On August 18, 2015, the United States Court of Appeals for the District of Columbia Circuit reaffirmed its ruling in National Association of Manufacturers v. Securities and Exchange Commission that portions of the SEC’s conflict minerals rules, adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, violate the First Amendment. The court limited its holding “to the extent” that the conflict mineral rules “require regulated entities to report to the Commission and state on their website that any of their products have not been found to be ‘DRC conflict free.’”
Background on the Conflict Mineral Rules
Following enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the Securities and Exchange Commission (SEC) promulgated rules that require public companies that manufacture products for which “conflict minerals” (gold, tantalum, tin or tungsten) are necessary to the functionality or production to make certain disclosures in their public filings. Specifically, public companies that manufacture or contract to manufacture products with conflict minerals must conduct a reasonable country-of-origin inquiry (RCOI) to determine whether the conflict minerals contained in their products originated in the Democratic Republic of Congo (DRC) or adjoining countries, where war a war continues to be waged over these minerals. Depending on the results of the RCOI, a public company may then be required to:
- File a Form SD with the SEC
- Conduct additional due diligence on the source and chain of custody of its conflict minerals
- File a Conflict Minerals Report with the SEC
- Disclose in SEC filings and/or the company’s website information about whether or not the company’s products are “DRC conflict free”
The Litigation Challenging the Conflict Mineral Rules
After the SEC issued the final conflict mineral rules, the National Association of Manufacturers filed a lawsuit in United States District Court for the District of Columbia, challenging the rules on various constitutional and statutory grounds. In pertinent part, it argued that the rules violated the First Amendment by requiring public companies to engage in compelled speech. The district court rejected that argument and granted summary judgment to the SEC (and to an intervenor, Amnesty International).
The Court of Appeals for the District of Columbia Circuit reversed. In April 2014, it held that portions of the conflict minerals rules that required public companies to state that their products have not been found to be “DRC conflict free” violated the First Amendment. Rejecting the SEC’s argument that a deferential review standard (rational basis review) should apply, the court held that under any higher standard—whether intermediate or strict scrutiny—the conflict minerals rules failed. That is because the SEC did not show that the rules were narrowly tailored to achieve a substantial government interest. The court pointed out, for example, that the SEC itself could publish a list of products with DRC conflict minerals that would be even more convenient and trustworthy for investors than compelling many public companies to make disclosures mandated by the rules.
In response, the SEC and Amnesty International asked the three-judge panel to rehear the case. In light of doctrinal developments at the court, the panel agreed. After considering the issue for a number of months, the panel reaffirmed its prior ruling. It squarely rejected the SEC’s renewed argument that rational basis review applied, and again held that the compelled disclosures mandated by the conflict mineral rules violated the First Amendment. But in doing so, the panel majority added a new ground for its decision: even under a more deferential standard, the government’s interest in ameliorating conflict in the DRC was not advanced by the rules. The court concluded: “requiring a company to publicly condemn itself is undoubtedly a more effective way for the government to stigmatize and shape behavior than for the government to have to convey its views itself, but that makes the requirement more constitutionally offensive, not less so.” One judge dissented from the opinion.
Implications of the Court’s Rulings
In April 2014, in response to the panel’s first opinion, the SEC issued further “guidance” on the conflict mineral rules, informing public companies that they need not describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” The SEC guidance also relieved companies of the obligation to conduct an independent private sector audit (IPSA) of a company’s due diligence framework. As a result, very few public companies have conducted IPSAs; in fact, only six companies obtained an IPSA for calendar year 2014—a slight increase over four companies for calendar year 2013.
In light of the panel’s August 18, 2015 opinion, until the SEC issues additional guidance, public companies remain in the same state of uncertainty and are left to follow the agency’s April 2014 guidance. Under that direction, public companies may exclude the actual “DRC conflict free” labels from their products and websites, and no company is required to obtain an IPSA unless it voluntarily elects to describe its products as “DRC conflict free” in its Conflict Minerals Report. But companies still must comply with the remaining, multi-step conflict minerals disclosure and due-diligence process. As of the date of this alert, the SEC has said that it is reviewing the opinion. Until additional guidance is issued by the SEC, public companies should prepare for the upcoming IPSA requirement to the extent that any company plans to voluntarily elect to describe any of its products as “DRC conflict free.”