In a long-awaited decision, a three-judge panel of the U.S.
Court of Appeals for the District of Columbia Circuit (DC Circuit)
reaffirmed its prior decision, striking down one aspect of the
SEC's conflict minerals disclosure rule as unconstitutional
compelled speech. In April 2014, the three-judge panel had ruled
that the requirement for reporting companies to identify their
products as "not found to be 'DRC conflict-free'"
represented compelled commercial speech in violation of the First
Amendment and could not be enforced by the SEC as part of its
conflict minerals disclosure rule. The three-judge panel
subsequently agreed to rehear the case and revisit its prior ruling
in the wake of a decision last summer by the full DC Circuit in
another commercial speech case, American Meat Institute et al.
v. U.S. Dep't of Agriculture, which had rejected a
challenge by meat industry groups to a government-imposed
country-of-origin labeling requirement. In this Legal News
Alert, we address key questions that yesterday's decision
by the DC Circuit likely raises for companies that have been
dealing with the SEC's conflict minerals disclosure rule and
the reporting obligations it imposes.
How does this decision impact my reporting
obligations with the SEC for next year? Should I be changing my
existing procedures or asking for anything different from my
suppliers?
This decision essentially preserves the status quo that has
existed since the three-judge panel's initial April 2014
decision striking down the "not found to be DRC
conflict-free" disclosure requirement. Therefore, pending the
issuance of any new or revised guidance by the SEC, the SEC's
April 29, 2014 Statement (the SEC Statement) — which has
governed the reporting requirements for the first two years during
which reporting has been required — still applies.
Accordingly, yesterday's decision should not necessitate
changes to the existing reporting and compliance procedures that
companies have established to comply with the rules as modified by
the SEC Statement. Moreover, non-SEC reporting companies that are
not covered by the SEC disclosure rule itself, but face
customer-imposed reporting obligations to facilitate reporting by
upstream customers, should not expect to see changes in the type of
information regarding conflict minerals sourcing or
smelters/refiners requested by their customers as a result of the
decision.
In accordance with the SEC Statement, reporting companies are
not currently required to identify products in their conflict
minerals reports as "DRC conflict free," "not found
to be 'DRC conflict free'" or "DRC conflict
undeterminable." The SEC Statement also indicated that
independent private sector audits (IPSAs) would not be required,
except for companies electing voluntarily to describe their
products as "DRC conflict free." Under the SEC's
original conflict minerals rule, that IPSA requirement would have
been triggered as part of the conflict minerals reports filed by
large reporting companies in the third reporting cycle —
i.e., for their May 31, 2016 reports on conflict minerals
sourcing during calendar year 2015. Yesterday's decision makes
it very unlikely that companies will need to obtain an IPSA for
their calendar-year 2015 conflict minerals reports due next May,
unless they intend to describe their products as "DRC conflict
free."
Does this mean the conflict minerals litigation is
over, and that we'll never have to describe our products as
"not found to be 'DRC conflict
free'"?
In short, no. It is likely that yesterday's decision is not
the final word in this litigation, and that the litigation itself
will extend beyond next year's reporting deadline. While the
SEC has yet to formally announce its plans in response to
yesterday's decision, it would be surprising if the SEC did not
seek further review of the panel's decision. The SEC's next
step likely will be to petition for a rehearing before the entire
DC Circuit, which may well be a more favorable audience for the SEC
on this commercial speech issue than the three-judge panel that
rendered yesterday's decision. The full DC Circuit upheld the
USDA's country-of-origin labeling requirement for meat products
in July 2014 against a similar "compelled commercial
speech" challenge by the meat industry, finding that the
labeling requirement was "factual and uncontroversial."
The two-judge majority in yesterday's decision took pains to
note several features of the SEC's conflict minerals rule that,
in their view, distinguish it from the AMI meat-labeling
decision, but the dissenting judge argued that the "not found
to be 'DRC conflict free'" label was essentially
indistinguishable from the type of "factual" and
"accurate" compelled disclosure that the entire DC
Circuit had ruled permissible in AMI. It is far from
certain whether yesterday's result would survive review by the
entire DC Circuit.
It will likely be several months before additional action is
taken in this case. First, the entire DC Circuit must agree to
accept the case for an en banc rehearing, and then it
would likely take several additional months before the entire DC
Circuit issues a ruling. (As a frame of reference, it took nearly
four months for the DC Circuit to issue its July 29, 2014 en
banc decision in the AMI meat-labeling case after
having agreed on April 4, 2014 to rehear the case en
banc.) Regardless of which side prevails in an en
banc rehearing, the litigation could well continue through an
appeal to the U.S. Supreme Court — especially since the DC
Circuit is being asked to parse Supreme Court precedent on
commercial speech issues. The Supreme Court may decide to clarify
some of the issues raised by yesterday's split panel decision,
such as whether the more lenient Zauderer standard applied
by the dissent applies only in the case of voluntary advertising or
point-of-sale labeling (as interpreted by the majority), or whether
it applies to any disclosure compelled by the government, including
in annual reports filed on the company's website (as
interpreted by the dissent).
This whole conflict minerals reporting obligation is
a drag. Any chance yesterday's decision ends up spurring the
repeal of the entire requirement?
Not very likely. The National Association of Manufacturers, the
lead plaintiff in the litigation, has argued that the "name
and shame" aspect of the rule is so fundamental to the
underlying reporting regime that the SEC needs to reexamine the
entire rule if it can no longer "shame" companies by
forcing them to self-identify as "not found to be 'DRC
conflict free.'" However, yesterday's decision does
not expressly require the SEC to do so, and it limits its reach to
the "not found to be 'DRC conflict free'" label,
leaving undisturbed the SEC's ability to require companies to
file annual reports describing the due diligence performed on their
sourcing of conflict minerals. To date, legislative efforts to
change or limit the rule have not seemed to gain much traction.
Thus, the SEC's conflict minerals reporting requirements appear
likely to remain largely intact for the foreseeable future.
Moreover, even if the SEC's conflict minerals reporting
requirement were to disappear tomorrow, there remains significant
pressure on companies to adopt and enforce responsible-sourcing
policies, both from non-U.S. government bodies or agencies (such as
the European Union's own efforts to adopt conflict minerals
reporting requirements) and from non-governmental interests
(consumers, investor groups focused on socially responsible
sourcing, non-governmental organizations, etc.). Companies should
therefore assume that traceability of their conflict minerals will
remain an important aspect of their supply chain due diligence, no
matter the outcome of this litigation challenging the SEC's
conflict minerals rules.
We will continue to monitor the SEC's reaction to the DC
Circuit's ruling and will provide additional guidance as the
SEC takes steps to address the decision.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.