Conflict Minerals Challenge: DC Circuit Reaffirms Decision on Rehearing | Practical Law

Conflict Minerals Challenge: DC Circuit Reaffirms Decision on Rehearing | Practical Law

The US Court of Appeals for the District of Columbia Circuit reaffirmed its April 2014 decision that a disclosure requirement of the conflict minerals rule and Section 1502 of the Dodd-Frank Act violates the First Amendment of the US Constitution.

Conflict Minerals Challenge: DC Circuit Reaffirms Decision on Rehearing

Practical Law Legal Update w-000-5308 (Approx. 4 pages)

Conflict Minerals Challenge: DC Circuit Reaffirms Decision on Rehearing

by Practical Law Corporate & Securities
Published on 18 Aug 2015 • USA (National/Federal)
The US Court of Appeals for the District of Columbia Circuit reaffirmed its April 2014 decision that a disclosure requirement of the conflict minerals rule and Section 1502 of the Dodd-Frank Act violates the First Amendment of the US Constitution.
On August 18, 2015, the US Court of Appeals for the District of Columbia Circuit issued a long-awaited opinion on petitions for panel rehearing of National Association of Manufacturers v. U.S. Securities and Exchange Commission. This action was a challenge by several business groups to the SEC's conflict minerals rule (Rule 13p-1 under the Exchange Act), and Section 1502 of the Dodd-Frank Act (codified as Section 13(p) of the Exchange Act), the statute that required the SEC to adopt the conflict minerals rule. In the opinion, the Court of Appeals reaffirmed its April 14, 2014 ruling in the case, effectively preserving the legal status of the conflict minerals rule that has been in place for the first two years of conflict minerals reporting.
In its April 2014 ruling, the Court of Appeals held that the conflict minerals rule and Section 13(p) violate the First Amendment to the US Constitution to the extent they require companies to disclose that their products have "not been found to be 'DRC conflict free.'" As adopted by the SEC, the rule required this disclosure under certain circumstances. In the April 2014 holding, the Court of Appeals rejected several other arguments challenging the rule as arbitrary and capricious under the Administrative Procedure Act and Exchange Act, effectively upholding the remaining requirements of the rule. For more information on the April 2014 holding, see Legal Update, Conflict Minerals Challenge: DC Circuit Strikes Disclosure Provision and Upholds Rest of Rule.
The April 2014 holding did not stay the conflict minerals rule, and both the SEC and the Court of Appeals declined to stay the rule in response to separate motions by business groups. As a result, reporting companies were required to make conflict minerals disclosure in both 2014 and 2015. Under an SEC staff statement, those companies were permitted to make modifications to the disclosure required by the rule to account for the Court of Appeals ruling (for a discussion of these modifications, see Legal Update, Companies Must Report under Conflict Minerals Rule with Modifications: SEC Staff).
It remains to be seen whether the SEC will formally amend the conflict minerals rule so that it is consistent with the Court of Appeals ruling, and whether there will be further litigation in this controversy.

Selected Opinion Highlights

In granting panel rehearing in November 2014 of the April 2014 holding, the Court of Appeals requested that the parties file supplemental briefs on:
  • The effect, if any, of the Court of Appeals' ruling in American Meat Institute v. U.S. Department of Agriculture (760 F.3d 18 (D.C. Cir. 2014) (en banc)) on the First Amendment issue in the conflict minerals case regarding the rule's requirement that companies disclose that their products are not DRC conflict free. In American Meat Institute, the Court of Appeals upheld country-of-origin labeling on meat products, finding that disclosure mandated by Congress regarding the location of an animal's birth, raising and slaughter does not violate the First Amendment.
  • The meaning of "purely factual and uncontroversial information" as used in Zauderer v. Office of Disciplinary Counsel (471 U.S. 626 (1985)) and American Meat Institute.
  • Whether the determination of what is "uncontroversial information" is a question of fact.
Notably, the Court of Appeals states in its August 18, 2015 holding that:
  • The intermediate standard of review set out in Central Hudson Gas & Electric Corp. v. Public Service Commission (447 U.S. 557 (1980)) applies to the conflict minerals rule, and the conflict minerals rule does not pass that standard. In discussing American Meat Institute, the court held that statements as to whether a product is DRC conflict free cannot be considered factual and uncontroversial information.
  • The more lenient rational basis standard under Zauderer is not applicable to compelled disclosures that are unconnected to advertising or product labeling at the point of sale.
  • Even if the more lenient Zauderer standard applied, the conflict minerals rule and Section 13(p) could not pass it. The court states that the Congressional record and SEC rulemaking process did not include findings supporting the conclusion that the challenged disclosure requirement is an effective means to achieve their motivating interest (ameliorating the situation in the Congo). Instead, the link between the disclosure and this motivation was based on "speculation and conjecture," which is insufficient in the First Amendment context.
  • If the requirement for companies to use the phrase "not been found to be 'DRC conflict free'" in their disclosure is the result of an SEC discretionary choice in the rulemaking process (as opposed to being mandated by Section 13(p)), then the statute may not itself be unconstitutional.
For more information on the conflict minerals rule, see Practice Note, Conflict Minerals Diligence.