On November 9, 2015, the U.S. Court of Appeals for the District of Columbia Circuit denied petitions filed by the Securities and Exchange Commission (SEC) and Amnesty International requesting a full panel rehearing of its previous decisions on aspects of the "conflict minerals rules" under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The court had found that "[b]y compelling an issuer to confess blood on its hands," the statute violates the First Amendment in requiring companies to state whether their products have "not been found to be ‘DRC conflict free.’" The rest of the conflict minerals rules remain intact.
Background
The Dodd-Frank Act was signed into law in July 2010. Though the vast majority of the Dodd-Frank Act is dedicated to improving accountability and transparency in the financial system, Section 1502 imposes new audit and disclosure requirements on SEC reporting companies regarding their use of "conflict minerals" in products they manufacture.
In response to the violence in the Democratic Republic of the Congo (DRC) perpetrated by armed groups and thought to be financed, in part, by the exploitation and trade of certain "conflict minerals" (including tantalum, tin, gold and tungsten), Section 1502 was enacted to force SEC-reporting companies to disclose the use of these minerals in their products.
Conflict minerals are utilized in numerous industries, but they are especially prevalent in the electronics, aerospace, automotive, industrial machinery, construction, jewelry, and medical device industries.
Starting with the calendar year 2013, affected companies have had to conduct supply chain inquiries and disclose annually whether conflict minerals in their products originated in the DRC or an adjoining country.
Legal Challenge
The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable sued the SEC in October 2012, claiming that the SEC had exceeded its authority in its final rule and that the statute and rule violated companies’ First Amendment rights.
In April 2014, the U.S. Court of Appeals for the District of Columbia Circuit upheld the majority of the statute and rule, including the SEC’s analysis of the statute’s costs and benefits. The court, however, struck down a key provision requiring regulated entities to report to the SEC and state on their websites that any of their products have "not been found to be ‘DRC conflict free.’" On August 18, 2015, after agreeing to review its ruling, an appeals panel voted 2-1 to uphold its ruling. Forcing companies to disclose which products could not be found to be "DRC conflict free," said the court, is tantamount to requiring companies to criticize their own products, and violates the First Amendment.
The SEC and Amnesty International (which had intervened in the case in support of the conflict minerals rules) filed petitions on October 2, 2015, requesting an en banc (full panel) rehearing of the April 2014 and August 2015 decisions. On November 9, 2015, however, the court denied the request for rehearing without comment or discussion.
Conclusion
The court’s decisions only affect the specific wording of the determination that a product is or is not "DRC conflict free." All other aspects of the statute and the SEC’s rule remain intact. Until there is new guidance from the SEC, reporting companies should continue to use the SEC’s April 2014 statement regarding the effect of the court’s decision on its conflict minerals rule. In that statement, the SEC provides that an independent private sector audit will not be required unless a company voluntarily elects to describe a product as "DRC conflict free" in its conflict minerals report.
