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Conflict Minerals Rule Partially Overturned on Constitutional Grounds

Wednesday, April 16, 2014
Sandler, Travis & Rosenberg Trade Report

A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled April 14 that a requirement to publicly disclose that a company’s products may use conflict minerals violates First Amendment protections of free speech. The decision could complicate efforts by thousands of affected companies to meet the May 31 deadline to submit their first conflict minerals reports to the Securities and Exchange Commission. The full appeals court will also rule on this “compelled speech” issue later this year in a case involving Department of Agriculture regulations on the country of origin labeling of certain meat products.

Under the 2010 Dodd-Frank Act and the SEC’s implementing regulations, companies that file reports with the SEC under the Securities and Exchange Act of 1934, whether foreign or domestic, must disclose their use of tantalum, tin, gold or tungsten originating in the Democratic Republic of Congo or an adjoining country if those minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. The minerals at issue are used to make a wide range of goods such as cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass and lamps. The first reports, covering calendar year 2013, are due May 31, 2014.

Among other things, the SEC regulations require companies that use any of the designated minerals to conduct a reasonable inquiry to determine whether they originated in the covered countries. If the inquiry determines that the company knows or has reason to believe that the minerals may have originated in those countries, the company must undertake due diligence on the source and chain of custody of its conflict minerals, file a conflict minerals report with the SEC and make that report publicly available on its Web site. The company must list in that report any products it manufactures or contracts to manufacture that are not found to be “DRC conflict free” (i.e., they contain minerals that may have directly or indirectly financed or benefitted armed groups in the covered countries).

The appeals court’s majority decision ruled that this disclosure requirement violates First Amendment protections by essentially requiring companies to criticize their own products. “It is far from clear that the description at issue – whether a product is ‘conflict free’ – is factual and non-ideological,” the majority wrote. “Products and minerals do not fight conflicts. 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. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that ‘message’ through ‘silence.’ 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.”

The other judge hearing the case, however, said the court should not have ruled on the constitutionality issue because its decision “might effectively be undercut” by the full court’s decision in the COOL case. Oral arguments in that case are scheduled for May 19.

The court upheld the rest of the conflict minerals regulations against other challenges. For example, it rejected arguments by business organizations that the SEC did not adequately analyze the costs (estimated at $3-4 billion initially and $207-609 million annually thereafter) of the regulations or determine whether they would actually achieve their intended purpose. Given that the benefits of the rule relate to promoting peace and stability in the Congo and are thus “immeasurable,” the court said, it is “difficult to see what the Commission could have done better.” The court also approved the SEC’s decision not to include a de minimis exception that would have allowed small amounts of conflict minerals to be present in a company’s products without triggering the disclosure requirement, stating that the SEC relied on text, context and policy concerns to infer that “Congress wanted the disclosure regime to work even for those small uses.”

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