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Appeals Court Ruling Could Drag Out Conflict Minerals Lawsuit

Joe Mont | May 2, 2013

Companies that have delayed getting to work on newly required disclosures of their use of conflict minerals mined in the Congo, hoping that a legal challenge would offer relief, may way want to reassess that strategy. A decision in an unrelated lawsuit may signal that a legal resolution will take much longer than anticipated.

Although very different, the Securities and Exchange Commission's recent requirement to disclose the presence of so-called conflict minerals in supply chains (tin, tungsten, tantalum, and gold) is often lumped together with demands that oil, gas, and mining companies document payments to governments, foreign and domestic, for extraction rights. Both were required by the Dodd-Frank Act, enacted by the Commission on the same day, tackle social ills (the funding of violent warlords for the former, bribery for the latter), and require filings that use the new Form SD. Both are also being challenged with lawsuits filed by industry groups.

On April 27, the U.S. Court of Appeals for the District of Columbia Circuit on Friday dismissed an oil industry lawsuit against the SEC that sought to overturn the rulemaking requiring the disclosure of payments for extraction rights. The appeals court cited “lack of jurisdiction” for its dismissal of the petition for review. The industry groups behind the lawsuit – which include the American Petroleum Institute, the Independent Petroleum Association of America, the National Foreign Trade Council, and the U.S. Chamber of Commerce – will now need to make their case that the rule is “arbitrary and capricious” in a lower court, specifically U.S. District Court for the District of Columbia.

On May 15, oral arguments are scheduled to begin in National Association of Manufacturers, Chamber of Commerce of the United States of America, Business Roundtable v.  Securities and Exchange Commission. Opponents of the conflict minerals rule will make their case against it in the same Court of Appeals that dismissed the extraction payments challenge. That means the “lack of jurisdiction” decision is likely to be repeated, dashing hopes a ruling would be rendered by early autumn.

“If you were waiting to implement your compliance program until after the court reached a decision in NAM v. SEC, you may want to reconsider that strategy. The wait may be a lot longer than you expected,” says Dynda Thomas, a partner with the law firm Squire Sanders. “After all the discussion about the substance of the rule, it is a procedural issue that has everyone talking.”

Thomas detailed the situation in a blog post this week on her firm's Web site. “In light of yesterday's ruling, it is not clear how the parties will proceed,” she wrote. “In the meantime, you will want to turn your attention (again) to your own conflict minerals compliance program and prepare for the requirements and deadlines as they currently exist.”

The Petition for Review with the U.S. Court of Appeals, filed in October, requests that the new Conflict Minerals Rule be modified or set aside in whole or in part. Among their arguments:

  • The SEC failed to do the proper cost/benefit analysis of the rule and failed to determine that it would provide the intended benefits.
  • The Commission acted arbitrarily when it imposed more stringent requirements and rejected less burdensome ones. It was also wrong to conclude that it could not create a de minimis exception to the Rule.
  • An unreasonably stringent “reasonable country of origin inquiry” demand was imposed if companies have “reason to believe” minerals may have originated in the covered countries.
  • The SEC was wrong to extend the rule to those who contract with others for the manufacture of products, and acted arbitrarily when it provided a shorter phase-in period for larger companies and a longer phase-in period for smaller ones.
  • That the rule violates the First Amendment by compelling companies to make “misleading and stigmatizing” public statements that suggest their products contribute to human rights abuses.