D.C. Circuit Finds Conflicts Minerals Required Disclosure Unconstitutional

April 16, 2014

On April 14, 2014, the U.S. Court of Appeals for the District of Columbia decided National Association of Manufacturers v. SEC, available here. The case challenges parts of the Conflict Mineral Regulations promulgated by the Securities Exchange Commission in an effort to implement Section 1502 of the Dodd-Frank Act. The Conflict Minerals Regulations require publicly traded companies that use minerals including tin, tungsten, tantalum and gold in the manufacture of their products to examine their supply chains to determine the source of these minerals. If these companies have a reason to believe the source for the minerals used in their products is the Democratic Republic of the Congo, it must conduct due diligence and report their findings to the SEC on an annual basis. If products manufactured or contracted to be manufactured contains conflict minerals sourced from the DRC or another covered country, companies must disclose that fact on their websites. While the Court upheld many of these regulations promulgated by the SEC, it found that the disclosure requirement in cases where minerals were not conflict-free unconstitutionally compelled speech and struck down that part of the regulations.

The regulations required publicly traded companies to post on their websites factual statements in cases where they found their products contained conflict minerals that were not DRC Conflict Free. The SEC argued that the rational basis review applied because the statement whether a product is DRC Conflict Free is a factual statement. The Court disagreed. It stated that the disclosure requirement forces a company to tell consumers that its products are ethically tainted and requires the company to confess blood on its hands. The Court indicated that those kinds of statements are not purely factual and determined that the correct standard applicable to reviewing whether the compelled speech is constitutional is the intermediate standard stated in Central Hudson Gas & Electric Corp. v. Public Service Commission, 487 U.S. 781, 797 (1988). Under that case, the government must show (1) a substantial government interest that is; (2) directly and materially advanced by the restriction; and (3) that the restriction is narrowly tailored. The narrow tailoring requirement invalidates regulations for which narrower restrictions on expression would serve the government’s interest as well. 

The Commission did not provide evidence showing that a narrower restriction would frustrate the purpose of the statute. Consequently, the Court held that the disclosure requirement for products found to not be DRC Conflict Free was unconstitutional.