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From Securities Regulation Daily, July 29, 2014

Securities world eyes decision on food labels

By Mark S. Nelson, J.D.

In a case watched closely by the business community and regulators for its possible impact on the SEC’s conflict minerals rule, the D.C. Circuit has held that the Supreme Court’s Zauderer opinion can embrace country of origin food labeling rules whose scope goes beyond deception-correction. (American Meat institute, et al. v. U.S. Department of Agriculture, July 29, 2014, Williams, S.).

Judges Janice Rogers Brown and Karen LeCraft Henderson both issued strongly-worded dissents, while two other judges concurred in part, or only in the court’s judgment. Judge Judith W. Rogers concurred in part in order distance herself from the majority’s “reformulation” of the Zauderer and Central Hudson tests. Judge Henderson dissented separately to emphasize the majority’s departure from the law-of-the-circuit doctrine and stare decisis.

COOL rules. The American Meat Institute (AMI), representing a collection of livestock producers, feedlot operators, and meat packers, challenged the U.S. Department of Agriculture’s (USDA’s) country of origin labeling (COOL) requirements for meat products. The AMI said the COOL requirements violated its First Amendment right not to be compelled to speak outside the anti-deception context as established by the Supreme Court’s Zauderer opinion.

The D.C. Circuit panel in AMI upheld the district court’s refusal to preliminarily enjoin the USDA’s COOL requirements. That panel also said Zauderer could apply beyond its anti-deception context and proposed that the D.C. Circuit rehear the matter en banc because this part of its opinion may be at odds with some of the circuit’s prior opinions.

The D.C. Circuit opted for the en banc rehearing soon after the panel issued its opinion. Today, the full court held that Zauderer goes beyond the deception context to include the USDA’s COOL requirements. The court said the First and Second circuits had already reached similar conclusions. The court also said today’s opinion overrules any prior D.C. Circuit opinions that may have limited application of Zauderer to government speech limits aimed at curing consumer deception.

Conflict minerals. For those trying to grasp how today’s opinion may impact other types of government regulations, one need only look to a related case in which a D.C. Circuit panel found the SEC’s conflict minerals rules violated the First Amendment to the extent the Dodd-Frank Act-amended Exchange Act provision and the SEC’s rule required a company to state in its SEC filings and on its website that its products have “not been found to be DRC conflict free” (National Association of Manufacturers v. SEC, April 14, 2014, Randolph, A.).

The statute and the SEC’s rule, said the court, ran afoul of Central Hudson’s narrow tailoring requirement, without deciding if strict scrutiny or Central Hudsonapplied to commercial speech. The court did say that rational basis review was inapt. One judge urged the panel not to rule pending the en banc D.C. Circuit’s opinion in AMI.

The SEC has since responded to the D.C. Circuit’s conflict minerals ruling by issuing guidance and an order staying the part of the rules that the court said violated the First Amendment. Companies are now preparing for their next round of conflict minerals reports, having filed their first-ever reports earlier this year.

According to the en banc court, Central Hudson is an “elusive” standard. Citing AMI’s supplemental brief, the court suggested that the line of demarcation between Zauderer and Central Hudson is hard to see.

Said the court: “Thus, to the extent that the pre-conditions to application of Zauderer warrant inferences that the mandate will ‘directly advance’ the government’s interest and show a ‘reasonable fit’ between means and ends, one could think of Zauderer largely as ‘an application of Central Hudson, where several of Central Hudson’s elements have already been established.’”

In her dissent, Judge Brown noted that the majority had conceded that Zauderer is more akin to Central Hudson’s intermediate scrutiny than to the rational basis test.

For Judge Brett M. Kavanaugh, who concurred in the AMI judgment, any attempt to opt between a tough Central Hudson test and a “lenient” Zauderer test is a “false choice.” Judge Kavanaugh said Zauderer is a special application of Central Hudson that illumines the “tailored in a reasonable manner” standard for compelled commercial disclosures. According to Judge Kavanaugh, compelled commercial disclosure must have a substantial government interest, be purely factual, uncontroversial, not unduly burdensome, and reasonably related to the government’s interest.

Moreover, the majority today emphasized that its opinion on the USDA’s COOL requirement is consistent with the Supreme Court’s caveat in Zauderer that the government cannot mandate a company to carry a third party’s message that is biased against (or contrary to) the company’s views. Nor could Zauderersupport government-mandated disclosures that are so burdensome that they would restrict constitutionally protected speech.

Substantial interest. The court in AMI found the USDA had a substantial government interest in the COOL requirements. The court said the USDA had an interest in continuing a long history of country-of-origin disclosure requirements that let consumers opt to buy-American. Likewise consumers have an interest in country-of-origin disclosures about the food products they use. Moreover, the USDA’s COOL requirements can aid in combatting outbreaks of food-borne illnesses, which can impact individuals’ health and markets.

Significantly, the court noted one thing it was not deciding today. The court said that because it found the government interest here to be substantial, it need not mull if Zauderer embraces any lesser interests.

The court also noted the differences between the Supreme Court’s opinions in Central Hudson and Zauderer: “Zauderer’s method of evaluating fit differs in wording, though perhaps not significantly in substance, at least on these facts.” Specifically, Zauderer is satisfied if the disclosure mandate advances an interest in purely factual and uncontroversial information.

Here, AMI did not quibble with the factual nature of the COOL requirements. AMI did, however, contest the use of the word “slaughter” as being too controversial. But the court noted that AMI did not challenge the use of “harvested” as an alternative in the COOL requirements.

Carnage and delirium. In a scathing 34-page dissent, Judge Brown, joined by fellow dissenter, Judge Henderson, said the majority have taken Zauderer so far beyond that opinion’s own language that the court forged a new standard that falls short of rational basis review. Judge Brown said the court’s opinion inflicted “carnage” on the First Amendment and, referencing the philosopher Jeremy Bentham’s phrase “nonsense upon stilts,” also likened the majority’s reading of Zauderer to “delirium on a pogo stick.”

Said Judge Brown: “By expanding Zauderer beyond deception, the court has now created a standard that is actually even more relaxed than rational basis review; essentially, the new standard for compelled commercial disclosures—or perhaps even all commercial speech restrictions—thus becomes rational basis review minus any legitimate justification.”

According to Judge Brown, Zauderer aims at those who have already spoken (e.g., advertisers). In this context, she said the advertiser has “minimal” First Amendment protections. But when the government seeks not to cure consumer deception, “robust and undiminished” First Amendment protections apply. Judge Brown also noted a trend in the Supreme Court’s recent opinions to give more protection to commercial speech.

Judge Brown also cited what she described as “troubling” gaffes by the government’s lawyer at the en banc oral argument. 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.

In her dissent, Judge Brown said that, despite this exchange, the majority disregarded the First Amendment. “Yet, remarkably, the court today agrees with the government that the First Amendment no longer matters here, as long as a court can agree the compelled information is factual and uncontroversial.”

Judge Brown began her dissent by noting that AMI’s counsel often reminded the en banc court at oral argument of the seeming improbability that AMI would lose. In other words, AMI would win if either Central Hudson applied or Zauderer was limited to consumer deception. AMI would lose only if the court extendedZauderer beyond its anti-deception role.

Judge Brown ended her dissent by saying the majority’s opinion drastically weakened First Amendment protections. Said Judge Brown: “Today, the court’s commitment to country-of-origin labeling leads it to willfully distort the fundamental holding and limitations of Zauderer and a virtually unbroken line of Supreme Court precedent to do exactly that—a perniciously Procrustean solution that hacks the First Amendment down to fit in the government’s hip pocket. I will not join the carnage.”

The case is No. 13-5281.

Attorneys: Catherine Emily Stetson (Hogan Lovells US LLP) for American Meat Institute, American Association of Meat Processors, Canadian Cattlemen's Association, Canadian Pork Council and National Cattlemen's Beef Association. Mark B. Stern, U.S. Department of Justice for the USDA.

Companies: American Meat Institute; American Association of Meat Processors; Canadian Cattlemen's Association; Canadian Pork Council; National Cattlemen's Beef Association

MainStory: TopStory DoddFrankAct

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