Beware of Contingent Fee Restrictions When Your Association Hires a Lobbyist

kahl_beware_of_contingent_fee_restrictions_when_your_association_hires_a_lobbyist May 3, 2022 By: James A. Kahl

Many states prohibit lobbyists from receiving contingent fees, and those bans can be broader than they appear. Here’s a look at scenarios that could run afoul of state restrictions, as well as some precautions your association can take when hiring a lobbying firm.

More than 40 states and the District of Columbia prohibit the receipt of contingent fees for lobbying. This restriction generally prohibits a person or entity from being paid a fee that is contingent upon a successful outcome, including the passage or defeat of legislation, the issuance of an executive order, the adoption or rejection of a regulation, or the award of a public contract.

Compliance with all lobbying rules is essential for associations to limit legal risks and protect their organization’s reputation. In the area of contingent fee restrictions, liabilities exist not only for the lobbyist, but also for the client association. Unfortunately, many states do not provide clear guidance on the scope of these restrictions, and in some cases, they have been applied in ways that are far broader than the statute’s wording might suggest.

If your association is contemplating retaining a lobbyist or lobbying firm, avoid the following scenarios, which can result in violations of contingent fee lobbying prohibitions.

Separate but Connected Agreements

In this scenario, a consultant performs both lobbying and nonlobbying work, but only the latter is compensated on a contingent basis. Several states, including Connecticut, Kentucky, Maryland, Minnesota, and Oregon, have addressed when these types of engagements can violate contingent fee prohibitions. In a nutshell, the contingent fee prohibition is triggered if the contingent payment can be viewed as connected to the success of the legislative affairs efforts.

A 1994 Connecticut Office of State Ethics (OSE) opinion examined a public relations firm that had two separate agreements with a client. The first agreement supported the client’s efforts to obtain state-issued bonds and/or other state financing to develop a continuing care retirement community (CCRC). These services did not involve lobbying under Connecticut law, and compensation was a set monthly payment and an incentive payment if the financing was secured.

Consider retaining experienced counsel who can assist you in drafting a compliant retention agreement that will achieve your public policy goals and protect your legal interests.

A second contract provided for the firm to lobby to obtain a change in Connecticut law regarding the provision of guaranteed life care by CCRCs. The change in law would have enhanced the client’s ability to obtain the state financing it was seeking under the first agreement.

OSE found the contingent fee ban was violated. While the desired legislative amendment was not “absolutely necessary,” it would have contributed to the client obtaining its financing and to the public relations firm obtaining its contingent incentive payment. The arrangement was a violation because the incentive payment was “dependent,” to some material extent, on the legislative outcome

Nonlobbying Work as Reward

This scenario was addressed in a 1988 Maryland Ethics Commission advisory opinion. Under a proposed agreement, if a law firm successfully lobbied to get a state contract awarded to its client, then the firm would serve as counsel to the client for nonlobbying legal work related to the contract. Even though the legal work would be paid for on a flat fee basis, the commission viewed the payments for this subsequent nonlobbying work as prohibited contingent fees.

Bonuses and Other Incentives

Several opinions have addressed proposed agreements that are not on their face contingent on the success of lobbying efforts, but rather have payments tied to the client’s broader financial success.

For example, a 2002 Kentucky Legislative Ethics Commission opinion addressed a public communications and lobbying firm (which was partially owned by registered lobbyists) that was retained to provide public relations services to a company. Compensation included a bonus tied to the increase in gross revenue realized by the company in future years. The commission concluded that the firm’s public outreach efforts did not meet the statutory definition of lobbying. However, had any part of its services for the client included “lobbying,” the arrangement would have been considered a prohibited contingent fee.

For the same reason, both Connecticut and New York generally view stock option payments to lobbyists as violating contingent fee bans if the value of the stock is dependent, in part, on the success of the lobbying efforts.

Precautionary Steps

If your association is considering a retainer agreement with a lobbyist or lobbying firm that falls into any of these categories or includes any type of incentive pay provisions, it is important to ensure that it complies with the applicable contingent fee restrictions.

If the arrangement is proposed by a lobbyist or lobbying firm, ask if it has been approved by state regulators or reviewed by the lobbyist’s counsel. Review any available written guidance from the state lobbying regulatory agency. Many state regulators provide helpful advice over the phone or through email. They also may be able to help you find opinions and guidance materials not readily available to the public.

Finally, consider retaining experienced counsel who can assist you in drafting a compliant retention agreement that will achieve your public policy goals and protect your legal interests.

James A. Kahl

James A. Kahl is a partner at Whiteford, Taylor & Preston LLP in Washington, DC. He is also a member of ASAE’s Government Relations and Advocacy Professionals Advisory Council.