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From Securities Regulation Daily, May 20, 2014

Court hears arguments in case related to conflict minerals ruling

By Mark S. Nelson, J.D.

The en banc U.S. Court of Appeals for the District of Columbia yesterday heard oral arguments in a case that is being watched closely by public companies that must soon file conflicts minerals reports with the SEC. The American Meat case raises First Amendment issues that are similar to those the court ruled on in its April conflict minerals opinion, which upheld the SEC’s rule against Exchange Act and Administrative Procedure Act challenges, but held the statute and rule ran afoul of the First Amendment to the extent they required disclosure by a company of its products that “have not been found to be DRC Conflict free.”

The law and rules at issue in American Meat impose country-of-origin labeling requirements for meat products. As in the conflict minerals case, the industry groups argue that the court should apply heightened scrutiny to these laws and rules, while the government says a lower standard should apply because of the factual and non-controversial nature of the required disclosures (American Meat Institute et al. v. USDA et al., May 19, 2014).

Scope of Zauderer. Arguing for appellant, American Meat Institute, attorney Catherine Emily Stetson said the court should not expand the Supreme Court’sZauderer opinion beyond the context of speech limits that seek to avoid public deception. When asked if all statutory labeling requirements could fall under the appellant’s view, Stetson said only that these laws should be viewed not under the lower Zauderer standard, but instead under the heightened standard inCentral Hudson.

In later questioning, the court asked what was different between the labelling requirements here and in other federal laws. Stetson said the government here did not articulate a governmental interest in the country-of-origin requirement.

In a follow-up question, one judge asked about the government’s possible interests, including health, safety and protectionism. Stetson reiterated that the government had “disclaimed” these interests. Another judge noted that the government could not explicitly raise some of these interests, especially protectionism, because of treaty and other international obligations.

As for Zauderer’s factual and non-controversial requirement, a key issue in the conflict minerals case, one judge asked how the court was to make this determination by looking at the implicit message contained in the explicit words of the law or rule. Stetson noted the court may find this difficult, but she suggested that the country-of-origin requirement was controversial because of the split on this issue within the meat industry. Another judge followed-up by asking if under the appellant’s view everything might be controversial. Several judges suggested that individual words, like “sugar,” “cholesterol” or “high fructose corn syrup” may be controversial.

Stetson concluded her argument by responding to a question about the ideological nature of the “buy American” component of the country-of-origin requirement. Stetson said that the only way the appellants may lose this appeal is if the court finds that Zauderer applies to any government interest regardless of how it is articulated or how speculative it is.

Government interest. The government’s lawyer began his argument by stating that the appellant’s interest is in not providing factual data about its products. According to the government, Zauderer should apply, but the appellants were trying to persuade the court to use heightened scrutiny to evaluate all government commercial disclosure laws and rules.

One judge interrupted by noting that First Amendment cases usually begin with an examination of the government’s interest in some restriction or disclosure that affects speech rights. The government said its interest here was in getting information to consumers so they can make food choices. In reply to later questions, the government said that Zauderer was “clear” that unjustified or unduly burdensome disclosures could chill protected commercial speech.

The court then questioned if this case was “going into a new box” because it did not fit neatly within the goals of health, safety or deception. The government posited that Zauderer is about more than deception, citing to distinctions between disclosures and speech restrictions, and noting that Zauderer also can be distinguished from compelled speech cases. But one of the judges noted that other cases tie Zauderer to deception, and that Central Hudson applies if a case is not about deception.

The court then delved more generally into the purposes of the government’s disclosure requirements. One judge asked if the government could mandate disclosure if there was a perception that consumers wanted certain information. This judge then asked if it even mattered why consumers wanted the information. The government’s lawyer said there was no First Amendment interest if the company could get out its own message.

This reply inspired a hypothetical question: What if consumers want information for “nefarious purposes,” such as to “give effect to biases or prejudices.” Earlier questions from the court raised the possibility of a law or rule that required disclosure that a product was “made by U.S. citizens” or expressed a bias, such as the apparent bias in this case against Mexican and Canadian ranchers. A later series of questions from multiple judges asked the government to distinguish between “made by U.S. citizens” and “made in the U.S.A.,” and noted that national origin discrimination would be unconstitutional.

The government answered that the “nefarious purposes” hypothetical was tricky, and it did not represent the facts of this case, but that “the actual First Amendment interest might start to crop up on the other side if they say they are being asked to buy into these biases or nefarious purposes.”

As for the appellant’s claim that the government had disclaimed the interests stated in the legislative history of the country-of-origin requirement, the government said it did not, but was instead arguing that the government’s interest was in “furthering consumers’ ability to act on their own preferences.” One judge asked if the court was being asked to tread lightly because of World Trade Organization (WTO) concerns. The government said the WTO rules distinguish between a country’s laws aimed at protectionism and those aimed at consumer choice.

The court returned to the question of whether the government was asking the court to create a new version of Zauderer. According to the government, this case does not suggest a new standard because Zauderer’s rationale can apply even if the government’s interest is “something else.” As for why other courts often refer to Zauderer as stating a rational basis test, the government said that was true, but only if speech is not being chilled.

One of the judges then asked the same question asked earlier of the appellants: How should the court decide in the Zauderer context if something is non-controversial? The government noted that this case is a poor one for doing this, but that the appellants did not argue in their briefs that the disclosure here was controversial. This reply drew a series of increasingly pointed questions from the court that peaked with two questions: (1) Is the uncontroversial requirement in Zauderer a stand-in for viewpoint discrimination? and (2) Is “buy American” a viewpoint? Immediately preceding this exchange, one of the judges had asked how the court should evaluate the implicit message here (i.e., to buy American).

The court then asked what, if any, limits it could place on the government’s position. The government’s lawyer said that Zauderer suggests limits related to the burden on protected commercial speech, a theme he raised earlier in his argument. He also said that if a regulated entity could not get its viewpoint out, that could be “tantamount to a restriction on speech.” This could move the matter into the Central Hudson realm.

Several judges asked what the government’s interest was, and what test the court should adopt. The government’s said its interest often will be to provide consumers with information about products they may want to buy. As for the test, the government said its interest in providing this information was reasonable and legitimate, but that the Zauderer anti-deception interest was still alive in the en banc review.

On rebuttal, Stetson argued that the best judge of consumer choice is the marketplace. She also reiterated that the appellants were not objecting to a regime in which the law or rule impinged on other speech they wanted to make because they objected to being asked to speak at all when they choose not to speak. She also noted that the country-of-origin requirement imposed significant burdens, including $200 million in compliance costs.

NAM amicus brief. In the conflict minerals case, the SEC has issued guidance and an order staying the part of its rule that the D.C. Circuit found to be constitutionally infirm. The court had found the provision failed the Central Hudson test, without deciding if strict scrutiny or Central Hudson applied. The court declined to apply rational basis review.

Meanwhile, the court has denied the National Association of Manufacturers’ (NAM’s) emergency motion for a stay of the SEC’s rule. The court may issue its mandate in the case as early as June 5, 2014. The SEC’s stay order will terminate once judicial review of the conflicts minerals rule has ended (National Association of Manufacturers et al. v. SEC, May 14, 2014, per curiam).

NAM also submitted an amicus brief in the American Meat case backing the American Meat Institute, which the court has formally allowed to be filed. NAM argued that American Meat raises the same question of whether Zauderer or Central Hudson applies to compelled commercial speech that is unrelated toZauderer’s anti-deception rationale.

NAM’s amicus brief reiterated its views from its case against the SEC’s conflict minerals rule. NAM said that compelled disclosure that seeks to achieve goals beyond Zauderer’s consumer protection setting run afoul of the First Amendment. Still, if the court opts to give Zauderer more leeway, NAM said it should emphasize Zauderer’s “purely factual and uncontroversial” language. But NAM warned that expanding Zauderer’s reach would leave few limits on what the government can require companies to disclose.

Going forward, companies should continue their preparations to file reports with the SEC as required by the still-operative portions of the conflicts minerals rule. But companies also should watch for any additional guidance the SEC may issue, and for any new court developments in either the conflict minerals case or the American Meat case.

The case is No. 13-5281.

Attorneys: Catherine Emily Stetson (Hogan Lovells US LLP) for American Meat Institute. Daniel Tenny, U.S. Department of Justice, for United States Department of Agriculture. Jonathan Fredrick Cohn (Sidley Austin LLP) for National Association of Manufacturers, Chamber of Commerce of the USA and Business Roundtable. Tracey Anne Hardin for SEC.

Companies: American Meat Institute; National Association of Manufacturers

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