April 28, 2014
Conflict Minerals and Speech: D.C. Circuit Strikes Down Part of SEC’s Conflict Mineral Rule on First Amendment Grounds
April 28, 2014
What Congress and the SEC did: In 2010, Congress enacted Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required the SEC to adopt and issue regulations requiring companies using “conflict minerals” (i.e., tin, tungsten, tantalum and gold, and their derivatives) to investigate and disclose the origin of those minerals. On November 13, 2013, the SEC issued rules pertaining to disclosure reporting of conflict minerals. The rules require SEC reporting companies who either manufacture or contract to manufacture products containing conflict minerals that are “necessary to the functionality or production of” such products to comply with the conflict minerals rules, including conducting a “reasonable country of origin” inquiry as to the origin of the conflict minerals, performing additional due diligence (if warranted), and potentially filing a conflict minerals report detailing, among other things, whether the products have “not been found to be ‘DRC conflict free.’” Companies that file a conflict minerals report with the SEC, are also required to publish the reports on their websites.
How the courts interpreted it: The National Association of Manufacturers, along with a number of other plaintiffs, filed a lawsuit in the U.S. District Court for the District of Columbia, challenging the conflict mineral rule under the Administrative Procedures Act, the Securities Exchange Act of 1934, and the First Amendment to the U.S. Constitution. The district court ruled in favor of the SEC on all claims. On appeal, the U.S. Court of Appeals for the D.C. Circuit upheld the district court’s rulings under the Administrative Procedures Act and the Exchange Act, but reversed the district court’s ruling on the First Amendment grounds. The Court of Appeals held that the requirement in the SEC conflict minerals rule to label products as “not being found to be ‘DRC conflict free’” was a violation of the First Amendment to the U.S. Constitution.
How this affects the industry: Because the Court of Appeals’ decision did not strike down the disclosure or reporting requirement under the SEC conflict minerals rule (as the decision only applies to the requirement to label products as “not being found to be ‘DRC conflict free’”), SEC reporting companies are still required to comply with the SEC’s conflict minerals rule and publicly disclose all products that are not DRC conflict free. What companies ARE now able to do is LABEL those products differently – not deceptively, but differently. However, the Court of Appeals did not provide guidance on what labelling would be acceptable and what would not.
Moreover, the Judge writing the concurring (in part) opinion, reminded us that there is another case currently pending in the court of appeals that is scheduled to be heard en banc in May, 2014, which could arguably affect the standard applied by this court of appeals in rendering its decision.
What does this mean to you? If you are an SEC reporting company that is subject to the SEC’s conflict minerals rule, and even if you aren’t directly subject to the rule but are indirectly impacted by it (such as through your customers), the best advice right now is stay tuned for any changes that may come in the near future.