16 Apr Court of Appeals Strikes Down Portions of the SEC Conflict Minerals Rule Impacting Footwear Production
The Dodd-Frank Wall Street Reform and Consumer Protection Act instructs the Securities and Exchange Commission to issue regulations requiring companies to disclose whether they used various rare minerals from war-torn regions in central Africa in their production of goods. This has been especially challenging for footwear companies to track these ‘conflict minerals’ in their supply chains. Shortly after this regulation was issued, several trade associations filed a legal challenge against the US Securities and Exchange Commission’s (SEC) Conflict Minerals Rule.
A group of trade associations challenged the SEC’s cost-benefit analysis, questioned many of the SEC’s discretionary choices, and claimed that certain requirements of the Conflict Minerals Rule violate the First Amendment. On April 14, in a 2-1 decision, the District of Columbia Court of Appeals for the Federal Circuit sided with the SEC and rejected all but one of the trade associations’ arguments. After discussing the legal test for its review of the First Amendment claim, the court concluded that portions of Section 1502 of the Dodd-Frank Act and of the SECs Conflict Minerals Rule violated the First Amendment when they required that reporting companies report to the SEC and state on their websites that any of their products have “not been found to be ‘DRC conflict free.’” The court remanded (sent back) the case to the district court for further proceedings. It was the product description requirement that was the focus of the court’s attention. In what will likely be the most quoted selection from the opinion, the majority stated “The label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war…. By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
However, despite the decision by the Court of Appeals, uncertainty remains. The court did not stop the implementation of the Conflict Minerals Rule, and all provisions other than the “not found to be ‘DRC conflict free’” product description and public posting of that description remain valid. Within the next couple of weeks, any of a number of actions might clarify the implications of the court’s decision – the trade associations could seek a stay of the implementation of the Conflict Minerals Rule in order to delay any required filings beyond the current June 2, 2014 filing deadline, the SEC could challenge the Court of Appeals’ decision, and/or the SEC might communicate that it expects reporting companies to file the required disclosure except for the “not been found to be ‘DRC conflict free’” product description. Until the implications of the Court of Appeals decision are known, companies should continue to press forward with their inquiries, diligence and with the drafting of their Form SDs and Conflict Minerals Reports so that they are prepared to make the conflict minerals disclosures by the June 2, 2014 deadline.
FDRA will keep its members up-to-date on these continued court developments as they occur.