On January 31, 2017, Acting Chairman of the Securities and Exchange Commission (SEC), Michael S. Piwowar, issued two statements calling for comments on the SEC’s enforcement of the conflict minerals reporting requirements of the Dodd-Frank Act. Congress implemented the conflict minerals reporting requirements in an effort to reduce funding to armed groups that commit human rights abuses and contribute to conflict in the Democratic Republic of Congo (DRC).
On August 18, 2015, the U.S. Court of Appeals for the D.C. Circuit reaffirmed its April 2014 decision in NAM v. SEC, where it held that certain portions of the SEC’s conflict minerals reporting requirements unconstitutionally compel speech. As we covered in previous blog posts, the court granted the SEC’s motion for rehearing following the court’s May 2014 decision in American Meat Institute v. U.S. Department of Agriculture. In its American Meat Institute decision the court addressed the standards of review that apply to commercial speech, including the standards applied in NAM v. SEC.
On November 18, 2014, the U.S. Court of Appeals for the D.C. Circuit granted the SEC’s motion to rehear the court’s decision in NAM v. SEC. As covered in previous blog posts, the court’s NAM decision held that portions of the SEC’s conflict minerals reporting requirements run afoul of the First Amendment. The D.C. Circuit’s ruling in a subsequent case, American Meat Institute v. U.S. Department of Agriculture, questioned the standard of review that the court applied in the NAM case.
The American Meat case considered whether the scope of the standard of review for claims of government compelled speech established by the Supreme Court in the Zauderer v. Office of Disciplinary Counsel (1985) case. The Zauderer standard is more relaxed than it was in Central Hudson Gas & Electric v. PSC of New York (1980). Under Zauderer, if a government disclosure requirement is “purely factual” and “non-controversial” there must be a “reasonable fit” or “reasonable proportion” between the means and the ends. The conflict minerals court declined to apply the Zauderer standard of review outside of consumer deception, whereas the American Meat court held that Zauderer does in fact “reach beyond problems of deception.”
As we have discussed over the last few months, the fate of the conflict minerals rule has been uncertain. In April 2014, in the National Association of Manufacturers (“NAM”) case, the Court of Appeals for the D.C. Circuit invalidated portions of the conflict minerals rule on First Amendment grounds. However, it has been widely recognized that the American Meat Institute (“AMI”) en banc review – then pending at the time of the NAM decision – could change the framework for evaluating the conflict minerals rule.
In American Meat Institute, decided on July 29, 2014, a panel of the D.C. Circuit applied a more relaxed standard of review established by the Supreme Court in the 1985 Zauderer case. Until Zauderer, the general test for First Amendment commercial speech restrictions was the test formulated by the Supreme Court in Central Hudson in 1980. Under Central Hudson, the governmental regulation in question had to (i) directly advance the state interest involved, and (ii) be narrowly tailored to serve that end. Zauderer applies to mandated disclosures that are “purely factual” and “non-controversial,” and if a disclosure meets these two requirements, there must be a “reasonable fit” or “reasonable proportion” between the means and the ends. Recently the D.C. Circuit expounded upon the type of government interest that may receive the Zauderer standard of judicial review, rather than a more stringent level of review.
On May 29, 2014, the Securities and Exchange Commission petitioned the U.S. Court of Appeals for the District of Columbia Circuit for a rehearing of the First Amendment issues in the conflict minerals case. The SEC, however, asked the Court to hold the case for a rehearing or rehearing en banc until after the Court issues a decision in the American Meat Institute v. United States Department of Agriculture case.
The decision reached in American Meat has significant implications for the First Amendment claims asserted by the National Association of Manufacturers in the conflict minerals case. As we have mentioned, the American Meat case is addressing the longstanding precedent established in Zauderer v. Office of Disc. Counsel as to whether the government may compel disclosures of “purely factual and uncontroversial” commercial information for reasons other than preventing consumer deception. In American Meat, the Court could decide that compelled factual disclosures that are “reasonably related” to a government interest are permissible. A decision to the contrary would be more in keeping with the result the Court reached in the conflict minerals case, where the Court applied the intermediate standard of review (without deciding whether the highest level of review might apply). A decision along these lines would be more likely to maintain the status quo, namely, that companies are not required to label products as “DRC Conflict Free,” “DRC Conflict Undeterminable” or “Have Not Been Found to be DRC Conflict Free.”
On May 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit issued a per curium order denying the motion filed by the National Association of Manufacturers (“NAM”) to stay the SEC’s Conflict Minerals Rule. The court previously held on April 14 that it is unconstitutional for the Rule to require companies to declare which of their products “have not been found to be DRC Conflict Free.” NAM had argued that a stay was warranted because, among other things, it would be able to demonstrate in later proceedings that the court should vacate the Rule as purposeless. NAM also argued that reporting issuers would suffer substantial harm in the form of billions of dollars of unrecoverable compliance costs, if they are required to comply with a rule that the court ultimately overturns.
On May 7, 2014 the United States Court of Appeals for the District of Columbia Circuit filed a per curiam order in response to the appellant’s emergency motion for stay of the SEC’s Conflict Minerals Rule. The Court ordered that the briefing schedule proposed by appellants—the National Association of Manufacturers—be adopted. Appellees’ opposition to the emergency motion will be due by 3:00 p.m. on Friday, May 9, 2014, and appellants reply will be due by 3:00 p.m. on Tuesday, May 13, 2014. Given the June 2 reporting deadline, Appellees’ have requested a decision by May 26, 2014.
Following through on its April 30 statement, the National Association of Manufacturers, joined by the U.S. Chamber of Commerce and the Business Roundtable, filed an emergency motion for stay of the SEC’s Conflict Minerals Rule with the U.S. Court of Appeals for the D.C. Circuit. NAM’s motion requests an expedited review schedule that would result in a ruling by May 26, 2014. The court will consider four factors when reviewing NAM’s motion: (1) the likelihood of success on the merits; (2) the threat of irreparable injury to the movant if a stay is not granted; (3) whether a stay would substantially harm other parties; and (4) the public interest.
NAM asserts that a stay is warranted because it will demonstrate in later proceedings that the court should vacate the Rule. Among other things, the appellants argue that vacature is appropriate because the Rule has no purpose after the court held on April 14 that it is unconstitutional for the Rule’s to require companies to declare which of their products “have not been found to be DRC Conflict Free.”
If NAM’s motion is successful, covered issuers will not have to file conflict minerals disclosures on June 2. However, May 26 – just five business days before the reporting deadline – is the soonest issuers are likely to know whether the reporting requirement remains in effect. Accordingly, issuers should continue to prepare as though the Rule is effective and should plan to comply with the SEC’s guidance of April 29.