The U.S. Court of Appeals for the District of Columbia Circuit has ruled that the Securities and Exchange Commission another setback as it seeks to require companies to disclose the use of minerals that may fund militias in the Democratic Republic of the Congo. On Tuesday, a 2-1 decision upheld an earlier ruling that prohibited the SEC from requiring companies to publicly report whether their products are "not found to be DRC conflict free" on the grounds that doing so violates free speech protections.
The decision resolves, for now, a lawsuit against the SEC by the National Association of Manufacturers, U.S. Chamber of Commerce, and the Business Roundtable. In April 2014, the U.S. Appeals Court for the District of Columbia Circuit agreed that a requirement for companies to reveal not just supply chain due diligence, but also whether or not their products are “conflict free” was a violation of free speech protections. The SEC, in response, issued a partial stay of the rule that maintained required Form SD disclosures but without requiring a declarative admission of conflict minerals use.
“Under the First Amendment, in commercial speech cases the government cannot rest on ‘speculation or conjecture,’” Judge Raymond Randolph wrote in the majority opinion. “But that is exactly what the government is doing here.”
Randolph added that: “evidence throws further doubt on whether the conflict minerals rule either alleviates or aggravates” the militia problem because some companies are now avoiding the DRC and “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 builds upon concerns that the SEC remains “unable to quantify any benefits of the forced disclosure regime itself” and that the Government Accountability Office “has refrained from addressing the issue, even though the conflict minerals statute required it to assess the effectiveness of the required disclosures in relieving the humanitarian crises.”
“All of this presents a serious problem for the SEC because the government may not rest on such speculation or conjecture,” Randolph wrote. “The SEC had the burden of demonstrating that the measure it adopted would ‘in fact alleviate’ the harms it recited ‘to a material degree.’ This in itself dooms the statute and the SEC’s regulation.”
Randolph disputed SEC claims that the compelled conflict minerals disclosures escape free speech scrutiny because they are “purely factual and uncontroversial.” He reiterated the earlier opinion that a description of whether a product is conflict free or not conflict free was hardly “factual and non-ideological.” Such labels, metaphorically, tell consumers that a company’s products “are ethically tainted, even if they only indirectly finance armed groups” and amount to having a company “publicly condemn itself.”
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