• United States Court of Appeals Holds SEC's Rules Regarding Conflict Minerals Violate First Amendment
  • April 21, 2014 | Authors: Bradley C. Brasser; Charles T. Haag; J. Eric Maki; Joel T. May; Kimberly J. Pustulka
  • Law Firms: Jones Day - Chicago Office ; Jones Day - Dallas Office ; Jones Day - New York Office ; Jones Day - Atlanta Office ; Jones Day - Cleveland Office
  • On April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit held that a portion of the conflict minerals rules adopted by the SEC pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) violates the First Amendment.

    The conflict minerals rules, adopted in August 2012, impose disclosure requirements for reporting companies that manufacture or contract to manufacture a product where "conflict minerals" are necessary to the functionality or production of the product.

    In a lawsuit filed in 2012, trade groups, including the National Association of Manufacturers, challenged the conflict minerals rules in the United States District Court for the District of Columbia on two separate grounds:

    • that the SEC, in adopting the rules, ignored its obligations under the Administrative Procedure Act and the Exchange Act, including the obligation to conduct a proper cost-benefit analysis; and
    • that the disclosure required by the rules was a violation of the First Amendment, thereby rendering the rules unconstitutional

    The district court rejected all the plaintiffs’ claims and granted summary judgment for the SEC on both grounds.

    On appeal, the circuit court rejected each of the plaintiffs’ arguments under the Administrative Procedure Act and the Exchange Act and acknowledged the appropriateness of the SEC’s rulemaking process. The circuit court held, however, that Section 1502 of Dodd-Frank and the SEC’s rules violate the First Amendment to the extent that the statute and rule require companies to report to the SEC and post on their websites that their products have not been determined to be "DRC conflict free." The circuit court noted:

    The label 'conflict free' is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups...By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.

    In its opinion, the circuit court refused to apply the lenient "rational basis" standard of review applied in circumstances in which factual disclosure is compelled to prevent deception of consumers. Instead, the circuit court stated that at a minimum, the government must show a substantial government interest in the compelled speech required by the conflict mineral disclosure rules that is directly and materially advanced by a narrowly tailored disclosure requirement. In his concurring opinion, Circuit Judge Srikanth Srinivasan stated that he would have preferred that the circuit court hold in abeyance its consideration of the First Amendment issue until a decision regarding the appropriate standard of review for compelled commercial-speech disclosure was handed down in a separate case pending before the same court.

    The circuit court remanded the case for further proceedings. In light of the uncertainty regarding the actions that the district court will take on remand, or that the SEC may take in the meantime, it would be prudent for companies that are affected by the statute to continue to compile the information currently required to be disclosed pursuant to the rules.

    The push for public disclosure of the sources of conflict minerals is likely not over. This setback for the SEC may only lead to a temporary delay in the implementation of the statutory requirements. As an initial matter, the SEC may pursue further judicial review, including but not limited to a rehearing en banc.