U.S. Securities and Exchange Commission (Photo: Diego M. Radzinschi/THE NATIONAL LAW JOURNAL)
A federal securities rule that requires companies to publicly declare whether certain minerals used in products are “conflict free” violates the First Amendment, a divided federal appeals court in Washington ruled on Monday.
The U.S. Securities and Exchange Commission adopted the rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit upheld in large part the substance of the rule, which requires covered companies to disclose the “source and chain of custody of its conflict minerals.” The National Association of Manufacturers, represented by Sidley Austin’s Peter Keisler, had challenged the rule.
The appeals court was divided over the requirement that covered companies must on their websites and in SEC reports declare whether a product is “conflict free.” A product is “conflict free,” the appeals court said, “if its necessary conflict minerals did not ‘directly or indirectly finance or benefit armed groups’ in the covered countries, which include the Democratic Republic of the Congo. The minerals at issue include gold, tin and tungsten. (Tungsten, the appeals court noted, is used in products that include lighting, power tools and golf clubs.)
“[I]t is far from clear that the description at issue—whether a product is ‘conflict free’—is factual and non-ideological,” Senior Judge A. Raymond Randolph wrote for the majority. “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.”
SEC lawyers argued that covered companies could in their own terms define “conflict free.” However, “the right to explain compelled speech is present in almost every such case and is inadequate to cure a First Amendment violation,” Randolph wrote, joined by Senior Judge David Sentelle: “Even if the option to explain minimizes the First Amendment harm, it does not eliminate it completely.”
Randolph added: “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.” At oral argument in the case, Randolph called the disclosure rule a “slippery slope.”
Judge Sri Srinivasan, writing separately, said the appeals court should have skipped ruling on the First Amendment challenge. The en banc D.C. Circuit, Srinivasan said, intends to examine in an unrelated case “a question of central importance to the resolution” of the National Association of Manufacturers’ compelled-speech claim.
Other than the First Amendment issue, Srinivasan agreed with the majority in upholding the bulk of the SEC’s conflict-minerals rule.
The rule contains no exception that would give covered companies a pass on disclosure if only a small amount of conflict minerals were used in a particular product, and the SEC “did not act arbitrarily and capriciously by choosing not to include a de minimis exception,” the D.C. Circuit panel said.
“Having established that conflict minerals are frequently used in minute amounts, the commission could reasonably decide that a per-issuer exception could ‘thwart’ the statute’s goals by leaving unmonitored small quantities of minerals aggregated over many issuers,” Randolph wrote.
Randolph called the “conflict mineral” rule “expansive” but said the SEC “did not go as far as it might have.” The final rule, he wrote, “resolve[s] the association’s concern that the rule will yield a flood of trivial information.”
May 31 marks the first deadline for the conflict-minerals disclosure report.