On July 23, 2013, the U.S. District Court for the District of Columbia rejected the plaintiffs’ challenge of the SEC's conflict minerals rule and granted summary judgment to the SEC. As a result of the decision, public companies with fiscal years ending on December 31, 2013, that are subject to the conflict minerals rule will need to complete their investigations and reporting requirements related to conflict minerals by May 31, 2014, barring any appeal of this decision by the plaintiffs to the Court of Appeals for the District of Columbia Circuit.

Background

On August 12, 2012, the SEC adopted the conflict minerals rule under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which requires public companies to annually disclose information about their use or manufacture of products containing “conflict minerals,” such as gold, cassiterite (tin), columbite-tantalite (tantalum) and wolframite (tungsten), from the Democratic Republic of the Congo and nine adjoining countries. The goal of this new rule is to increase public pressure on companies to stop using these minerals, which help finance armed groups that create conflict and commit human rights abuses in this part of the world. The general public may be unaware that these “conflict minerals” are used by many companies to manufacture a wide variety of everyday products, such as smartphones, computers, cameras, microchips, cars and numerous other products.

The District Court’s Decision

The three plaintiffs in the case — the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable — challenged the conflict minerals rule on two grounds: (i) that the rule was arbitrary and capricious under the Administrative Procedure Act (APA) and (ii) that the rule violated the First Amendment of the U.S. Constitution by compelling burdensome and potentially damaging disclosures on the companies’ websites stating that certain products are not conflict-free.

The District Court rejected both of these challenges to the conflict minerals rule for the reasons set forth below.

With respect to the APA claims, the District Court held that the SEC was not required to “reevaluate and independently confirm that the Final Rule would actually achieve the humanitarian benefits Congress intended.” The District Court also rejected the plaintiffs’ claim that the conflict minerals rule should have contained a de minimis exception for manufacturers that use small amounts of conflict minerals in their products. The District Court also rejected plaintiffs’ other arguments under the APA, determining that the SEC’s estimate of the costs of compliance with the rule was adequate, and that several specific aspects of the rule adopted by the SEC were not arbitrary or capricious within the applicable judicial review standards. In short, the District Court found the SEC’s interpretation of Dodd-Frank to be reasonable and permissible.

With respect to the plaintiffs’ First Amendment claims, the District Court adopted the “intermediate scrutiny” standard of review articulated by the Supreme Court in the Central Hudson case, which provides that the required disclosures must “directly and materially advance” a “substantial” government interest. The District Court upheld the conflict minerals rule as a valid restriction on commercial speech because it: (i) directly advances the government’s compelling interest in promoting peace in the Democratic Republic of the Congo and (ii) because it merely requires companies to publish “verbatim copies of disclosures already prepared for and filed with” the SEC, just as public companies already publish other required SEC filings on their websites such as annual reports, proxy statements and other investor-related information.

Next Steps

Although the plaintiffs may decide to appeal the District Court’s decision to the Court of Appeals for the District of Columbia Circuit, public companies that are subject to the conflict minerals rule should proceed with their diligence, investigations, and compliance policies and procedures, and continue to work under the assumption that their first conflict minerals reports and Form SD filings will be due on May 31, 2014.

For a complete copy of the decision, see http://www.thecorporatecounsel.net/member/FAQ/Mine/07_13_rules.pdf.