D.C. Circuit Rules A Provision Of The SEC Conflict Minerals Rule Violates The First Amendment

by Pepper Hamilton LLP
Contact

On April 14, 2014, the D.C. Circuit Court of Appeals in Nat'l Ass'n of Mfrs. v. SEC, 2014 BL 102614, D.C. Cir., No. 13-5252, 4/14/14) (available at http://www.cadc.uscourts.gov/internet/opinions.nsf/D3B5DAF947A03F2785257CBA0053AEF8/$file/13-5252-1488184.pdf) upheld all aspects of the Securities and Exchange Commission (SEC)’s conflict mineral rule, except for holding unconstitutional as compelled speech a provision of the rule that required a company to describe its products as not “DRC conflict-free” in a post on its Web site if its products are not free of certain “conflict minerals” (e.g., tin, tungsten, tantalum and gold) originating in the Democratic Republic of the Congo (DRC).

The court cited prior case law holding that “[t]he right against compelled speech is not, and cannot be, restricted to ideological messages” and “the speaker has the right to tailor the speech, [which] applies ... equally to statements of fact the speaker would rather avoid.” Id. at 19. The court questioned whether designating a product as “DRC conflict-free” was factual and non-ideological because “[p]roducts and minerals do not fight conflicts. The label ‘conflict-free’ is a metaphor that conveys moral responsibility for the Congo war.” The court reiterated prior holdings that in this type of First Amendment case, the government must show a substantial government interest that is directly and materially advanced by the restriction, and that the restriction is narrowly tailored. Id. at 21.

The SEC rule did not satisfy that standard because the SEC did not present evidence that less restrictive means would fail. Id. at 22. Specifically, “issuers could use their own language to describe their products, or the government could compile its own list of products that it believes are affiliated with the Congo war, based on information the issuers submit to the Commission.” Id. at 22. In fact, the court noted that a centralized list compiled by the SEC in one place may even be more convenient or trustworthy to investors and consumers. The SEC failed to explain why the alternatives to regulating speech would be any less effective. The right to explain compelled speech is inadequate to cure a First Amendment violation. The opinion suggests that issuers may provide their own more detailed and nuanced explanation of what “DRC Conflict-Free” means on their Web sites, if they voluntarily choose to do so.

There may not be much practical impact of this successful First Amendment challenge, since it appears that the SEC is free to post on its Web site its conclusion that the issuer’s products are not “DRC conflict-free.” The ruling does avoid forcing companies into any confusing “admission” that may be interpreted to imply a degree of support for the conflict that simply does not reflect reality, and allows a company to use its own characterization of the facts reported to the SEC. Otherwise, this decision gives the SEC a green light to proceed on the other aspects of the Conflict Minerals Rule.

Even this First Amendment victory could be short-lived. One member of the panel of three judges deciding the case suggested that the D.C. Circuit hold the First Amendment portion of the opinion in abeyance until the D.C. Circuit en banc rules concerning a similar First Amendment compelled speech case involving a U.S. Department of Agriculture rule requiring labeling requirements for meat. The majority disagreed with that suggestion, even though the en banc ruling might require a rehearing of the First Amendment ruling on the Conflict Minerals Rule.

To the disappointment of the trade associations challenging the rule (and many companies that were following this challenge), the court upheld the remaining challenges to the SEC regulations. Specifically, the court held that the SEC “did not act arbitrarily and capriciously by choosing not to include a de minimis exception,” because conflict minerals “are often used in products in very limited quantities” and such an exception “could ‘thwart’ the statute’s goals by leaving unmonitored small quantities of minerals aggregated over many issuers.” Id. 9-10. This provision bore a “rational connection” to the facts, so it was upheld.

The court also upheld the requirement to conduct “due diligence” if, after inquiry, an issuer “has reason to believe that its necessary conflict minerals may have originated in ‘covered countries’,” because the statute does not say in what circumstances an issuer must perform due diligence before filing a report and, therefore, since the statute “is silent or ambiguous with respect to the specific issue at hand” then the SEC “may exercise its reasonable discretion in construing the statute.” Id. at 10.

The SEC’s expansive interpretation of persons covered, which includes issuers that only contract to manufacture, was upheld. The court reasoned that the SEC interpretation of persons covered: (a) “reconciles otherwise confusing and conflicting provisions ‘into an harmonious whole’;” (b) “provided policy justifications and structural inferences supporting its decision;” and (c) was rational. Id. at 13.

The court also upheld a two-year phase-in period for larger issuers and a four-year phase in for small issuers. The court reasoned that “large issuers could exert greater leverage to obtain information” than smaller issuers, and thus did not require the longer phase-in period afforded to smaller issuers. Id. at 14.

Finally, the court held that the SEC “exhaustively analyzed the final rule’s costs” and the court found “it difficult to see what the Commission could have done better” since the SEC determined that it was unable to readily quantify the benefits because it “lacked data” and, therefore, relied on Congress’s determination that the costs were “necessary and appropriate.” Id. 16.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP
Contact
more
less

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!