On Monday, a federal appeals court struck down a rule implementing the Dodd-Frank Act’s requirement that companies disclose whether their products contain conflict materials originating from the Democratic Republic of Congo (DRC), or adjoining countries. A divided (2-1) panel of the U.S. Court of Appeals for the D.C. Circuit ruled [PDF] that the U.S. Securities and Exchange Commission (SEC) rule compelled commercial speech in violation of the First Amendment.
Industry groups challenged the SEC’s final rule on Administrative Procedure Act (APA), Exchange Act, and First Amendment claims. In National Association of Manufacturers v. Securities and Exchange Commission, the industry groups appealed the District Court’s rejection of their claims, but only prevailed with respect to the First Amendment challenge.
The APA claim in part attacked the rule’s lack of a de minimis exception. As we reported in November, because the SEC rule does not contain a de minimis exception, the disclosure requirement – which also calls for due diligence and auditing – could apply to firms that use conflict minerals in very small amounts as catalysts in the manufacturing process. The Court upheld the decision not to include a de minimis exception, finding that the SEC, “relying on text, context, and policy concerns, inferred that Congress wanted the disclosure regime to work even for small uses,” and a de minimis exception would thwart the statute’s goals.
The Exchange Act challenge also failed, as the Court found that the SEC’s cost-benefit analyses as required by the Exchange Act were “reasonable,” even though the rule’s “compelling social benefits” were not quantifiable.
However, the Court sided with the industry groups with regard to the SEC rule’s requirement that companies describe its products as not “DRC conflict free” in reports filed with the Commission and on the companies’ own websites. Writing for the Court (and joined by Judge Sentelle), Judge Randolph found that rational basis review was not appropriate for this type of speech, because it only applies to “purely factual and uncontroversial information,” in cases in which “disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers.” In this case, the SEC did not argue that the rule related to preventing consumer deception. Judge Randolph concluded that requiring the use of the “conflict free” label was found to convey a “moral responsibility for the Congo war,” tantamount to “compelling an issuer to confess blood on its hands” in interference with the First Amendment.
The Court further found that the SEC’s rule failed to meet the intermediate standard for commercial speech set out in Central Hudson, which “invalidates regulations for which narrower restrictions on expression would serve the government’s interest as well.” (Quotations omitted.) In this case, the SEC presented no evidence that less restrictive means would be ineffective, and the Court rejected its argument that the rule’s minimal impact was dispositive of the “narrowly tailored” requirement.
Notably, Judge Srinivasan declined to join the Court’s opinion with respect to the First Amendment claim, arguing that the issue should have been held in abeyance and part of the SEC rule stayed until the Circuit’s en banc re-hearing of a related case, American Meat Institute v. United States Department of Agriculture, regarding meat labeling.
Moving forward, the rule’s effective date for compliance is June 2, and the SEC has not yet offered a stay or guidance to companies on how to comply with the partially-invalidated rule. The SEC has also not yet announced whether it will seek to participate in the AMI case; otherwise, the case will be remanded to the D.C. District Court.