SEC’s Conflict Mineral Rule Disclosure Requirement Unconstitutional Again
The SEC’s conflict mineral disclosure rule, enacted under Dodd-Frank, is a continuing source of controversy. An initial challenge to the rules was brought by the National Association of Manufactures. That challenge was largely rejected by the district court and the D.C. Circuit. One provision, however, was held to contravene the First Amendment — a disclosure requirement that the products be labeled DRC Free with a corresponding statement on the firm website. National Association of Manufactures v. SEC, No. 13-5252 (D.C. Circ. 2014)(here).
On rehearing the result was the same. National Association of Manufactures v. SEC, No. 13-5252 (D.C. Cir. Opinion issued August 18, 2015). In the initial decision much of the controversy revolved around the standard of scrutiny that would be applied to the disclosure requirement. There the Court applied the teachings of Zander v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985). While the circuit courts are split on the meaning of this decision, the D.C. Circuit has conclude that it is “limited to compelled speech designed to cure misleading advertising. Other government regulations compelling commercial speech are evaluated under Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980). Zander utilizes a more relaxed standard than Hudson Gas.
In its earlier ruling the Court concluded that Zander was inapplicable because it was limited to situations where the disclosures were being compelled to cure what would otherwise be misleading advertising. That is not the case with the SEC’s conflict mineral rules.
Following the initial decision, however, the Court, sitting en banc, decided American Meat Institute v. U.S. Department of Agriculture, 760 F. 3d 18 (D.C. Cir. 2014)(en banc). There the Court concluded that Zander applies to “more than a state’s forcing disclosures in order to cure what would otherwise be misleading advertisements . . . Some other governmental interests might suffice.” In AMI the Court applied the Zander standard in concluding that the government had not violated the First Amendment by forcing companies to list country of origin information on meat cuts. This decision overruled part of the Circuit’s jurisprudence regarding Zander. In view of AMI the Court granted rehearing.
The conflict mineral rules do not deal with advertising or point of sale disclosures. Rather, they were directed at achieving “overall social benefits.” The Supreme Court has refused to apply Zander to cases not involving voluntary commercial advertising. Accordingly, the Court refused to apply it here. This puts the case in the same posture as the first time it was before the Court. Then the Court concluded that the final rule “does not survive even Central Hudson’s intermediate standard.” That holding still applies.
To bolster its decision, the Court added an alternate holding keyed to three points. First, under Central Hudson the court must assess the interest motivating the disclosure requirement. The SEC noted that it is ameliorating the humanitarian crisis in the DRC. This is sufficient under AMI and Central Hudson.
Second, the effectiveness of the measure in achieving that goal must be assessed. The SEC offered little on this point the Court noted. A review of various materials, including the potential costs, lead the Court to conclude that there was little but speculation. “[T]his presents a serious problem for the SEC because . . . the government must not rest on such speculation or conjecture . . . Rather the SEC had the burden of demonstrating that the measure it adopted would ‘in fact alleviate’ the harms it recited . ..” “This in itself dooms the statute and the SEC’s regulations” the Court concluded.
Finally, the Court considered if the compelled disclosures were “purely factual and uncontroversial.” The descriptions of “conflict free” or “not conflict free” are hardly factual and non-ideological. This requires an issuer to tell consumers if its goods are ethically tainted.” “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.”