DC Circuit Dumps ‘Conflict Minerals’ Rule

(CN) - The Securities and Exchange Commission's rule requiring companies to disclose their use of "conflict minerals" violates the First Amendment, the D.C. Circuit reaffirmed.

Congress ordered the Securities and Exchange Commission (SEC) to enact the conflict minerals rule in 2010, warning regulators that American companies were fueling "an emergency humanitarian situation" in central Africa by using conflict minerals - tantalum, tin, tungsten and gold - in their products.

Under the rule, codified as Section 1502 of the Dodd-Frank Act, any company whose products include conflict minerals that are "necessary to the functionality or production" of the product must inform the commission whether those minerals originated in the Democratic Republic of Congo (DRC) or an adjoining country.

Implicated companies must submit a report, known as a Form SD, to the SEC that includes a "description of the measures taken ... to exercise due diligence on the source and chain of custody of such minerals," and "a description of the products manufactured or contracted to be manufactured that are not DRC conflict free," according to the statute.

Companies must also explain "the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity."

The SEC purportedly expects companies to exercise due diligence if it spots any "red flags" indicating that the minerals it uses come from central Africa.

If such diligence shows that its minerals did indeed come from the region, the rule requires it to draft a conflict minerals report and post it on its website.

Aside from the report, however, the rule does not require any type of label or disclosure on products themselves.

The National Association of Manufacturers, the U.S. Chamber of Commerce and Business Roundtable challenged virtually every facet of the rule in a federal complaint.

A federal judge initially upheld the rule, but the D.C. Circuit voided the rule last year on First Amendment grounds.

The appeals panel reaffirmed its decision 2-1 on Tuesday after it agreed to reconsider the decision in light of the court's en banc decision in American Meat Institute v. USDA , which upheld federal regulations requiring meat producers to include country-of-origin labeling on their products.

Congress clearly stated that it enacted the conflict minerals rule for humanitarian reasons, not commercial reasons, according to the 25-page opinion.

The rule anticipates the possibility that some companies will boycott mineral suppliers from central Africa.

But "how would that reduce the humanitarian crisis in the region?" Circuit Judge Raymond Randolph asked, writing for the majority. "The idea must be that the forced disclosure regime will decrease the revenue of armed groups in the DRC and their loss of revenue will end or at least diminish the humanitarian crisis there. But there is a major problem with this idea - it is entirely unproven and rests on pure speculation."

The court said the government's interest in forcing speech cannot rest on "speculation or conjecture." Appellants also presented evidence that the conflict rule may have backfired.

"Because of the law, and because some companies in the United States are now avoiding the DRC, miners are being put out of work or are seeing even their meager wages substantially reduced, thus exacerbating the humanitarian crisis and driving them into the rebels' camps as a last resort," Randolph said.

The SEC has the burden in a case such as this to prove that the adopted rule would actually alleviate the humanitarian crisis in the Congo.

But "the SEC has made no such demonstration in this case and, as we have discussed, during the rulemaking the SEC conceded that it was unable to do so.

"This in itself dooms the statute and the SEC's regulation," Randolph wrote.

Randolph, a George H.W. Bush appointee, was joined in the opinion by Circuit Judge David Sentelle, a Reagan appointee.

Judge Sri Srinivasan, an Obama appointee, filed a 29-page dissent.

He objected to appellant's comparison of the conflict disclosure rule to Hester Prynne's "A" in Nathaniel Hawthorne's "The Scarlet Letter."

"When a law mandates disclosure of 'particular factual information' about a company's product, the Supreme Court has said, the company has only a 'minimal' cognizable interest in withholding public disclosure," Srinivasan said. "Requiring a company to disclose product information in the commercial marketplace is not the same as requiring Hester Prynne to 'show her scarlet letter in the town marketplace.'"

He further argued that even if Congress did not anticipate all the repercussions of the rule, "the law was reasonably designed to further its aim of reducing funding for armed groups through the conflict minerals trade.

"Indeed, the law has done precisely that," Srinivasan wrote. "If unanticipated downstream effects eventually call into question the ongoing desirability of a law working as intended, it should be up to the political branches to alter or repeal it, not to the judicial branch to invalidate it."

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