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United States: Appellate Court Reaffirms Decision that Conflict Minerals Rule Violates First Amendment

(Aug. 25, 2015) A panel of the U.S. Court of Appeals for the D.C. Circuit recently reaffirmed its 2014 judgment that a Securities and Exchange Commission (SEC) rule requiring companies to publicly disclose that their products are not “conflict free” violates the First Amendment. (Nat’l Ass’n of Manufacturers v. SEC, No. 13-5252 (D.C. Cir. 2015) (NAM 2015), U.S. Court of Appeals for the D.C. Circuit website.)

Background

The SEC’s rule on conflict minerals disclosure requires a company covered by the rule to investigate whether conflict minerals—including columbite-tantalite, cassiterite, gold, wolframite, or the derivatives tantalum, tin, and tungsten—required for its products were mined in the Democratic Republic of Congo (DRC) or an adjoining country. (Conflict Minerals, 77 Fed. Reg. 56,274, 56,362-64, Government Printing Office website.) If the company determines that its conflict minerals may have originated in one of those countries, it must file with the SEC, and post on its website, a report with information about the source of the minerals, the results of a private audit, and a statement that the products are not “DRC conflict free.” (Id. at 56, 363-64.)

The D.C. Circuit initially struck down this disclosure requirement in an April 2014 decision. (Nat’l Ass’n of Manufacturers v. SEC, 748 F.3d 359 (D.C. Cir. 2014) (NAM 2014), U.S. Court of Appeals for the D.C. Circuit website.) The court agreed to rehear the case following its July 2014 en banc decision in American Meat Institute v. U.S. Department of Agriculture. (760 F.3d 18 (D.C. Cir. 2014) (en banc) (AMI), U.S. Court of Appeals for the D.C. Circuit website.) In AMI, the D.C. Circuit held that regulations by the U.S. Department of Agriculture requiring companies to indicate on food labels the country of origin of animals in meat products did not violate the First Amendment. (AMI, at 17-18.)

D.C. Circuit Ruling 2015

On rehearing NAM 2014, a panel of the D.C. Circuit, by a 2-1 margin, reaffirmed the decision on August 18, 2015. The majority held that the requirement of the SEC’s conflict minerals rule for companies to publicly state in reports to the SEC and on their websites that their products “have not been found to be ‘DRC conflict free'” violates the First Amendment. (NAM 2015, at 25.) The dissent argued that the disclosure requirement was constitutionally permissible because it involves truthful disclosures of fact. (NAM 2015, dissent at 4.)

The majority held that the First Amendment standard of review in Zauderer v. Office of Disciplinary Counsel (471 U.S. 626 (1985), JUSTIA), did not apply to the conflict minerals disclosure rule. In Zauderer, the U.S. Supreme Court held that disclosure requirements did not run afoul of the First Amendment rights of advertisers as long as the requirements were “reasonably related to the State’s interest in preventing deception of consumers.” (Zauderer, at 651.) In AMI, the D.C. Circuit majority pointed out, the D.C. Circuit had relied on Zauderer‘s “relaxed” rational basis standard of review in holding that the country-of-origin meat-labeling regulations at issue were permitted by the First Amendment (NAM 2015, at 4); in NAM 2014, the court had held that Zauderer did not apply to the conflict minerals rule, as that rule did not relate to protecting consumers against deceptive advertising. (NAM 2014, at 18-19.) After rehearing the case, the majority again held that the Zauderer standard was inapplicable, and that the rule did not pass the more stringent intermediate standard of review required under the First Amendment, as set forth in Central Hudson Gas & Electric Corp. v. Public Service Commission (447 U.S. 557 (1980), JUSTIA; NAM 2015, at 11-12.)

As an alternative ground for its holding, the court indicated that, even if Zauderer, as interpreted under AMI, were to apply, the SEC’s rule, because it does not involve “purely factual and uncontroversial information” about the products, would violate the First Amendment. (NAM 2015, at 12, 19.) The majority argued that compelling a company to state that products are not “DRC conflict free” involves an assignment of moral responsibility for the conflict in the DRC with which the company may disagree. (Id. at 24.) In light of its analysis, the majority concluded that the conflict minerals disclosure rule violated the First Amendment to the extent that it required companies to “report to the [SEC] and state on their website that any of their products have not been found to be ‘DRC conflict free.'” (Id. at 25.)

The dissent noted that public companies are required to “make all sorts of disclosures about their products for the benefit of the investing public” that raise no First Amendment concerns. (NAM 2015, dissent at 1.) The dissent argued that the relaxed Zauderer standard of scrutiny should apply, that a statement that products have not been found to be DRC conflict free is a “truthful, factual disclosure” that would satisfy the Zauderer standard, and, moreover, that such a statement would also survive the Central Hudson intermediate standard applied by the majority. (Id. at 3, 5.)