On July 23, 2013, the U.S. District Court for the District of Columbia dismissed in its entirety a legal challenge to the Conflict Minerals Rule (Rule) brought by several business groups. Although there is no word yet on whether the plaintiffs will appeal the ruling, it is unlikely that an appeal would have substantial traction. With this uncertainty on the Rule's status removed, companies that have not yet started to take steps to comply - or to respond to customers who must comply - should now do so.
The Conflict Minerals Rule
The Securities and Exchange Commission (SEC) promulgated the Rule pursuant to the 2010 Dodd-Frank Act, issuing the final rule in August 2012. In brief, subject to certain limitations and exceptions, the Rule requires most publicly traded companies to determine whether they use certain "conflict minerals" - essentially, gold, tin, tungsten and tantalum. If a company uses these minerals, it must determine whether they originate in "covered countries" - the Democratic Republic of Congo (DRC) and adjoining countries. If a company's conflict minerals originate in a covered country, it must determine whether the minerals are "conflict free" - i.e., that use of the minerals will not "directly or indirectly finance or benefit armed groups" in the covered countries. Depending on the results, the company is required to report its determinations to SEC and place its SEC reports on its public website.
The challenge to the Rule was brought by the National Association of Manufacturers (NAM), U.S. Chamber of Commerce and Business Roundtable. These organizations challenged the Rule on two grounds:
- That requiring a company to post its conflict minerals reports on its public website "compels" speech in violation of the First Amendment
- That the Rule is, in several respects, "arbitrary and capricious" under the Administrative Procedures Act (APA)
On the constitutional claim, the court found that the public disclosure requirement - posting on the company website - passed muster under the applicable standard of review because that requirement "directly and materially advances" Congress's goal of promoting peace and security in and around the DRC and is a "reasonable fit" in achieving that goal. Thus, the court concluded that the Rule's public disclosure requirement does not violate the First Amendment.
With respect to their APA claims, the plaintiffs essentially threw in the kitchen sink, asserting that SEC:
- Failed to adequately weigh the Rule's costs and benefits
- Underestimated certain of the Rule's costs
- Did not provide a de minimis exemption
- Prescribed a statutorily impermissible process for determining the country of origin for minerals
- Impermissibly included companies that "contract to manufacture" products with conflict minerals
- Impermissibly allowed a longer phase-in period for small companies
The court reviewed each of these claims and found that the SEC did not exceed its mandate under Dodd-Frank and did not fail to meet any other statutory obligations or limitations. The court further found that the SEC's decisions in crafting the Rule were not arbitrary and capricious. Based on these findings, the court dismissed all of the plaintiffs' APA claims.
It is unclear at this point whether the business groups that brought this case will appeal the District Court's decision. If they do, the U.S. Court of Appeals for the D.C. Circuit will review the legal issues de novo, applying the same standard of review as the District Court. Nevertheless, it is very unlikely that the appellate court will overturn each and every holding by the District Court. In any case, a ruling probably would not be forthcoming until late 2013 at the earliest. In the meantime, the first compliance period - calendar year 2013 - is already more than half over.
Therefore, any company that has delayed taking compliance measures related to the Rule, in the hope that the courts would remand it to the SEC for a time-consuming rewrite, should now move on. Companies should now strongly consider taking appropriate steps to comply with the Rule, e.g., requesting information from suppliers regarding use and sourcing of conflict minerals and responding to information requests from customers.