U.S. Court of Appeals for the District of Columbia Circuit Holds That Portion of Conflict Minerals Rule Violates First Amendment

by Akin Gump Strauss Hauer & Feld LLP
Contact

On April 14, 2014, the United States Court of Appeals for the District of Columbia issued its decision in the pending court challenge to the conflict minerals rule. The rule was promulgated in 2012 by the Securities and Exchange Commission (SEC) in response to Dodd-Frank Act mandates. After the district court upheld the rule, the National Association of Manufacturers (NAM) appealed. While the court sustained the conflict minerals rule against challenges brought under the Administrative Procedure Act and the Securities Exchange Act of 1934, it held that certain aspects of the rule, and, conditionally, certain aspects of the Dodd-Frank Act, violate the First Amendment. Judge Randolph delivered the opinion of the Court, which concluded that the government failed to demonstrate that the rule is narrowly tailored to achieve its goal. While the Court did not provide express guidance on the reports some companies must file with the SEC beginning on May 31, 2014, it held that the rule’s requirement, that reporting companies list “products” that “have not been found to be DRC conflict free,” is unconstitutional.

The conflict minerals rule aims to reduce the source of funding for armed groups that are committing human rights abuses and contributing to the conflict in the eastern Democratic Republic of Congo (DRC). To accomplish this, the rule generally requires covered companies to: (1) determine whether products that they manufacture or contract to have manufactured include tungsten, tantalum, tin or gold (collectively, “conflict minerals”) that are necessary to the functionality or production of its products; (2) conduct a reasonable country of origin inquiry to determine whether any of its conflict minerals originate in the DRC or adjoining countries (i.e., Angola, Burundi, the Central African Republic, Congo, Rwanda, South Sudan, Uganda, the United Republic of Tanzania, or Zambia) and did not come from recycled or scrap sources; (3) file a Specialized Disclosure (Form-SD) with the SEC; and, if necessary, (4) conduct due diligence on the source and chain of custody of its necessary conflict minerals and file a conflict minerals report as an exhibit to its Form-SD filing. Subject to certain exceptions, the conflict minerals report must also include an independent private sector audit (IPSA) report.

During an interim two- to four-year period, reporting companies may describe their products as “DRC conflict undeterminable” if the results of their due diligence are inconclusive. However, reporting companies that determine that their necessary conflict minerals originated in a covered country, did not come from recycled or scrap sources, and directly or indirectly benefited designated armed groups must list such products in their disclosure and on their public website and state that the products “have not been found to be ‘DRC conflict free.’” This, NAM argued, was compelled speech that runs afoul of the First Amendment.

In its First Amendment argument, NAM only challenged the requirement that an issuer describe its products as not “DRC conflict free” in its report and on its website. A critical question with any First Amendment challenge is which level of judicial review applies. The SEC argued that because the disclosures are purely factual and non-ideological, rational basis review applies. The court disagreed, stating that the controlling precedent limits rational basis review to cases in which purely factual disclosure requirements are reasonably related to the State’s interest in preventing consumer deception. Simply put, compelled speech is not immune from scrutiny merely because it is rooted in fact. As the court indicated, the SEC admitted that the rule was not related to a consumer deception interest.

Although the court concluded that rational basis review does not apply, it declined to state what level of review does apply. In short, the court concluded it did not need to make a level of review determination: since the rule does not satisfy the precedential “Central Hudson” intermediate scrutiny standard, it would not pass under a strict scrutiny standard. The Central Hudson test requires that the government show a substantial government interest that is directly and materially advanced by the restriction, and that the restriction is narrowly tailored. The court determined that the government presented no evidence that less restrictive means would cause the rule to fail to meet its objectives. As such, the court held certain provisions of both the rule and conditionally, the statute, unconstitutional, and remanded the case for further proceedings.

The immediate and long-term implications of the decision are unclear. While some issuers may view this as a “win,” the court did not strike down the entire rule and indeed rejected several of NAM’s arguments targeted at setting the entire rule aside. The court’s holding was narrow. It applied only to the requirement that companies label their products “not DRC conflict free;” additionally, in a footnote, the court included a caveat that the corresponding Dodd-Frank provision is itself unconstitutional only to the extent it imposes this labeling requirement. Thus, if the labeling requirement is purely a result of the SEC’s rule, then the court’s holding leaves the statute unaffected. Furthermore, the court expressly left open the opportunity for the SEC to impose different or less restrictive labeling requirements, or for the SEC to create its own public list of products containing DRC conflict minerals, based on the required due diligence processes.

Several points in Judge Srinivasan’s concurring opinion highlight the complexity of the analysis. In his opinion, the court should not have ruled on the First Amendment issue because the D.C. Circuit is conducting an en banc review of another case, American Meat Institute v. United States Department of Agriculture, that could change the conclusion that rational basis review only applies to compelled speech with an interest tied to preventing consumer deception. As he explains, a critical step in the majority’s First Amendment analysis is that the relaxed, rational basis standard of review did not apply to the conflicts mineral rule, because the rule was not related to a consumer protection interest. Judge Srinivasan asserts that the validity of this principle is being reviewed in the pending American Meat case. Judge Srinivasan argues that if the en banc court decides that “mandatory disclosure” obligations can properly proceed, even if they service interests aside from addressing consumer deception, the present case would need to be reconsidered afresh.

Consequently the conflict minerals rule is still in limbo. It is possible that the SEC will await a possible favorable decision from the en banc court, and then argue to the district court on remand that a rational basis review applies and the rule should survive. It is also possible that NAM will move quickly to seek to enjoin enforcement of the entire rule at the District Court. However, as Judge Srinivasan asserted in his concurring opinion, the Dodd Frank Act “contains no mandate to use any magic words when categorizing those products.” If the courts ultimately agree that the Dodd Frank Act does not compel speech, the D.C. Circuit’s caveat would apply and the NAM decision would not invalidate the statute itself.

Clarification from the SEC about interim responsibilities would be welcomed by the issuer community. In the meantime, issuers should consult with counsel concerning their responsibilities under the conflict minerals rule.

Compliance Guidance: Updated FAQs

Prior to the court’s decision, the SEC published updated conflict minerals FAQs on its website. The updates focused particular attention on the rule’s IPSA requirement. An IPSA of the Conflicts Minerals Report is required if the minerals used in an issuer’s products may have originated in one of the covered countries, but did not finance or benefit armed groups, or if the minerals are classified as Not Been Found to Be DRC Conflict Free. The IPSA evaluates the issuer’s due diligence framework and measures. The FAQs and responses are available at: http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.

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.

© Akin Gump Strauss Hauer & Feld LLP | Attorney Advertising

Written by:

Akin Gump Strauss Hauer & Feld LLP
Contact
more
less

Akin Gump Strauss Hauer & Feld 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!