On August 22, 2012, the Securities and Exchange Commission (“SEC”) issued its final rule implementing a provision of the Dodd-Frank financial reform legislation that requires publicly traded companies to disclose whether their products contain the minerals tantalum, tin, gold or tungsten, which have been associated with financing of warfare in the Democratic Republic of Congo and surrounding areas of Central Africa. Disclosure is not required where retailers do not have any control over the manufacture of the goods. However, the issue of the extent to which private label products sourced by mass retailers would be subject to such disclosures was very contentious during the rulemaking process.
The final rule states that a Conflict Minerals Report must be filed where such minerals are “necessary to the functionality of a product manufactured or contracted to be manufactured by the company.” The SEC’s accompanying guidance fact sheet states that:
A company would be considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination would be based on the facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing.
A company would not be deemed to have influence over the manufacturing if it merely:
- Affixes its brand, marks, logo or label to a generic product manufactured by a third party.
- Services, maintains or repairs a product manufactured by a third party.
- Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.
The financial press has generally construed the first of these three enumerated “safe harbors” as excluding private label products. However, the suggestion that “some actual influence” over the manufacturing of products and emphasis on an analysis of “the facts and circumstances taking into account the degree of influence” not only creates a high degree of ambiguity and uncertainty for retailers that source specially designed private label products, but also has raised questions for licensors of branded merchandise.
The plain language of the rule seems clearly to exclude licensors from any disclosure obligation with respect to products manufactured or sourced by licensees because the licensor is not involved either in making the licensee’s products or contracting with any third-party manufacturer. Most experienced securities lawyers consider that interpretation to be correct. However, the emphasis on the term “influence” and the failure of the SEC simply to state that a licensor’s exercise of product approval and quality control rights under a trademark license does not create a disclosure obligation raises concerns. By analogy, the role of a brandowner in selecting and contracting for the manufacture and delivery of private label products for its own account would seem to require a considerably higher level of “influence” over the product than that exercised by a licensor. Nevertheless, the SEC’s indication that the facts and circumstances related to “influence” must be analyzed essentially on a case-by-case basis creates an unnecessary degree of uncertainty.
The new rule provides for a two-year phase-in period, and it has been suggested that the SEC may supply clearer guidance for companies which are subject to reporting obligations during