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U.S. Circuit Court of Appeals Upholds Most of SEC Conflict Minerals Rule

The U.S. Court of Appeals for the D.C. Circuit has upheld the information collecting, record keeping, and reporting requirements of the U.S. Securities and Exchange Commission (SEC) Conflict Minerals Rule in an April 14 ruling. However, the court struck down as a violation of the First Amendment prohibition against government compelled speech the law's requirement that companies with certain covered products publicly describe such products as not "DRC conflict free."

The Conflict Minerals Rule implements Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The statute and the SEC's implementing regulations require companies to investigate and publicly disclose whether their products contain conflict minerals, which are defined as columbite-tantalite (coltan), cassiterite, gold, and wolframite; related derivatives (tantalum, tin, and tungsten); or any other mineral or derivative, which the Secretary of State determines is financing armed conflict in the Democratic Republic of the Congo (DRC) or any adjoining country.

The National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable (collectively NAM) challenged various aspects of SEC's final rule in U.S. federal district court in 2013. In particular, the lawsuit challenged the Conflict Minerals Rule on the basis that SEC's actions were arbitrary and capricious in: (1) failing to create a de minimis exception for products that may contain just traces of the listed minerals; (2) requiring companies to file reports whenever their minerals "may have originated" in the DRC; (3) including within the scope of the rule non-manufacturers (i.e., those that merely contract to manufacture); and (4) providing for an irrational transition period. NAM also argued that the SEC failed to conduct a proper cost-benefit analysis and that requiring certain public disclosures violates the First Amendment.

In July 2013, the U.S. District Court for the District of Columbia upheld the final rule, finding in favor of the SEC on all counts. (For more information on that ruling, see the article, U.S. District Court Upholds SEC Conflict Minerals Rule.)

Following an appeal by NAM, the DC Circuit Court of Appeals upheld the lower court's ruling in favor of the SEC on all issues except the First Amendment claim. While the court acknowledged that the lack of a de minimis exception would be "costly" to industry, it did not find that SEC acted arbitrarily or capriciously by not including a de minimis exception as part of the rule or that SEC improperly exercised its authority in carrying out Congress' mandate when declining to adopt the de minimis exception. Explaining, the court stated, "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."

The court did, however, find that requiring companies to file a report with SEC and to state on their website that any of their products have "not been found to be ‘DRC conflict free'" violates the First Amendment as commercial speech that is unlawfully compelled by the government and remanded the case to the lower court for further proceedings on this issue.

The first reports—covering the calendar year 2013—disclosing the origin of "conflict minerals" are due May 31, 2014. As for next steps in the litigation, the parties can petition for a rehearing within 45 days of the ruling or appeal to the U.S. Supreme Court within 90 days. No determinations have been made by the parties on that score at this time.