Yesterday a panel of the D.C. Circuit Court of Appeals held the Conflict Minerals Rules’ requirement that a company that issues stock disclose if its products are not “DRC conflict free” violated the First Amendment.
In an effort to de-finance parties engaged in violence and human-rights abuses related to the extraction of gold, tantalum, tin, and tungsten—so-called “conflict minerals”—from Democratic Republic of the Congo, Congress, through rules promulgated by the Securities Exchange Commission, required companies to disclose not “DRC conflict free” in reports filed with the SEC and on the company’s website if they determine upon due diligence that their products contain such minerals. On appeal of the district court’s ruling in National Association of Manufacturers v. Securities and Exchange Comm’n upholding the law, the Association challenged the SEC’s disclosure requirement as unconstitutionally compelling speech in violation of the First Amendment.
In reversing the district judge, the panel majority of the D.C. Circuit rejected the SEC’s argument that the required disclosure was one of “purely factual and uncontroversial information” and therefore, subject to the “rational basis review” under Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985), holding instead that the rational basis review under Zauderer is “limited to cases in which disclosure requirements are ‘reasonably related to the State’s interest in preventing deception of consumers’” (to which neither party argued the Rules are related), and in the context of the First Amendment is the “exception, not the rule.”
That a disclosure is factual, standing alone, does not immunize it from scrutiny because “[t]he right against compelled speech is not, and cannot be, restricted to ideological messages.” Nat’l Ass’n of Mfrs., 717 F.3d at 957. Rather, “the[e] general rule, that the speaker has the right to tailor the speech, applies … equally to statements of fact the speaker would rather avoid.” Hurley v. Irish-Am. Gay, Lesbian & Bisexual Grp., 515 U.S. 557, 573-74 (1995).
The panel majority further found Zauderer inapposite because it “is far from clear that the description at issue—whether a product is “conflict free”—is factual and non- ideological”:
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.
Though the SEC and intervenor Amnesty International argued that the Association’s proposed disclosure alternatives would be less effective and companies could, nonetheless, explain the meaning of “conflict free” in their own terms, the panel majority found the right to explain compelled speech “inadequate to cure a First Amendment violation.”
The D.C. Circuit unanimously affirmed the district court’s rulings relating to other portions in the SEC’s Conflict Minerals Rules—no de minimis exception to the Rules, applying the Rules to companies that only contract to manufacture products, and the due diligence trigger. Judge Srinivasan dissented on the First Amendment issue, contending that the panel’s opinion should be suspended pending the en banc court’s decision in American Meat Institute v. United States Dep’t of Agriculture, which was certified for review to address the relationship between Zauderer and Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980), which applied an intermediate standard of review relating to commercial speech.
The practical implications of this decision for manufacturers will depend on the actions of the SEC in response to the ruling. The D.C. Circuit remanded the case to the district court for “further proceedings.” Although the Conflict Minerals Rules will live on in some form, given the issues in the pending First Amendment case and the dissenting opinion, we think the SEC will seek rehearing of the Court’s decision. It is possible that the Court will stay the reporting requirements under the Rules on its own motion or in response to a request from the Association. In addition, the SEC could voluntarily delay the effective date of the Rules pending revisions.
We will monitor developments and keep you posted. Irrespective of potential changes to the Rules, however, companies should continue to implement and follow reasonable compliance programs in view of the likely ultimate requirements.
A copy of the decision is available here.