenced in the
initial advisory request and above, in order to obtain value for the benefit of both parties.
You assure the Commission that any contracting between Baum and the Bureau would
occur within the parameters of Section 1103(f) of the Ethics Act, 65 Pa.C.S. §1103(f).
You state that Advice 01 -524 may have misconstrued the second marketing
proposal by assuming that the Bureau would pay royalties to the new entity formed and
owned in whole or part by Baum ( "New Entity ") or to Baum. You state that in fact, the
reverse is true. Under the second proposal, the New Entity would spend substantial
funds developing and marketing the enhanced software system and would then pay
royalties to the Bureau proportionate to its ownership interest as utilized. You further
state that the royalties would constitute full and fair compensation to the Bureau for use
of its ownership interest.
You contend that Advice 01 -524 erroneously assumed that Baum developed the
software system during Bureau time using Bureau funds. While you acknowledge that
Baum did in fact develop "portions" of the system during Bureau time and using Bureau
funds, you maintain that he also developed "substantial portions" of the software on his
own time and without compensation.
You do not dispute that to the extent Baum spent Bureau time and Bureau funds
on this project, the Bureau has an ownership interest in the software. In fact, you state
that it is not Baum's position that he has any claim or ownership interest with respect to
the use of the software by the Bureau for its tax collection purposes. Instead, it is your
theory that while the Bureau has an ownership interest in the software to the extent
Baum spent Bureau time and Bureau funds on it, Baum also has an ownership interest in
the software to the extent he modified and enhanced the software on his own time.
You state that the Bureau sees this situation as "an opportunity to maximize the
utility of a valuable asset that, without ongoing cooperation of public and private
enterprise, may deteriorate into a wasted asset." (April 6, 2001, Letter of Reist at 2).
You further state that the Bureau "wishes to act as a good steward of public money by
capitalizing on that asset in a way that is advantageous to the Bureau and its
participating School Districts." (April 6, 2001, Letter of Gray at 2). The Bureau Venturing
Committee is exploring the possibility of marketing and developing the software product
with Baum acting in his individual and private capacity and on his own time, rather than
in his capacity as Executive Director of the Bureau, so as to "make it possible for the
[Bureau] to take full advantage of this valuable asset." Id.
You state that in implementing this proposal, the Bureau intends to impose
safeguards to protect itself and its participating school districts through the guidance of
the Bureau's solicitor and a solicitor's committee, consisting of other prominent lawyers
Reist -Gray, 01 -524 -S
May 11, 2001
Page 5
in the community who represent the Bureau's participating school districts. Such
safeguards would include, for example, (1) full disclosure of all relevant facts to the
Bureau Board and approval by the Bureau Board of all potential conflicts of interest,
which information would be shared with the participating school districts; (2)
consideration given to opening the process of competing proposals through solicitation of
RFPs from potentially interested third parties; and (3) construction of the contract
between the Bureau and the New Entity in such a manner that would ensure fairness to
all of the parties and provide substantial protections to the Bureau.
You state that because of the inherent concern about a possible conflict, the
Bureau would appoint the Venture Committee or its Chair to make decisions relating to
the initial contract with the New Entity and future decisions relating to the administration
of the contract. You state that Baum would recuse himself from representing the Bureau
in any such decision making. You further state that if Baum were determined to have an
economic interest in the New Entity, he would not spend any Bureau time on matters
involving that company.
You anticipate that the Bureau may wish to limit the amount of time it would allow
Baum to both lead the Bureau and have involvement with the New Entity. After the
expiration of an agreed period of time, Baum would be asked to decide whether he
would devote his full attention to the Bureau or the New Entity. You expect that the
Bureau Board would appoint a committee to review periodic progress on the New Entity
and monitor any potential conflicts of interest.
Based upon these additional facts, you argue that Brochius, Order 1151 cited by
Advice 01 -524 is factually distinguishable from the instant case in several ways. First,
you state that both the Bureau and Baum (as well as Dulcian) have ownership interests
in the software product. Second, you state that neither Baum nor any business in which
he might have an interest would receive or use the Bureau software asset without paying
full and fair compensation to the Bureau. You contend that Brochius, supra, did not
involve, and Section 1103(a) of the Act does not prohibit, an employee's personal use of
a government asset where full and fair compensation is paid to the government body for
such use.
You argue that since it is recognized that Section 1103(a) of the Ethics Act does
not prohibit a public official /public employee from having outside business activities or
employment, the Bureau should be permitted to capitalize on its ownership interest in the
software by entering into a cooperative venture with other parties who also have an
ownership interest in the software, and, in the case of Baum, specialized knowledge and
expertise which can potentially add value to this asset by adapting it to other financial
applications. You state:
As long as the [Bureau] Employee does not use Bureau time
or Bureau facilities in working with or for the marketing and
development entity, as long as the Bureau received full and
fair compensation for its interest in the software asset, and
as long as the Bureau provides the kinds of safeguards
described herein, the Bureau, and ultimately the tax payers
will benefit from this arrangement. If, on the other hand, it is
determined that such a cooperative venture cannot occur,
then the [Bureau] and the other parties with an interest in
this software will be foreclosed from obtaining any benefit
from it other than the direct benefit received by the Bureau in
using the software for its own activities.
(April 6, 2001, Letter of Gray at 4).
Reist -Gray, 01 -524 -S
May 11, 2001
Page 6
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.
As Executive Director of the Lancaster County Tax Collection Bureau ( "Bureau "),
Thomas Baum ( "Baum ") is a public employee 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,
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.
65 Pa.C.S. §1102.
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May 11, 2001
Page 7
In addition, Sections 1103(b) and 1103(c) of the Ethics Act provide in part that no
person shall offer to a public official /employee anything of monetary value and no public
official /employee shall solicit or accept anything of monetary value based upon the
understanding that the vote, official action, or judgment of the public official /employee
would be influenced thereby. Reference is made to these provisions of the law not to
imply that there has been or will be any transgression thereof but merely to provide a
complete response to the question presented.
Section 1103(f) of the Ethics Act provides as follows:
§1103. Restricted activities
(f) Contract. - -No public official or public employee or
his spouse or child or any business in which the person or his
spouse or child is associated shall enter into any contract
valued at $500 or more with the governmental body with
which the public official or public employee is associated or
any subcontract valued at $500 or more with any person who
has been awarded a contract with the governmental body with
which the public official or public employee is associated,
unless the contract has been awarded through an open and
public process, including prior public notice and subsequent
public disclosure of all proposals considered and contracts
awarded. In such a case, the public official or public employee
shall not have any supervisory or overall responsibility for the
implementation or administration of the contract. Any contract
or subcontract made in violation of this subsection shall be
voidable by a court of competent jurisdiction if the suit is
commenced within 90 days of the making of the contract or
subcontract.
65 Pa. C. S. §1103(f).
Section 1103(j) of the Ethics Act provides as follows:
§1103. Restricted activities
(j) Voting conflict. - -Where voting conflicts are not
otherwise addressed by the Constitution of Pennsylvania or
by any law, rule, regulation, order or ordinance, the following
procedure shall be employed. Any public official or public
employee who in the discharge of his official duties would be
required to vote on a matter that would result in a conflict of
interest shall abstain from voting and, prior to the vote being
taken, publicly announce and disclose the nature of his
interest as a public record in a written memorandum filed with
the person responsible for recording the minutes of the
meeting at which the vote is taken, provided that whenever a
governing body would be unable to take any action on a
matter before it because the number of members of the body
required to abstain from voting under the provisions of this
section makes the majority or other legally required vote of
approval unattainable, then such members shall be permitted
to vote if disclosures are made as otherwise provided herein.
In the case of a three - member governing body of a political
subdivision, where one member has abstained from voting as
a result of a conflict of interest, and the remaining two
Reist -Gray, 01 -524 -S
May 11, 2001
Page 8
members of the governing body have cast opposing votes, the
member who has abstained shall be permitted to vote to
break the tie vote if disclosure is made as otherwise provided
herein.
65 Pa.C.S. §1103(j).
In each instance of a conflict, Section 1103(j) requires the public official /employee
to abstain and to publicly disclose the abstention and reasons for same, both orally and
by filing a written memorandum to that effect with the person recording the minutes or
supervisor.
In applying the above provisions of the Ethics Act to the instant matter, pursuant to
Section 1103(a) of the Ethics Act, a public official /public employee is prohibited from
using the authority of public office /employment or confidential information received by
holding such a public position for the private pecuniary benefit of the public official /public
employee himself, any member of his immediate family, or a business with which he or a
member of his immediate family is associated. Pursuant to Section 1103(a) of the Ethics
Act, Baum would be prohibited from using government time, equipment, facilities, or
property, or confidential information received by being in his public position, for the
private pecuniary benefit of Baum or a business with which he is /would be associated.
Under the facts most recently submitted, it remains clear that Baum initially
created a software system for the Bureau at the Bureau's expense. Both of you
acknowledge that this is true and that this is why the Bureau has an ownership interest in
what has been developed.
It is also clear that at least "portions" of the system were in fact developed by
Baum on Bureau time. (April 6, 2001, letter of Attorney Gray at 2). Yet it is also factually
submitted through Attorney Wolstoncroft's letter, on which you rely, that creating software
was not part of Baum's job, and that he therefore has a private interest in the software.
These facts reveal that Baum has a serious dilemma insofar as the Ethics Act is
concerned. While this Advice may not rule upon the propriety or impropriety of Baum's
past conduct, this Advice may identify Baum's dilemma without ruling upon it. Since
Baum worked on at least "portions" of the software system during Bureau time, he either
did such work as the Bureau's Executive Director, such that the work product belongs to
the Bureau, or he did private work on government time using government equipment and
facilities contrary to Section 1103(a) of the Ethics Act. See, e.q., Holt, Orders 1153 and
1153 -R.
Furthermore, it is clear that either way, Baum further developed and enhanced the
software system that belongs at least partially to the Bureau to achieve third arty
applications. No matter how the resulting system is labeled— whether as a 'New
Product," as Attorney Reist calls it, or as the development of another "portion" of the
software system, as Attorney Gray describes it —Baum used government roperty to do
it. As noted above, a public employee is precluded under Section 1103(a) of the Ethics
Act from using government property for a prohibited private pecuniary bene it.
Therefore, to the extent Baum or a business with which he is /would be associated
would receive a private pecuniary benefit from Baum's use of government time,
equipment, facilities, or property, or confidential information received by being in his
public position, Baum would transgress Section 1103(a) of the Ethics Act.
The element of a prohibited private pecuniary benefit could be established, for
example, by an ownership interest in the enhanced software system; financial gains to a
business with which Baum would be associated; or compensation for providing services
related to the software which would involve the use of confidential information obtained
by being in the public position.
Reist -Gray, 01 -524 -S
May 11, 2001
Page 9
Attorney Wolstoncroft's analysis under intellectual property law, although
interesting, does not in any way alter the above conclusions under the Ethics Act. The
fact that the Bureau does not object and in fact seems to view Baum as having an
ownership interest in the enhanced software is remarkable, but does not affect a proper
analysis of the facts under the Ethics Act.
As for your argument that Section 1103(a) of the Act does not prohibit an
employee's personal use of a government asset where full and fair compensation is paid
to the government body for such use, such an argument fails where it is only an after -
the -fact attempt to legitimize such past use.
Under the facts which you have submitted, what you are proposing would
inherently be prohibited as to Baum under the Ethics Act. As for your concerns that the
Bureau not be precluded from capitalizing on this valuable asset, the obvious response is
that unlike Baum, the Bureau is not precluded by the Ethics Act from capitalizing on it.
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 County Code.
Conclusion: Thomas Baum ( "Baum "), Executive Director of the Lancaster County
Tax Collection Bureau (the "Bureau ") 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.
Pursuant to Section 1103(a) of the Ethics Act, Baum would be prohibited from using
government time, equipment, facilities, or property, or confidential information received by
being in his public position, for the private pecuniary benefit of himself or a business with
which he is /would be associated. Under the submitted facts that Baum created a
software system for the Bureau at Bureau expense, and that at least "portions" of the
system were developed by Baum during Bureau time, Baum either did such work as the
Bureau's Executive Director, such that the work product belongs to the Bureau, or he did
private work on government time using government equipment and facilities contrary to
Section 1103(a) of the Ethics Act. Baum used the software system that belongs at least
partially to the Bureau, and made further developments and enhancements to it to
achieve third -party applications. To the extent Baum or a business with which he
is /would be associated would receive a private pecuniary benefit from Baum's use of
government time, equipment, facilities, or property, or confidential information received by
being in his public position, Baum would transgress Section 1103(a) of the Ethics Act.
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 -Gray, 01 -524 -S
May 11, 2001
Page 10
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(hh). The appeal may be received at the
Commission by hand delivery, United States mail, delivery service, or
byy 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