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US court finds conflict minerals rule violates corporations' free speech rights

Source: Mon, 14 Apr 2014 20:07 GMT
Author: Sarah N. Lynch and Lawrence Hurley
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A soldier keeps watch in Nyabibwe, a mining town in the Kivus, one of the most conflict-torn regions of the Democratic Republic of Congo and the source of many of the minerals that have financed violence here since the 1990s. A tagging project is underway here to authenticate that the minerals are "conflict-free". Oct 31, 2012. REUTERS/Jonny Hogg
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A U.S. appeals court on Monday struck down parts of a regulation that forces public companies to disclose if their products contain "conflict minerals" from a war-torn part of Africa, saying it violates free speech rights.

The ruling by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit marks a partial victory for the three business groups that had filed the original lawsuit, which claimed that the regulation violated companies' free speech rights under the U.S. Constitution's First Amendment by in essence forcing them to condemn their own products.

The appeals court upheld other parts of the U.S. Securities and Exchange Commission rule, which requires publicly traded manufacturers to disclose to investors whether any tantalum, tin, gold or tungsten used in their products may have originated from the conflict-ridden Democratic Republic of Congo.

The case is one of several in recent years in which industry groups have, with mixed success, made free speech objections to government regulations. Others include challenges to meat labeling requirements and a rule that required extractive industries to disclose payments to foreign governments.

The same appeals court is due to issue a key ruling on the free speech issue when it rehears the meat labeling case next month. If the federal government requests it, that case could be consolidated with a rehearing of the conflict minerals case, the court indicated in Monday's ruling.

An SEC spokeswoman said the agency was reviewing the decision.

Human rights groups had worked to persuade Congress to include the conflict minerals provision in the 2010 Dodd-Frank Wall Street reform law, saying the disclosures would help consumers who want to avoid products that encourage mining in areas gripped by rebel violence and humanitarian conflict.

The appeals court found fault with a part of the rule that requires companies to state that their products are not "DRC conflict free" if their internal investigations lead to that conclusion.

FIRST AMENDMENT

Senior Circuit Judge A. Raymond Randolph cited both the Dodd-Frank law and the SEC regulation in his ruling, writing that they "violate the First Amendment to the extent the statute and rule require regulated entities to report ... on their website that any of their products have not been found to be ... conflict free."

One of judges on the panel, Sri Srinivasan, wrote a separate opinion stating that the court should have delayed ruling on the free speech issue until it rehears the meat-labeling case.

On March 28, a three-judge panel upheld the regulation challenged by meat producers on free speech grounds. The rule specifies labeling requirements for certain meat products.

A week later, in a sign of the importance of the legal question, the court agreed to rehear the case "en banc," meaning all the court's judges will participate. Oral arguments are scheduled for May 19.

Srinivasan wrote on Monday that the conflict minerals decision could "effectively be undercut by the en banc court in relatively short order."

OTHER CLAIMS

Although the future of the regulation on conflict minerals is in doubt, Monday's ruling marks a partial victory for the SEC, which has lost a long string of prior legal challenges to its rules.

"Although the commission adopted an expansive rule, it did not go as far as it might have," Randolph wrote, noting that the SEC "exhaustively analyzed" the final rule's costs.

The three groups that filed the lawsuit - the U.S. Chamber of Commerce, the BusinessRoundtable and the National Association of Manufacturers - had argued that the SEC conducted a flawed rulemaking and failed to weigh the costs of new regulations.

The U.S. Chamber of Commerce and the Business Roundtable on Monday said they were not ready to comment on the judge's ruling because they were still reviewing it.

One human rights group voiced some disappointment, but said SEC authority to regulate on the issue is not in question.

"It's kind of a mixed bag," Jonathan Kaufman, an attorney with human rights group Earthrights International, said of the ruling.

Although the free speech finding was disappointing, the rest of the ruling made it clear the SEC can require companies to carry out due diligence and report findings to the agency, he said. (Reporting by Sarah N. Lynch and Lawrence Hurley; Additional reporting by Aruna Viswanatha; Editing by Howard Goller and Leslie Adler)

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