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From Securities Regulation Daily, November 18, 2014

Sharp questions for SEC, others in Act II of conflict minerals appeal

By Mark S. Nelson, J.D.

A three-judge panel that earlier this year upheld the bulk of the SEC’s conflict minerals rule, but also struck-down one of the rule’s disclosure requirements on First Amendment grounds, will reconsider its free speech holding given the D.C. Circuit’s en banc opinion in a related case that extended a Supreme Court precedent beyond the consumer deception genre. The D.C. Circuit also will defer acting on petitions for en banc rehearing of the conflict minerals case until the panel acts (National Association of Manufacturers, et al. v. SEC, et al., November 18, 2014, Per Curiam [Panel rehearing]; National Association of Manufacturers, et al. v. SEC, et al., November 18, 2014, Per Curiam [En banc rehearing]).

Three questions. For much of this year, the business community has been closely watching the American Meat Institute’s (AMI’s) challenge of the U.S. Department of Agriculture’s country-of-origin labeling (COOL) rules because of that case’s potential to upend the panel opinion in the conflict minerals case. The AMI opinion significantly broadened the D.C. Circuit’s application of the Supreme Court’s Zauderer opinion (American Meat Institute, et al. v. U.S. Department of Agriculture, July 29, 2014, Williams, S.).

By contrast, the conflict minerals panel tried to navigate between what it perceived as a limited Zauderer test and a tougher, and more generally applicable, commercial speech test employed by the Supreme Court in its Central Hudson opinion. The business industry’s case against the SEC focused on required disclosures about what Congress described in Dodd-Frank Act Sec. 1502 as the role of the conflict minerals trade in helping to finance armed groups in the Democratic Republic of the Congo (DRC), which contributes to a humanitarian emergency due to these groups’ reliance on sexual- and gender-based violence (National Association of Manufacturers v. SEC, April 14, 2014, Randolph, A.).

The conflict minerals panel’s order today asks the SEC and the other parties to explain how the D.C. Circuit’s AMI opinion impacts the conflict minerals case. Specifically, the panel wants to better understand the immediate reach of the AMI opinion, plus the larger conceptual role played by the AMI court’s view of the Supreme Court’s language in Zauderer.

  • Question 1—What effect, if any, does this court’s ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc), have on the First Amendment issue in this case regarding the conflict mineral disclosure requirement?

  • Question 2—What is the meaning of “purely factual and uncontroversial information” as used in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), and American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc)?

  • Question 3—Is determination of what is “uncontroversial information” a question of fact?

Answers to these questions may help the conflict minerals panel to refine its opinion. The D.C. Circuit still could rehear the case en banc as it only deferred this option pending the outcome of the panel rehearing.

AMI and Zauderer. In April, a D.C. Circuit panel cast aside a disclosure requirement in the SEC’s conflict minerals rule that would have required some issuers to state in their SEC filings and on their websites that their products “have not been found to be DRC conflict free” because the Dodd-Frank Act and the SEC’s implementing rule violated the First Amendment.

Specifically, the conflict minerals panel said the law and the SEC’s rule ran afoul of the Supreme Court’s Central Hudson narrow tailoring prong, without deciding if the court must apply strict scrutiny or the Central Hudson commercial speech test.

But the panel did say the rational basis test was inapt. The SEC had argued that its rule required the disclosure of “purely factual non-ideological information.” Intervenor Amnesty International USA, Inc. (Amnesty International) had also urged the rational basis test albeit based on the federal government’s sweeping power to regulate securities. Amnesty International cited the D.C. Circuit’s 1988 Wall Street Publishing opinion; the SEC did not join this argument.

One judge urged the panel not to rule due to the then-pending en banc D.C. Circuit’s opinion in AMI. As a result, the panel’s conflict minerals opinion left open the question of how to treat government-compelled speech that poorly fits Zauderer’s anti-deception aims.

The en banc D.C. Circuit’s July AMI opinion began with the premise that the Supreme Court’s language in Zauderer is unclear, so Zauderer may apply outside the consumer deception setting. The en banc court also noted the Supreme Court’s intermediate scrutiny test in Central Hudson is “elusive,” but the interests inAMI were substantial, so the full court did not decide if lesser interests could satisfy Zauderer.

Judge Brett M. Kavanaugh concurred in the AMI judgment to emphasize where he and the majority agreed on Zauderer. According to Judge Kavanaugh, “…To justify a compelled commercial disclosure, assuming the Government articulates a substantial governmental interest, the Government must show that the disclosure is purely factual, uncontroversial, not unduly burdensome, and reasonably related to the Government’s interest.”

Judge Judith W. Rogers also partially concurred in AMI to distance herself from the majority’s “reformulation” of the Zauderer and Central Hudson tests. Judge Karen LeCraft Henderson dissented to highlight what she saw as the majority’s departure from the law-of-the-circuit doctrine and stare decisis.

Judge Janice Rogers Brown, joined by fellow dissenter, Judge Henderson, issued a scathing 34-page dissent, which she ended by focusing on how the AMImajority had weakened First Amendment protections. “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.”

Purely factual and uncontroversial. As for the first panel rehearing question, the panel plausibly could rely on the AMI en banc holding that D.C. Circuit cases (including the conflict minerals case) are overruled only to the extent they can be read to limit Zauderer to the consumer deception setting, but otherwise leave its April conflict minerals opinion in-tact. The panel noted that the D.C. Circuit had held in other cases that Zauderer is limited to consumer deception, but it also said the parties in the conflict minerals case never argued that the SEC’s rule had anything to do with preventing consumer deception; the court even noted that the SEC admitted this in the district court.

Judge Kavanaugh observed in a footnote in his AMI concurrence, that the conflict minerals panel went astray by linking Zauderer to rational basis review. He said this led the panel to make a “false choice” between Zauderer and Central Hudson. Judge Kavanaugh also said the AMI majority’s shift away from earlier interpretations of Zauderer that invoked the rational basis test need not upset the results in the conflict minerals and its other prior cases.

The second and third questions to be addressed in the panel rehearing imply that the conflict minerals rule’s fate will likely turn on whether requiring an issuer to state that its products have not been found to be DRC conflict free is purely factual and uncontroversial.

In the AMI case, AMI did not quibble with the factual nature of the COOL requirements or that the facts implied by the required labels are “directly informative” about AMI’s products. AMI did, however, contest the use of the word “slaughter” as being too controversial. But the court noted that AMI did not object to the use of “harvested” as an alternative in the COOL requirements.

Still, the AMI majority noted that other types of disclosures may be far more controversial than the COOL requirements. Here, the court noted that the conflict minerals panel had asked just how controversial a disclosure can be without deciding the particular one there was controversial.

According to the conflict minerals panel: “At all events, it is far from clear that the description at issue—whether a product is “conflict free” —is factual and non-ideological.” The conflict minerals panel went on to say that “conflict free” implies “moral responsibility” that can lead consumers to believe a company’s products are “ethically tainted” even if the company’s business only remotely helps to finance the armed groups targeted by Congress.

The AMI majority emphasized this point by invoking the conflict minerals disclosure in the first sentence of this passage: “We also do not understand country-of-origin labeling to be controversial in the sense that it communicates a message that is controversial for some reason other than dispute about simple factual accuracy. Leaving aside the possibility that some required factual disclosures could be so one-sided or incomplete that they would not qualify as ‘factual and uncontroversial,’ country-of-origin facts are not of that type” (internal citations omitted).

The National Association of Manufacturers (NAM) and its allies had urged the court against en banc rehearing of the conflict minerals opinion because the panel could simply amend its opinion to explicitly say that the disclosure required by the Dodd-Frank Act and the SEC’s rule fall outside of AMI’s view ofZauderer. According to NAM, the disclosure is not purely factual and uncontroversial because of the moral taint implied by a disclosure that one’s products have not been found to be DRC conflict free. Citing the panel opinion, NAM said the SEC’s rule would require a company to “confess blood on [their] hands.”

The SEC asked the D.C. Circuit for panel or en banc rehearing of the First Amendment issue, but otherwise asked the court to retain the panel’s earlier opinion upholding most of the SEC’s conflict minerals rule. The SEC noted that a majority of the panel rejected the agency’s rational basis theory. The SEC also said its petition could be held in abeyance pending issuance of the AMI opinion to preserve the agency’s opportunity to ask for rehearing.

Amnesty International separately petitioned for panel or en banc rehearing, and reiterated it views in a post-AMI supplemental brief, which the panel today allowed to be filed. Amnesty International argued that Zauderer’s language about factual and uncontroversial matters described facts in that case, but is not a touchstone for all similar cases.

Amnesty International also said the conflict minerals disclosure at issue here is factual and uncontroversial because it is rooted in “objective” Dodd-Frank Act language and is uncontroversial because none of the parties deny the facts associated with the disclosure. Here, Amnesty International emphasized that “general controversy” over companies’ “moral responsibility” for the conflict minerals trade would be inapt in determining if factual disclosures are controversial.

Moreover, Amnesty International said that, like the AMI opinion implied, the SEC’s conflict minerals disclosure is directly related to an issuer’s products. Nor does Amnesty International believe the SEC’s rule imposes undue burdens on companies because they still have options regarding how they present their message along with the disclosure.

The case is No. 13-5252 Panel rehearingEn banc rehearing.

Attorneys: Jonathan Fredrick Cohn (Sidley Austin LLP) for National Association of Manufacturers, Chamber of Commerce of the United States of America and Business Roundtable. Tracey Anne Hardin for the SEC. Julie Alyssa Murray, Public Citizen Litigation Group for Amnesty International USA and Amnesty International Limited.

Companies: National Association of Manufacturers; Chamber of Commerce of the United States of America; Business Roundtable; Amnesty International USA; Amnesty International Limited

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