DC Circuit Won't Hear Bid To Revive SEC Conflict Minerals Rule

In the most recent step in the long journey of the legal battle over the conflict minerals rule, the DC Circuit Court on November 9th denied a petition to conduct an en banc hearing of the courts 2-1 August decision in the conflict minerals case.  That ruling found that the provision of the rule requiring companies subject to the rule to identify their products as conflict or non-conflict free violated the First Amendment.  (details of the holding and the rule here here and here).

Regardless of one’s opinion of the merits of the conflict minerals rule, the court’s refusal to hear the case is upsetting.  It leaves the law governing compelled commercial speech in a mess.  The decision must be read in conjunction with the recent decision in the American Meat case which upheld country of origin labeling rules. (that case discussed here)

The critical issue is what standard of review should be applied to compelled commercial speech, an issue with a complicated legal history.  There has long been disagreement over whether courts should apply a lower standard of protection for “commercial speech” than for other forms of expression, and whether the government should be required to explain its motives for compelling companies to say certain things. While it is uncontroversial to require companies to be truthful in their advertising, and the Securities and Exchange Commission requires a whole raft of disclosures in offering documents and other information provided to investors, those rules generally have the goal of preventing consumer deception.  It has proved much harder to determine how to test regulations that aim not to prevent deception but instead to provide information that contains a “message” to consumers.  In this area the law has evolved and not very cleanly.

In brief overview, the most stringent level of review applied to compelled commercial speech was established in Central Hudson case and tests:

(1) whether the speech at issue concerns lawful activity and is not misleading;

(2) whether the asserted government interest is substantial; and, if so,

(3) whether the regulation directly advances the governmental interest asserted; and

(4) whether it is not more extensive than is necessary to serve that interest.

In this analysis, the government bears the burden of identifying a substantial interest and justifying the challenged restriction: “The government is not required to employ the least restrictive means conceivable, but it must demonstrate narrow tailoring of the challenged regulation to the asserted interest — a fit that is not necessarily perfect but reasonable; that represents not necessarily the single best disposition but one whose scope is in proportion to the interest served.

This stringent standard of review was softened considerably in Zauderer v. Office of Disciplinary Counsel in which the Court found that Central Hudson scrutiny did not apply to  a “purely factual and uncontroversial” disclosure required in order to correct an otherwise misleading advertisement.  The Court reasoned that advertisers’ rights are protected so long as the compelled disclosure of truthful information reasonably relates to the state’s interest in preventing consumer deception. 

Recently, in American Meat Institute v. USDA the en banc D.C. Circuit broadened the reach of Zauderer finding that its standard of review applies to “factual and uncontroversial” disclosures mandated by the government for any purpose, not just those aimed at prevented consumer deception.  In doing so it referred directly to the earlier holding in the conflict minerals case striking down the requirement of “conflict-free” labeling on the basis that Zauderer applied only to compelled speech aimed at preventing deception.  The American Meat court stated:

To the extent that other cases in this circuit may be read as holding to the contrary and limiting Zauderer to cases in which the government points to an interest in correcting deception, we now overrule them.1See, e.g., Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359, 370-71 (D.C. Cir. 2014); Nat’l Ass’n of Mfrs. v. NLRB, 717 F.3d 947, 959 n.18 (D.C. Cir.2013); R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 1205, 1214 (D.C. Cir. 2012). 

So Where Does This Leave Us?

By refusing to hear the conflict minerals rule case en banc the DC Circuit has left the law concerning compelled disclosure in a muddle.  According to American Meat, the reach of Zauderer has been extended –but how far?  The justification in the conflict minerals case for not applying more lenient Zauderer scrutiny is that the statement was not factual and uncontroversial.  Because of this, the government must show that the required disclosure will have the desired effect—so in the case of the conflict minerals rule the government would have to show that the disclosure would lead to a decrease in the violence in the DRC—a burden it clearly could not meet.

This all leaves the fate of many other compelled disclosures in limbo.  The obligation of companies to disclose information about their industry and climate change has been very much in the news of late—but could mandated disclosure in this area pass muster under the current standards established by the DC Circuit?  It seems unlikely.  Other examples abound and it is not a stretch to see how the current developments in the DC Circuit pose serious impediments for corporate social responsibility advocates who seek to use compelled disclosures to address a whole host of human rights issues.

Much is at stake.  What is the role of the First Amendment in regulating commercial speech?  Does it serve as a restraint on government such that the government must show its regulations achieve some public goal?  Or conversely, does it provide power to the government allowing it to forced companies to disseminate information in the interest of broader speech?

The real question is now what?  An appeal to the Supreme Court is possible but even if an appeal is brought there is no guarantee that the Court would take it.   If the ruling is not appealed or if the appeal is rejected, the matter would go back to the U.S. District Court “for further proceedings.”  Those proceedings could be a simple as stating that the “conflict free” descriptor cannot be required, along with a remand of the rule to the SEC for revision.   However, some are proposing that when the case is remanded to the U.S. District Court, the parties might seek to have other issues considered, a fight that would extend the legal challenge even further.

While the battle continues, it is highly likely that industry groups such as the US Chamber of Commerce will see the refusal to rehear the conflict minerals case as creating an opportunity to challenge other disclosure requirements.  Perhaps future such challenges will provide the opportunity for the DC Circuit to clean up the mess that exists in the current state of the law regarding compelled disclosure.  We can only hope.

Celia Taylor