Friday, November 13, 2015

Uncertain Future for Conflicts Minerals Rule

By Mark S. Nelson, J.D.

The D.C. Circuit has denied a request by the SEC and Amnesty International USA for the full court to rehear the panel decision in the conflicts minerals case. The SEC and the human rights group had both hoped the appeals court would take yet another look at the commercial speech issue presented by the case in light of the court’s en banc ruling in a related case over a year ago (National Association of Manufacturers v. SEC, per curiam, November 9, 2015).

First Amendment worries. The three-judge panel had twice struck down the SEC’s requirement that companies post these disclosures on their websites as a violation of the First Amendment. The SEC and Amnesty International saw a glimmer of hope in the D.C. Circuit’s AMI decision, which extended the Supreme Court’s Zauderer precedent into new territory. But a two-judge majority upon panel rehearing in the conflict minerals case hewed closely to its earlier opinion, although it offered a second basis for its decision in order to account for the AMI case.

As a result, the SEC’s rule and the Dodd-Frank Act provision are unconstitutional to the extent they require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’” Business groups that challenged the SEC’s rule had argued that the disclosure requirement was akin to compelling them to confess blood on their hands.

Little can be gleaned from the court’s terse order denying en banc rehearing, except that two judges would have refused to let the Tobacco Control Legal Consortium file a friend of the court brief backing the SEC. That brief urged the full court to rehear the conflict minerals decision because of its potential impact on organizations that depend on mandated public disclosures to help inform the public about health and environmental issues. The AMI decision had overruled other D.C. Circuit cases to the extent they had improperly limited Zauderer, including the conflict minerals decision and the FDA’s case involving R.J. Reynolds Tobacco Co.

The conflict minerals provision in the Dodd-Frank Act required the SEC to implement rules for public companies to disclose information to the Commission and to investors about their supply chains for so-called conflict minerals that are mined in the Democratic Republic of the Congo and which may aid the financing of armed groups there and in adjoining countries. The sense of Congress accompanying the provision noted the need to spotlight instances of sexual- and gender-based violence in the DRC that contributes to a humanitarian emergency.

Few options but issues persist. The SEC’s options are now dwindling, but a rule rewrite or an appeal to the Supreme Court are at least possible. Still, the debate over the types of disclosures companies may be required to make in their future SEC filings is likely not going away.

In July, Rep. Carolyn Maloney (D-NY) introduced the Business Supply Chain Transparency on Trafficking and Slavery Act of 2015 (H.R. 3226) that would require firms to disclose if their supply chains involve labor that may be the product of human rights abuses. Senator Richard Blumenthal (D-Conn) also has re-introduced S. 1968, a bill he previously said would achieve many of the same goals as the Maloney bill.

The case is No. 13-5252.