US Court of Appeals for the DC Circuit Strikes Down the Conflict Minerals Rule—So Now What?

The long-running saga of Section 1502 of Dodd-Frank (the “Conflict Minerals Rule”) continued on August 18th as the US Court of Appeals for the DC Circuit struck down the Conflict Minerals Rule on First Amendment grounds.  The decision has long-ranging implications not only for the Conflict Minerals rule but for compelled speech issues in general.

As readers of this blog know, (see here) the court had initially struck down the disclosure rule in April of last year, but agreed to reconsider the decision in light of the D.C. Circuit’s en banc decision upholding the U.S. Department of Agriculture’s meat country-of-origin labeling requirements in American Meat Institute v. USDA. 

In this opinion the Court, in a literary reference laced opinion by Judge Raymond Randolph, left little doubt as to its position despite a vigorous dissent.  It gave multiple grounds to support its finding that the Rule is unconstitutional so as to protect its decision even if its perhaps most controversial finding (that Zauderer applies only to voluntary advertising) is struck down. 

Take Away Points From the Majority Opinion

Disclosure Requirements do not pass muster simply because they were passed by the SEC

Before we offer our legal analysis, a pervasive theme of the dissent deserves a brief response. To support the conflict minerals disclosure rule, the dissent argues that the rule is valid because the United States is thick with laws forcing “[i]ssuers of securities” to “make all sorts of disclosures about their products,” Charles Dickens had a few words about this form of argumentation: “‘Whatever is is right’; an aphorism that would be as final as it is lazy, did it not include the troublesome consequence, that nothing that ever was, was wrong.”

Besides, the conflict minerals disclosure regime is not like other disclosure rules the SEC administers. This particular rule, the SEC determined, is “quite different from the economic or investor protection benefits that our rules ordinarily strive to achieve.”

For this Court, Zauderer applies only to cases involving “voluntary advertising” or advertising by the company’s “own choice”.

The Court reviewed relevant Supreme Court precedent and concluded that the more lenient review afforded by Zauderer applies only when compelled disclosures are connected to advertising or product labeling at the point of sale.  Because the Conflict Minerals Rule is not, the Court found that Zauderer had no application to this case.

Having concluded that Zauderer did not apply, the Court ordinarily would have analyzed whether “strict scrutiny or the Central Hudson test for commercial speech” applies. Instead, relying on “the reasons we gave in that opinion,” the Court found that “the SEC’s “final rule does not survive even Central Hudson’s intermediate standard” and that it “need not repeat our reasoning in this regard….” 


Even if the Court is found to be wrong in its analysis regarded the reach of Zauderer, the Conflicts Minerals Rule is still unconstitutional because the SEC cannot prove that the Rule is an effective method to achieve the stated governmental interest or objective in passing it.

 The Court recognized “the flux and uncertainty of the First Amendment doctrine of commercial speech and the conflict in the circuits regarding the reach of Zauderer” and there stated “we think it prudent to add an alternative ground for our decision. It is this. Even if the compelled disclosures here are commercial speech and even if AMI’s view of Zauderer governed the analysis, we still believe that the statute and the regulations violate the First Amendment.”

Under Central Hudson the government must identify a goal or objective intended to be served by the regulation under scrutiny.  In the case of the Conflict Minerals Rule, “the SEC described the government’s interest as “ameliorat[ing] the humanitarian crisis in the DRC.” We will treat his as a sufficient interest of the United States under AMI and Central Hudson.

The second prong of Central Hudson requires the government to establish that the regulation under review is effective in achieving it and it is here where the Court found the Rule to be constitutionally infirm.  According to the Court, “the SEC had the burden of demonstrating that the measure it adopted would “in fact alleviate” the harms it recited “to a material degree.”  However, “[t]he SEC has made no such demonstration in this case and, as we have discussed, during the rulemaking the SEC conceded that it was unable to do so.

The Court also pointed to “post hoc evidence” questioning the effectiveness of the Rule in achieving its aims.  “[T]he conflict minerals law may have backfired. Because of the law, and because some companies in the United States are now avoiding the DRC, miners are being put out of work or are seeing even their meager wages substantially reduced, thus exacerbating the humanitarian crisis and driving them into the rebels’ camps as a last resort. This in itself dooms the statute and the SEC’s regulation.


Even if the Court is wrong in its analysis of the reach of Zauderer and it is found to not be limited to advertising it still requires that disclosure requirements be limited to  purely factual and uncontroversial information’ about the good or service being offered” a standard that the Conflict Minerals Rule cannot satisfy.

In our initial opinion we stated that the description at issue– whether a product is “conflict free” or “not conflict free” –was hardly “factual and non-ideological.  We put it this way: “Products and minerals do not fight conflicts. The label ‘[not] conflict free’ is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that ‘message ’through ‘silence.’ See Hurley, 515 U.S. at 573. 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. We see no reason to change our analysis in this respect. And we continue to agree with NAM that “[r]equiring a company to publicly condemn itself is undoubtedly a more ‘effective’ way for the government to stigmatize and shape behavior than for the government to have to convey its views itself, but that makes the requirement more constitutionally offensive, not less so.”

So now what?  With regard to the Conflict Minerals Rule, the statutory requirement for the SEC to craft disclosure requirements regulating the issue remains in place.  At this point, either the SEC must either seek an en banc review of the decision, go back to the drawing board and start over or Congress must repeal Section 1502. 

The implications for disclosure regulation in general are serious.  If the opinion holds and Zauderer is limited to voluntary advertising it will be more difficult for governmental regulators to justify disclosure requirements of the type involved in the Rule.  Further, requiring seemingly concrete proof of a disclosure regimes effectiveness will often be difficult as naysayers can always find someone willing to provide evidence to the contrary.  Finally, by limiting the definition of factual and non-controversial, the Court greatly reduces the application of Zauderer.  The decision is a victory for those opposed to mandated disclosure.  Whether it stands is therefore of great importance.

Celia Taylor