On August 18, 2015, the US Court of Appeals for the DC Circuit (the Court) re-affirmed by a vote of 2-1 its April 2014 decision striking down as unconstitutional a portion of the Conflict Minerals Rule (the Rule) requiring covered companies to disclose on their websites and in Securities and Exchange Commission (SEC) filings whether certain metals used in products they manufacture or contract to manufacture were “not found to be ‘DRC conflict free.’” While it appears unlikely that the decision itself will significantly alter current due diligence and reporting practices under the Rule and related SEC guidance, companies should remain informed of developments in this area as the SEC may seek to have the case heard en banc or may take this opportunity to revise reporting requirements.
SEC Rule Briefly Summarized
The Rule at issue was adopted by the SEC pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) for the purpose of implementing Congress’ statutorily-expressed intent to eliminate the minerals trade as a source of funding that has enabled decades-long armed violence in the Democratic Republic of the Congo (DRC) and its neighboring countries. The Rule applies directly to SEC-reporting issuers for which any one of four “conflict minerals” – tin, tantalum, gold, and tungsten – is necessary to the functionality or production of products they manufacture or contract to manufacture. Where these preconditions are satisfied, an issuer then may be required to: (1) conduct a reasonable country of origin inquiry (RCOI) to determine if the conflict minerals originated in a covered country; (2) file a Form SD describing the RCOI; and (3) depending on the results of the RCOI, (a) conduct due diligence on the mineral source and chain of custody and (b) file a report describing the due diligence process and disclosing the results.
While the Rule applies directly only to issuers, as described above, it has significant implications for their suppliers. Issuer customers require suppliers to respond to due diligence inquiries, which in turn requires suppliers throughout the supply chain to perform similar due diligence.
History of the Case
This case arose out of an industry challenge brought by the National Association of Manufacturers, the US Chamber of Commerce, and the Business Roundtable (collectively, Appellants). Following a July 23, 2013 decision of the US District Court for the District of Columbia that wholly rejected Appellants’ claims in support of invalidating the rule, Appellants appealed. In the Court’s April 14, 2014 decision, two members of the split three-judge panel rejected the majority of Appellants’ claims, but concluded that the Rule and underlying statute violate the First Amendment to the extent they require regulated entities to describe products on their website and in a report to the Commission as not “DRC conflict free.” The majority’s opinion reasoned that “[t]he label ‘conflict free’ is a metaphor that conveys moral responsibility” for the war in the Democratic Republic of Congo (DRC) and, to the extent the Rule and underlying statute mandate that a company “tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups,” they violate constitutional protections against compelled speech. All other challenges to the Rule were rejected, such that most of the conflict minerals due diligence and reporting requirements remained intact.
Following the Court’s April 14, 2014 decision, the SEC issued a statement clarifying that companies were required to continue filing reports with the SEC that complied with all portions of the Rule that were upheld, but were exempted from describing their products as “DRC conflict free,” “not found to be DRC conflict free,” or “DRC conflict undeterminable.” In that statement, the SEC also clarified that independent private sector audits (IPSAs) would not be required unless a company voluntarily elected to describe its products as “DRC conflict free.”
Highlights of the Decision
In November 2014 the Court deferred petitions from the SEC and Amnesty International seeking a rehearing en banc but granted a panel rehearing in light of a significant intervening decision in American Meat Institute (AMI). In AMI, the Court found no violation of First Amendment rights where the government compelled companies to list information relating to the country in which an animal was born, raised, and slaughtered on packaging labels.
Judge Randolph, joined by Judge Sentelle, distinguished AMI from NAM based on the particular subset of commercial speech at issue in AMI: advertising. Unlike AMI, which focused on compelled speech on product labels, NAM dealt instead with compelled language in SEC reports or on a company’s website. Because such a disclosure was not a voluntary advertisement, the more permissive standard of review in the Supreme Court’s Zauderer opinion did not apply. The Court re-affirmed that the more stringent Central Hudson test applied and, as discussed at length in its April 2014 decision, the disclosure requirements failed to meet that test. In addition, the Court provided an additional, independent ground for its decision by evaluating whether the disclosure requirements would survive even if AMI’s Zauderer analysis applied. In undertaking this additional analysis, the Court determined that the effectiveness of the Rule to obtain the desired outcome (reduction of funds to rebel groups in the Congo) was too uncertain and the compelled disclosure was not based on “purely factual and uncontroversial information.” Judge Srinivasan dissented.
As a practical matter, it remains too early to tell what effect the August 18, 2015 decision ultimately will have on reporting requirements under the Rule. The SEC now has the opportunity to seek a rehearing en banc before the Court, which it may choose to do given the split decision and Judge Srinivasan’s strongly worded dissent. In the meantime, the Court has stayed issuance of its mandate until seven days after disposition of such a petition. The SEC may also choose to file a statement clarifying obligations under the Rule, as it previously did following the April 2014 decision.
Pending such clarification – either in the form of further judicial developments or new SEC guidance – companies should continue to follow guidance provided by the SEC in the April 29, 2014 statement to ensure compliance with the Rule’s reporting requirements.