United States: Appeals Court Strikes Down Conflict Minerals Disclosure Rule

Apr 14, 2014 | Jeremy P. Jacobs
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Federal appellate judges today struck down a Securities and Exchange Commission rule that required companies to disclose whether minerals in their products were mined in conflict-ridden central Africa.

In a 2-1 ruling, the U.S. Court of Appeals for the District of Columbia Circuit held that the SEC's "conflict minerals" rule violated the First Amendment by requiring companies to state on their websites whether components of their goods "may have originated" in the Democratic Republic of the Congo.

Senior Judge Arthur Raymond Randolph, writing for the majority, said the rule "requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups" in the Congo.

A company, including one that strongly disagrees with the violence in the Congo, has the constitutionally protected right to express that opinion by placing a disclosure on its website but also through "silence,"

Randolph wrote.

"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," wrote Randolph, a Republican appointee.

The case was brought by several industry associations led by the U.S. Chamber of Commerce and National Association of Manufacturers. At issue are regulations that the SEC was required to promulgate under the 2010 Dodd-Frank Wall Street reform legislation to address the humanitarian crisis in the Congo.

Specifically, the legislation sought to crack down on the use of gold, tantalum, tin and tungsten that armed militias sold to fund their operations.

The trade groups challenged several aspects of the final rule, including its lack of a de minimus exception for companies that used tiny amounts of those minerals. Further, they sought to strike down due diligence requirements for what a company must do to ascertain whether its products contain minerals that came from the conflict zone, as well as requirements forcing contractors to conduct similar diligence efforts.

The court unanimously upheld all those aspects of the rule, which the SEC estimates will cost $3 billion to $4 billion initially and then $200 million to $600 million annually thereafter.

"Although the Commission adopted an expansive rule, it did not go as far as it might have, and it declined to require due diligence by issuers who encounter no red flags in their inquiry," Randolph wrote. "By doing so, the Commission reduced the costs of the final rule, and resolved [NAM's] concern that the rule will yield a flood of trivial information."

Randolph was joined in the opinion by Senior Judge David Sentelle, another Republican appointee. Judge Srikanth Srinivasan, a Democratic appointee, agreed with most parts but argued that the First Amendment challenge should have been severed and put on hold until the resolution of another case involving a Department of Agriculture rule requiring food packaging labels to include the country of origin for meat in the product.

A three-judge panel of the D.C. Circuit originally upheld the USDA rules, but it has agreed to rehear the caseen banc before all of the circuit's judges next month.

Srinivasan said the free-speech issue in both cases is similar, so the court should have waited to rule on the conflict minerals case until the other case is resolved.

Human rights organizations who supported the rule welcomed the majority of the opinion but expressed disappointment about the free speech holding.

However, attorney Jonathan Kaufman of EarthRights International and Oxfam American said he did not think the ruling “will affect the SEC’s ability to issue strong rules for transparency in the extractive industries.”

“Public disclosure of the payments extractive companies make to governments is the narrowest, least restrictive way to accomplish the important goals of Congress, which were to protect investors from hidden risks, promote energy security, and give communities the information they need to ensure the responsible use of natural resource revenues,” he said.

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