Guest View: D.C. Circuit Strikes Down Conflict Minerals Rules

Editors note:  In the coming days, there will be a great deal of legal analysis of today’s US Appellate court decision.  Our friend Brink Dickerson, a partner in the Atlanta office of Troutman Sanders, graciously agreed to offer us his views.  Brink can be contacted at brink.dickerson@troutmansanders.com.

In less time than many expected, this morning (April 14, 2014) the Court of Appeals for the D.C. Circuit handed down its decision in the National Association of Manufacturers’ challenge to the conflict minerals rules that the SEC adopted in response to Section 1502 of the Dodd-Frank Act.

The Court ruled that the requirement that companies report whether any of their products are not “DRC conflict free” violates the prohibition against compelled speech.  The Court held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.”  The Court analogized requiring this disclosure to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports,” which would be “obviously repugnant to the First Amendment.”

A critical question in the Court’s analysis was the appropriate standard for the review.  The Court concluded that the proper standard was provided by Central Hudson Gas and Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980), which required the SEC to show “(1) a substantial government interest that is; (2) directly and materially advanced by the restriction; and (3) that the restriction is narrowly tailored. . . .”  The Court found that the SEC had not offered evidence that could meet this standard.  In general, this is a very difficult standard to meet when there is any opportunity for a rule to be tailored more narrowly, which certainly is the case with the conflict minerals rules.  A less demanding standard was proffered by the SEC and others that supported the rules.  In a concurrence, one panel member argued that the Court should have deferred its decision on this aspect of the case pending the outcome of a case currently under en banc reconsideration by the D.C. Circuit and in which the appropriate standard for situations such as this one is under consideration.

Neither the immediate nor the longer-term implications of the decision are clear.  The Court remanded the case to the District Court for further consideration and contemplated the possibility that the SEC might be able to modify the rules to require less disclosure, or possibly different disclosure, that still was compliant with Section 1502.  For example, the SEC might be able to keep intact the overall conflict mineral regime of conducting a reasonable country of origin inquiry, due diligence and the like and just eliminate the ultimate conclusion that must be expressed.  Also, the majority opinion suggested that the issue of the standard for review could be considered as part of the case that that the D.C. Circuit is considering en banc.  On its face, however, the opinion overrules the District Court’s finding that the rules are legal, in all likelihood meaning that the May 31, 2014, deadline for Form SD filings now is inapplicable.

It is noteworthy that the Court found in favor of the SEC on all of the other points raised by NAM.  As a result, if the SEC finds a work-around on the First Amendment issue, there will be little room for NAM or anyone else to challenge the conflict minerals rules.

To avoid uncertainty, it is not unusual in situations such as this for the SEC to defer or suspend  the effectiveness of a rule without waiting for the District Court to either enjoin the rule or take other action.  If it does not, presumably NAM can seek prompt action from the District Court.  With the imminence of the conflict minerals rules reporting deadline, hopefully there will be unambiguous resolution in the next few days.

A copy of the case can be found here.

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