On April 14, 2014, the U.S. Court of Appeals for the D.C. Circuit issued a ruling in National Association of Manufacturers v. Securities and Exchange Commission, holding that one requirement of the SEC’s conflict minerals rules, namely the requirement that issuers report to the SEC and disclose on their website that certain products have “not been found to be ‘DRC conflict free,’” violates the First Amendment of the U.S. Constitution. The Court otherwise upheld the remaining requirements of the conflict minerals rules, rejecting claims that the rules violate the Administrative Procedure Act (APA) and the Securities Exchange Act (Exchange Act).
For a discussion of the SEC’s rules on conflict minerals disclosures, please refer to our August 2012 Client Alert titled “SEC Adopts Final Rules Regarding Conflict Minerals and Resource Extraction Payment Disclosures,” available here.
Section 1502 of the Dodd-Frank Act, which added Section 13(p) to the Exchange Act, directed the SEC to issue rules requiring companies to disclose their use of certain minerals that include tantalum, tin, gold or tungsten if those minerals (1) originated in the Democratic Republic of the Congo (DRC) or an adjoining country and (2) are "necessary to the functionality or production of a product" manufactured or contracted to be manufactured by those companies. Congress enacted Section 1502 because of concerns that the conflict minerals trade was helping to finance conflict in the DRC region and was contributing to a humanitarian crisis.
The National Association of Manufacturers and other business organizations (Association) challenged the SEC’s conflict minerals rules, raising First Amendment, APA and Exchange Act claims. In July 2013, the district court granted summary judgment in favor of the SEC, rejecting all of the Association’s claims, which the Association then appealed.
First Amendment Claim
The Court held that Section 13(p) of the Exchange Act and the SEC’s conflict minerals rules violate the First Amendment by unconstitutionally compelling speech to the extent they require issuers to report to the SEC and disclose on their website that any of their products have “not been found to be ‘DRC conflict free.’” The Court noted in a footnote that if the “conflict free” description is purely a result of the SEC’s rules and not Section 13(p) of the Exchange Act, then Section 13(p) may not itself violate the First Amendment.
In ruling on the First Amendment claim, the Court stated:
Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” . . . By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.
Although the Court rejected the SEC’s view that rational basis review should be applied, it did not determine the appropriate standard of review, concluding that the conflict mineral rules would not survive even an intermediate standard of review because the SEC failed to provide evidence that the rules were narrowly tailored to fit their goals. The Court noted the Association’s suggestions that, rather than the “conflict free” description, the rules could provide for issuers to describe their products in their own language or the government to compile a list of products it believes are affiliated with the conflict in the DRC region based on information submitted by issuers.
Although the Association raised a number of other claims alleging that the conflict minerals rules violate the APA and the Exchange Act, the Court upheld the other aspects of the SEC’s rules, including:
- the absence of an exception to the rules for de minimis uses of conflict minerals.
- the requirement that an issuer conduct due diligence if, after conducting a reasonable “country of origin” inquiry, it has reason to believe that its necessary conflict minerals may have originated in covered countries.
- the application of the rules both to issuers that manufacture their own products and to issuers that only contract to manufacture products.
- the different phase-in periods for large issuers (two years) and small issuers (four years) during which issuers may describe certain products as “DRC conflict undeterminable” and avoid conducting an audit.
The Court also found that the SEC adequately analyzed the costs and benefits of the rules based on available information.
Implications of Ruling
The Court remanded the case to the district court for further proceedings consistent with its ruling. It should be noted that the ruling will not take effect until the Court issues its “mandate.” On the same day as the ruling, the Court issued an order instructing the clerk of the Court to withhold issuance of the mandate until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc, subject to the parties’ right to move for expedited issuance of the mandate for good cause shown. Parties generally have 45 days to timely file a petition for rehearing in this instance; thus, the mandate may not be issued until after the initial reporting deadline under the conflict minerals rules (June 2, 2014). Additionally, the Court is set to rehear a separate case en banc on May 19, 2014 to address the appropriate level of scrutiny for First Amendment claims relating to compelled speech (the Court indicated in a footnote that the ruling provides an opportunity for the parties to participate in the Court’s en banc consideration of the First Amendment question).
It remains to be seen whether the parties will appeal the ruling or the SEC will issue any guidance on the initial reporting deadline in light of the ruling. In any case, issuers should understand that the ruling impacts only one aspect of the conflict minerals rules with respect to the requirement that issuers report that certain products have “not been found to be ‘DRC conflict free’” (and therefore does not impact the “country of origin” inquiry, due diligence investigation or other aspects of the rules). As such, issuers should continue their efforts to timely comply with the rules pending further developments.
A copy of the Court’s opinion can be found here.