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U.S. District Court upholds SEC Conflict Minerals Rule

July 29, 2013

The U.S. District Court for the District of Columbia upheld the U.S. Securities and Exchange Commission (SEC) final rule implementing regulations pursuant to Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act related to the use of conflict minerals. The Act defines "conflict minerals" as coltan, cassiterite, gold, wolframite; their derivatives (including tantalum, tin, and tungsten); or any other mineral or its derivatives, which finances the 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 Business Roundtable challenged various aspects of SEC's final rule in U.S. federal district court as arbitrary and capricious under the Administrative Procedure Act and claimed that the disclosures required to be made to the SEC run afoul of the First Amendment. In a July 23, 2013 ruling, the court found no problems with the SEC's rulemaking, disagreed that the "conflict minerals" disclosure scheme transgresses the First Amendment, and ruled that the Plaintiffs' claim lacked merit and denied their motion for summary judgment.

In ruling on the plaintiffs' challenge regarding the SEC's decision not to establish a de minimis exception, the court found that the Commission's decision not to adopt such an exception was not, as the plaintiffs had asserted, arbitrary and capricious. The court's reasoning was, in part, that since many products use conflict minerals in small amounts, the adoption of a de minimis threshold could serve to undermine the impact of the rule. Moreover, the court agreed with SEC's view that industry's concerns about the lack of a de minimis exception are somewhat mitigated by the rule's requirements that use of conflict minerals need only be reported where they are intentionally added to and necessary to the functionality of a product.

The Dodd-Frank Act requires that a company that is obligated to file reports under the Securities Exchange Act of 1934 and may use a conflict mineral in a product it manufactures or contracts for manufacture, must report such use of the mineral annually to the SEC. Prior to reporting, companies must conduct a reasonable inquiry into the country of origin of the minerals. Any company that determines it may be using a conflict mineral as a result of the inquiry, must conduct a "due diligence" inquiry into the source of the mineral. The rule also requires disclosure to the public through the Internet. The first reports will be due May 31, 2014, and will cover calendar year 2013.

Prior to SEC's issuance of the final rule in August, 2012, industry submitted comments requesting that the Commission explicitly exempt catalysts and other organic metal compounds from the scope of the rule. While the final rule did make mention of industry comments in this regard, the language does not provide for any clear exemption for such materials from the reporting requirements under the rule. While the scope of the rule is limited to the minerals and the three metal derivatives, it is ambiguous as to whether substances (e.g., catalysts and the like) that are produced from tin, tantalum, tungsten, and gold (the 3TGs) are exempt. Therefore, food-contact materials that contain derivatives of the 3TG metals likely would be considered to fall within the reporting requirements.

Plaintiffs have 60 days to file a notice of appeal with the Court of Appeals for the D.C. Circuit.