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Monday
Dec222014

Next Round in the Conflict Minerals Case Begins

The next round in the conflict minerals case has begun and will have important ramifications not only for the particular disclosures at issue in the case itself but for all compelled disclosures.  At issue in this round is the interplay of the First Amendment and compelled corporate disclosure, an issue put squarely into play in the recent American Meat decision.

On December 8th the Securities Exchange Commission filed its Supplemental Brief with the Clerk of Court for the United States Court of Appeals for the District of Columbia.  The brief was in response to a November 18, 2014 order granting rehearing of the April 14, 2014 decision of the Court of Appeals unanimously upholding many of the requirements of the conflicts mineral rule (the “Rule”) but striking down the “conflict free” labeling requirement as violative of the First Amendment.  Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359 (D.C. Cir. 2014).   That order requested that parties submit briefs addressing the following questions: 

(1)    What effect, if any, does this court’s ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc), (American Meat or AMI) have on the First Amendment issue in this case regarding the conflict minerals disclosure requirement?

(2)    What is the meaning of “purely factual and uncontroversial information” as used in Zauderer v. Office of Disciplinary Counsel , 471 U.S. 626 (1985), and  American Meat,  and

(3)    Is determination of what is “uncontroversial information” a question of fact? 

In its brief the SEC stated its position that the entirety of the Rule should be upheld.  The brief states: 

  • This Court’s decision in AMI makes clear that the conflict minerals disclosure is consistent with the First Amendment under either Zauderer or Central Hudson. The en banc court held that Zauderer applies to commercial disclosures of “purely factual and uncontroversial information about the good or service being offered” so long as they are supported by any sufficient governmental interest. And Zauderer and its progeny make clear that information is “factual and uncontroversial” if it provides objectively determinable facts and the disclosure is not tantamount to a statement of viewpoint, belief, or ideology. The description of products that “have not been found” to meet the statutory definition of “DRC conflict free,” made in the context of a detailed description of the issuer’s efforts to trace the origin of the minerals in its products, meets these criteria.  Zauderer therefore applies, and the conflict minerals disclosure survives such scrutiny.

A disclosure is factual and uncontroversial if it provides objectively determinable facts and is not tantamount to a statement of viewpoint, belief, or ideology; whether a disclosure meets this standard is a mixed question of law and fact. 

With regard to the controversial or uncontroversial nature of the disclosure required by the Rule, the SEC faces a tough battle.  The court in NAM made the strong statement (although it was not a ruling) that relaxing the level of scrutiny given to compelled commercial speech too much would give too much deference to regulating authorities in contravention of the First Amendment.  Such a relaxed standard “would allow Congress to easily regulate otherwise protected speech using the guise of securities laws. Why, for example, could Congress 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.” 

In response, the SEC argued that NAMs contention that the ….term “DRC conflict free” [is controversial] because it carries the “unmistakable connotation” that the issuer is “immoral and has not done enough to avoid responsibility for the conflict” is simply wrong.  The SEC argues that the connotation will be negated “because the extent of the issuer’s efforts is conveyed in the disclosure itself.”  Further, “the Supreme Court has made clear that the remedy for the hypothetical stigma appellants fear is not to suppress the information provided in the disclosure,  but rather to allow more speech (as the rule does).” If issuers worry that the disclosure requirement will confuse investors as to the issuers’ position on the conflict minerals issuer, the Rule permits “the disclosure of any additional information the issuer wishes to provide to dispel any perceived confusion about its connection to the conflict.”

As to whether the Rule passes Zauderer review the SEC states:

  • The first step in applying Zauderer is to “assess the adequacy of the interest motivating the [statutory] scheme.” AMI, 760 F.3d at 23. Because the governmental interest asserted in AMI was “substantial,” the Court did not decide whether a lesser interest would suffice. So too here: appellants “do not contest that the government’s interest in promoting peace and security in the DRC is substantial, even compelling.” Opening Br. at 54. “[W]hat remains,” then, “is to assess the relationship between the government’s identified means and its chosen ends.”

Here, the conflict minerals disclosure is “reasonably crafted” (id. at 26) to provide information about an issuer’s products without chilling protected speech. The rule is not a labelling requirement. Nor does it require that the challenged statement be made in the context of an issuer’s advertising. And issuers are not required to separately or conspicuously publish a list of products that have not been found to be “DRC conflict free.” Rather, the challenged statement is required once a year in the body of a conflict minerals report filed with the Commission and posted on an issuer’s website, at a location of its choosing. The disclosure is thus not “temporally, tangibly, or otherwise linked to other fully protected speech.”

The SEC brief further argues that even if the lesser Zauderer review standard is not applied to the Rule, that it still passes constitutional muster because it satisfies the more stringent Central Hudson review because it is “narrowly tailored” and is a ‘reasonable fit’ or a ‘reasonable proportion’ between means and ends.”

While the SEC brief naturally makes no mention of it, the position of the Commission in regard to the Rule is less than unified.    According the Bloomberg news, on the same day the brief was filed, SEC Commissioners Daniel Gallagher and Michael Piwowar issued a joint statement stating their opposition to the position taken in the SEC's brief.

“Requiring persons to presume their guilt by association with the current tragedy in the Congo region unless proven otherwise is neither factual nor uncontroversial….”  “Other alternatives might effectively convey the message as to which products contain conflict minerals without this assumption.”

The commissioners urged the court to remand the matter to the SEC for further consideration and “suspend the effectiveness of the rule pending completion of such proceedings.” 

The D.C. Circuit panel has called for an expedited briefing schedule, and the business groups challenging the SEC rule—the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable—have 20 days from the filing of the SEC's brief to file their brief.

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