Flag on the Play! Expired Contractor’s License!

It’s football season again. Which means, of course, that in addition to touch downs and field goals, you’ll also see hooting and hollering when the ref throws down a yellow flag signaling that a foul has been committed.

In Judicial Council of California v. Jacob Facilities, Inc., Case Nos. A140890, A141393 (August 20, 2015), The California Court of Appeals for the First District threw down its own yellow flag under the dreaded Business and Professions Code section 7031, finding that a contractor was required to disgorge all monies received on a project – to the tune of a whopping $18 million – when its parent company allowed the subsidiary’s contractor’s license to lapse when it rebranded a new company to perform the work of the old company but never formally assigned the contract. I think someone in marketing may be in big trouble.

Instant Replay

In Jacob Facilities, the Judicial Council of California (“Judicial Council”) entered into a three-year maintenance contract (“Contract”) with Jacobs Facilities, Inc. (“Facilities”), a wholly owned subsidiary of Jacobs Engineering Group, Inc. (“Jacobs”). Under the terms of the Contract, Facilities represented and warranted that it held a California contractor’s license and agreed to maintain all licenses required for its performance under the Contract. Facilities also agreed that it could not assign the Contract without the Judicial Council’s written consent.

At the time Facilities entered into the Contract and began performing work, Facilities was properly licensed. However, during the course of the project, Jacobs dissolved Facilities as part of a “rebranding initiative” and internally assigned administration of the Contract, the employees responsible for performing the Contract, and the compensation received from the Judicial Council under the Contract to a newly formed subsidiary, Jacobs Project Management Co. (“Management”), all without the Judicial Council’s knowledge or consent. In the process, Jacobs caused Management to obtain a contractor’s license but allowed Facilities’ license to expire. Nonetheless, Facilities continued as the signatory under the Contract, executed amendments to it, issued invoices and received payments, and maintained in its own name the insurance and bond required under the Contract.

When the Judicial Council discovered that Facilities had been unlicensed for almost a year, it sued Facilities for violation of the Contractor’s State License Law (“License Law”) and for disgorgement under Business and Professions Code section 7031. In total, the Judicial Council sought disgorgement of some $18 million it had paid Facilities for unlicensed work!

At trial, however, a jury found that the effect of the expiration of Facilities’ contractor’s license was de minimus and that the Judicial Council was unharmed because Facilities was licensed at the time it performed work under the Contract and Management was licensed at the time it performed work under the Contract.

The Judicial Council appealed.

Official Call

On appeal, the Court of Appeals reversed. According to the Court, any failure of compliance “whether or not technical or de minimis” is a violation of the License Law. By continuing to serve as the contracting entity under the Contract after the internal assignment of the Contract for the work requiring a contractor’s license, the Court explained, Facilities continued to act in the capacity of a contractor and was thus required to be licensed until the time it was relived of this role by the assignment. Because Facilities was unlicensed for part of its contract performance, the entire $18 million it had received in compensation (note: even the compensation it had earned while it was licensed) was subject to disgorgement under Business and Professions Code section 7031.

While the License Law allows a contractor who has failed to strictly comply with the License Law to avoid such forfeiture if a court determines that the contractor substantially complied with the License Law, explained the Court of Appeals, in order to demonstrate substantial compliance, Facilities would have to show (1) that it was licensed prior to performing under the contract, (2) that it acted reasonably and in good faith to maintain its license, (3) that it was unaware of any failure of licensure upon performance, and (4) that it acted promptly and in good faith to reinstate its license when it learned it was invalid.

While the Court of Appeals remanded the case to give Facilities a chance to show whether it substantially complied with the License Law, the writing appears to be on the wall, as the likelihood of Facilities being able to to show that it acted reasonably and in good faith to maintain its license, that it was unaware of any failure of licensure upon performance, and that it acted promptly and in good faith to reinstate its license when it learned it was invalid, appears slim indeed.

Post-Game Wrap Up

We’re less likely to chuck the chips at the TV on any given Sunday when the flag on the play is for an ugly foul (say, unnecessary roughness) than when it’s for something more technical (say, delay of game by a nanosecond). But when it comes to contracting, the Court of Appeal’s message in Jacobs Facilities is clear:  If you’re required to hold a contractor’s license to perform work in California, you dang well better, and this includes during corporate reorganizations where a “new” company takes over the work of an “old” company, even if you’re using the same personnel.