DC Circuit confirms conflict minerals ruling

On August 18, 2015, a three-judge panel for the U.S. Court of Appeals for the D.C. Circuit (the "DC Circuit") reheard National Association of Manufacturers, et al. v. Securities and Exchange Commission ("NAM"),1and confirmed its previous holding,2 again finding that one part of the Conflict Minerals Rule's (the "Rule")3 disclosure requirements—the requirement that Issuers4 report to the SEC and state on their website that certain of their products "have not been found to be 'DRC conflict free'" (hereinafter, the "Compelled Disclosures")—violates the First Amendment.5

Following the original NAM decision, the DC Circuit held in another case that the federal government did not violate the First Amendment when it required companies to list on labels of their meat cuts the country in which the animal was born, raised, and slaughtered.6  When asked to review the NAM decision in light of the later decision, the court found that the later decision's holding was not applicable to the Compelled Disclosures, and that even if it was, the Compelled Disclosures would still violate the First Amendment.

The road to rehearing

The DC Circuit first ruled on the NAM case on April 14, 2014, when a divided panel found that the Compelled Disclosures violate the First Amendment by forcing companies to associate themselves with groups engaged in human rights violations, thereby confessing "blood on their hands."7  In making this determination, the court applied the intermediate level of scrutiny provided for in Central Hudson,8 which requires that the government show (1) a substantial government interest that is; (2) directly and materially advanced by the Compelled Disclosures; and (3) that the Compelled Disclosures are narrowly tailored.9 The court also specifically rejected the less burdensome level of scrutiny used in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio10 ("Zauderer"), in which the United States Supreme Court held that "an advertiser's [First Amendment] rights are adequately protected as long as disclosure requirements are reasonably related to the [government's] interest in preventing deception of consumers."11

Following this holding, the original NAM decision's effect on the Rule's due diligence and disclosure requirements remained an open question.  On April 29, 2014, the SEC issued its Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule (the "April 29 Guidance"), stating, among other things, that (1) Issuers are no longer required to identify their products as "DRC conflict free," "DRC undeterminable," or "have not been found to be 'DRC conflict free"; and (2) only Issuers that choose to affirmatively label their products as "DRC conflict free" must obtain an independent private sector audit.12

On July 29, 2014, the DC Circuit issued its opinion in American Meat Institute v. U.S. Department of Agriculture13("AMI"). In that case, the DC Circuit applied the Zauderer standard to hold that the federal government did not violate the First Amendment when it required companies to list on labels of their meat cuts the country in which the animal was born, raised, and slaughtered.14 This holding expanded the use of the Zauderer standard, which the DC Circuit had previously held to apply to only "government compelled disclosures designed to prevent the deception of consumers."15 

Seeking rehearing in NAM, the SEC argued that the proper test the court should apply to determine if the Compelled Disclosures violate the First Amendment is AMI's use of the Zauderer standard, and not the Central Hudson test the court applied in the original NAM decision.16 That is, the SEC argued that it should only be required to show that the Compelled Disclosures are reasonably related to a government interest. This First Amendment issue was revitalized in a November 18, 2014 order, when the DC Circuit granted the SEC's and Amnesty International USA's (an intervenor) petitions for panel rehearing.

The DC Circuit confirms the original NAM decision, again vacating rule's labeling requirement for issuers with products they determine are "not 'DRC Conflict Free.'"

After rehearing NAM, the DC Circuit again held that the Rule and corresponding statute are unconstitutional to the extent that they require the Compelled Disclosures.

In the recent NAM decision, the DC Circuit disagreed with the SEC that the Compelled Disclosures were analogous to the disclosures required in AMI, opining that despite the holding in AMI, the Zauderer standard applies to only cases dealing with advertising or point of sale disclosures, and NAM involves neither.17  Additionally, the court held that even if the Zauderer standard did apply, the Compelled Disclosures would still violate the First Amendment because the SEC did not prove how the Compelled Disclosures achieve the objective congress presumably intended in drafting the statute allowing for the Rule—reducing the humanitarian crisis in the Democratic Republic of the Congo and surrounding areas.18 Finding yet another layer of unconstitutionality, the court also held that even if the SEC had met its burden, the Compelled Disclosures would still violate the First Amendment because such disclosures are not "purely factual and uncontroversial," as required by the Zauderer standard.

Key takeaways

The recent ruling in the NAM case is consistent with the original NAM decision, both of which vacate the part of the Rule that requires Issuers to report to the SEC and state on their website that certain of their products "have not been found to be 'DRC conflict free.'"

As for the current status of the Rule, because the recent NAM  ruling does not usurp the April 29 Guidance, and the SEC has not issued any subsequent guidance, the April 29 Guidance still controls. Thus, for Issuers with Conflict Minerals that are necessary to the functionality or production of a product that the Issuer manufactured or contracted to manufacture, the Issuer must still conduct a Reasonable County of Origin Inquiry and, if necessary, conduct additional due diligence on the origin and the Conflict Minerals, and on whether those minerals directly or indirectly benefitted armed groups in the Democratic Republic of the Congo and surrounding areas. Further, those Issuers must still make the required disclosures that were not vacated by the NAM holdings or revised in the April 29 Guidance. However, as that guidance notes, Issuers are no longer required to identify their products as "DRC conflict free," "DRC undeterminable," or "have not been found to be DRC conflict free." Additionally, only Issuers that choose to affirmatively label their products as "DRC conflict free" must obtain an independent private sector audit.