CSR—and other-- Disclosure as “Compelled Speech”: The US and the EU Consider Very Different Approaches
The fate of compelled commercial speech is the subject of great uncertainty in the US at the moment given two recent decisions by the U.S. Court of Appeals for the D.C. Circuit. As many previous posts have discussed, (here, here, here, and here) ,the conflict minerals rules issued by the SEC was subject to many legal challenges, including one based on the First Amendment. It its decision of April 14th the Court of Appeals upheld many aspects of the conflicts minerals rule but struck down the requirement that issuers must disclose if it cannot determine that its products are “DRC conflict free.” Under the rule, that disclosure must be made in the issuer’s filing with the SEC and made to the public on the company’s website. In striking down this provision of the rule the Court of Appeals agreed with the National Association of Manufacturers that such a disclosure was not factual, but ideological in nature, and that it was not targeted at preventing consumer deception.
The critical issue in the First Amendment portion of the case turned on the appropriate level of review. The U.S. Supreme Court held in Zauderer v. Office of Disciplinary Counsel that government can constitutionally require disclosures of a “purely factual” nature which are “reasonably related to the State’s interest in preventing deception of consumers.” The Court has repeatedly reaffirmed Zauderer, most recently in the 2010 case Milavetz, Gallop & Milavetz, P.A. v. U.S., where Justice Sotomayor wrote for a unanimous Court that a low level of scrutiny applies only in cases where the compelled speech is “directed at misleading commercial speech.” Because the “conflict free” labeling requirement went beyond that, the rule was subject to heightened scrutiny of Central Hudson.
At the same time as issuing the opinion, the Clerk of the D.C. Circuit issued an order staying the mandate in NAM v. SEC until seven days after disposition of a request for rehearing or rehearing en banc. This means that the court’s decision has not yet taken legal effect. Because NAM’s Administrative Procedures Act challenge failed, it is possible that both parties could seek rehearing. Each party has 45 days in which to file a rehearing petition. So far, neither has.
As noted by the dissenting opinion in NAM v. SEC, another case currently pending the same circuit, American Meat Institute v. U.S. Dep’t of Agriculture, raises comparable issues. In that case the AMI argued that Department of Agriculture rules requiring country of origin labeling compelled speech in violation of the First Amendment because the rules were not aimed at preventing the deception of consumers. A three judge panel of the Court of Appeals found that Zauderer encompassed interests beyond preventing customer confusion and upheld law. Thereafter the D.C. Circuit vacated the panel decision and ordered en banc review. Oral argument is set for May j19th.
The outcome of these cases will have significant impact on many types of disclosures including but not limited to labeling regarding genetically modified organisms, child labor practices and many others.
At the same time that is seems likely that at least the DC Circuit is willing to uphold some First Amendment challenges to compelled commercial speech, the European Union is taking steps in the opposite direction. On April 15th the European Parliament adopted the Directive on disclosure of non-financial and diversity information to require large companies and groups to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.
The new rules will only apply to large companies with more than 500 employees and should impact approximately 6 000 large companies and groups across the EU. Companies will be required to disclose “information necessary for an understanding of their development, performance, position and impact of their activity, rather than a fully-fledged and detailed report. Furthermore, disclosures may be provided at group level, rather than by each individual affiliate within a group.” Under the Directive, companies may choose how best to make their disclosures and may use international, European or national guidelines which they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code).
Large listed companies will be required to provide information on their board diversity policy, including, but not limited to, age, gender, educational and professional background. Disclosures will set out the objectives of the policy, how it has been implemented, and the results. Companies which do not have a diversity policy will have to explain why not.
In order to become law, the Commission's proposal needs to be adopted jointly by the European Parliament and by the EU Member States in the Council (Following today's adoption by the European Parliament, the Council is expected to formally adopt the proposal in the coming weeks. Thereafter the EU member states will have two years to implement the requirements in their national legislation. Each member state may grant exemptions from the reporting requirements. Already efforts are underway in some member states to protest the legislation, notably in Germany where the BDI trade association for German businesses argues that the legislation is unnecessary, because more and more firms are already producing reports on corporate social responsibility (CSR) without being forced into it. "In recent years, the number of companies in Germany who publish annual sustainability or CSR reports on a purely voluntary basis has steadily increased," said Holger Losch, a member of the BDI's executive board.
Thus the European Union may soon be a far cry away from the US position on compelled commercial speech—at least if American Meat Institute goes the way of the NAM v. SEC. Even if American Meat is more nuanced it seems hard to imagine US disclosure regulations reaching as far as those proposed under the EU Directive especially given the statement in the NAM v SEC opinion that “Congress [could] not require issuers to disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports? Those examples, obviously repugnant to the First Amendment, should not face relaxed review just because Congress used the “securities” label.
Much uncertainty remains in each of the US and EU as to the ultimate outcome of the divergent approaches to non-financial disclosure regulation. The varying approaches will provide interesting opportunities for empirical comparisons—even as they lead to frustration for issuers.