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DC Circuit Reaffirms that Disclosure Requirement Violates First Amendment

In a 2-1 decision, a three-judge panel from the U.S. Court of Appeals for the DC Circuit reaffirmed its previous decision striking down a narrow portion of the U.S. Securities and Exchange Commission’s (SEC) conflict minerals rule. See NAM v. SEC, No. 13-5252 (DC Cir. Aug. 18, 2015). The DC Circuit again concluded that the rule’s requirement that companies describe their products as “not found to be DRC conflict free” violates the First Amendment, but left intact the rule’s other requirements. The Court distinguished previous cases involving compelled disclosures from this case and found that requiring the use of the phrase “not found to be DRC conflict free” does not pass Constitutional muster, nor does it materially advance the government’s interest in reducing conflict in central Africa. 

Background

The National Association of Manufacturers (NAM) brought suit against the SEC shortly after the SEC issued its conflict minerals rule implementing Section 1502 of the Dodd-Frank Act in 2012. The rule requires issuers of U.S. securities to report on their use of tungsten, tantalum, tin, and gold in the products they manufacture, and the due diligence efforts the issuer undertook to ensure its use of those minerals did not support armed groups in the Democratic Republic of Congo (DRC). NAM argued, among other things, that the rule impermissibly compels speech, in violation of the First Amendment, by requiring companies to describe their products as “not found to be DRC conflict free.” This, NAM argued, violated the companies’ First Amendment rights by forcing them to adopt a political position denigrating their own products. 

In April 2014, the DC Circuit struck down the portion of the rule that required issuers to describe their products as “not found to be DRC conflict free” because the requirement did not pass the “heightened scrutiny” test the Court applied. A subsequent en banc DC Circuit decision in a case challenging the legality of country-of-origin labeling requirements for meat products, American Meat Institute v. U.S. Department of Agriculture, interpreted Supreme Court precedent in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio to mean that the more government-friendly “rational basis” test applied to compulsory disclosures of “purely factual and uncontroversial information.” 

Panel Rehearing

In response to the SEC and intervenor Amnesty International’s petitions for rehearing of the April 2014 decision in the conflict minerals case, the same three-judge panel invited supplemental briefing from the parties on what, if any, effect the American Meat Institute decision should have on the conflict minerals case. The briefing focused heavily on whether the rule’s requirement to describe products as “not found to be DRC conflict free” was a disclosure of “purely factual and uncontroversial” information. The Court found, however, that it did not need to reach that question because Zauderer and American Meat Institute can be distinguished from the conflict minerals case. The Court found Zauderer and American Meat Institute were limited to factual disclosures in advertising and point-of-sale communications directly to buyers of products, while the conflict minerals rule involves disclosures outside that context. Therefore, the Court reasoned, the more deferential standard of review applied in those cases does not control the outcome here, and the Court was left in the same position as when it made its first conflict minerals decision. This alone allowed the Court to reaffirm its previous decision.

The Court went on to offer an alternative ground for its decision, applying the heightened scrutiny test the DC Circuit cited in American Meat Institute. It first evaluated the adequacy of the governmental objective motivating the disclosure requirement, and second the effectiveness of the measure in achieving that objective. The Court assumed the government’s stated interest in ameliorating the humanitarian crisis in the DRC satisfied the first part of the test, but found the SEC has not met its burden of demonstrating that requiring the use of the phrase “not found to be DRC conflict free” would in fact materially advance that interest. This, the Court said, “doomed” the requirement.

Next Steps

The Court’s decision means that the current status of the conflict minerals rule remains unchanged. Most of the core elements in the rule—including its supply chain due diligence and reporting requirements—remain in effect. The requirement for issuers to characterize their products as “not found to be DRC conflict free”—which the SEC stayed in light of the Court’s decision last year—will not apply.

In addition, for now, the other elements of the partial stay that the SEC issued in April 2014 also remain in effect. Of most significance to issuers, that means that there is no requirement to obtain an independent private sector audit (unless the issuer chooses to characterize its products as “DRC conflict free”). This result is not directly compelled or addressed by the DC Circuit’s decision, however, and it remains to be seen whether the SEC will modify the content of its stay. 

The SEC could also issue additional guidance. 

Moreover, there could be further action in the DC Circuit. The SEC may appeal to an en banc panel of the DC Circuit. En banc review is discretionary, so the full Court may or may not decide to review the panel’s decision, but this process could take many additional months before it is resolved. The SEC or intervenors who support the rule could also petition the Supreme Court for certiorari.

We will continue to monitor this litigation and the SEC for any further developments. We will also watch for further action on conflict minerals in Europe as the EU moves closer to adopting conflict minerals legislation. In the meantime, companies with conflict minerals reporting obligations may wish to continue to conduct the supply chain inquiries and due diligence required under the rule as they prepare to make their calendar year 2015 disclosures.