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From Securities Regulation Daily, August 18, 2014

Spotlight back on conflict minerals after AMI opinion

By Mark S. Nelson, J.D.

Amnesty International of the USA, Inc. (Amnesty International) lodged a supplemental brief backing its request that the D.C. Circuit rehear the April panel decision holding that part of the SEC’s conflict minerals rule violated the First Amendment. In May, Amnesty International (as intervenor) and the SEC both asked the court for panel rehearing or rehearing en banc. Amnesty International’s latest filing urges the court to rehear the conflict minerals case because the full court’s opinion in another case applied the Supreme Court’s Zauderer opinion beyond the consumer deception setting to uphold country-of-original labeling rules for meat products (National Association of Manufacturers, v. SEC, August 15, 2014).

Need for review. Amnesty International said its new brief is needed to tell the court how the full court’s July AMI opinion may impact the April panel decision in the conflict minerals case. The panel in the conflict minerals case had invoked the narrow tailoring prong of the Supreme Court’s Central Hudson test to hold that part of the SEC’s rule ran afoul of the First Amendment, but AMI overruled that decision to the extent it limited Zauderer’s reach. The organization also said the new brief is needed because it had to file its petition for rehearing in the conflict minerals case prior to issuance of the AMI opinion.

Moral taint uncontroversial. According to Amnesty International, the SEC’s disclosure mandate that companies say if their products “have not been found to be DRC conflict free” is a substantial government interest that ought to fall within Zauderer, as interpreted by the full D.C. circuit in AMI.

Amnesty International also said the court in AMI merely found Zauderer’s “purely factual and uncontroversial” language to be an agreed “starting point” (not a holding) from which to decide if Zauderer reached beyond consumer deception to other government interests that mandate “factual and uncontroversial” disclosures. Moreover, Amnesty International said Zauderer’s discussion of “purely factual and uncontroversial” matters is not a “threshold requirement.” As a result, the government still could not tell companies what opinions to express regarding hot-button issues, such as politics, nationalism or religion.

Still, Amnesty International said the “descriptor” in the conflict minerals case is “purely factual and uncontroversial” because it is based on a statutory definition and the parties do not contest the factual basis for any disclosures (i.e., armed groups funded by sales of minerals engaged in conflicts in the DRC). For one, Amnesty International points to the “objective” definitions of “DRC conflict free” and “armed group” in the Dodd-Frank Act. These terms, says the organization, ensure that conflict minerals disclosures are “factual.”

Nor does Amnesty International see the required conflict minerals disclosures as controversial. But Amnesty International does note that some companies who cannot verify the source of minerals in their products may fear the requirement goes too far. Here, the organization counters any objections by reciting the text “not been found to be” as offering enough cover for these companies.

Amnesty International also said it does not see “general” worries about moral taint being ascribed to companies that file conflict minerals reports as making the disclosures controversial or the law or rule ineffective. Said Amnesty International, “But this kind of general controversy is irrelevant to determining whether the disclosure—which requires divulging only factual information—is itself controversial.” Citing the Supreme Court’s 1983 Bolger opinion, Amnesty International said it is not enough for business groups to link “non-controversial, factual disclosures” to some matter that is controversial.

Lastly, Amnesty International said the SEC’s conflict minerals disclosure requirement is directly related to products offered by companies subject to the rule. Likewise, Amnesty International said the SEC’s rule is not unduly burdensome in a manner that chills protected commercial speech because companies have leeway to make the required website postings and can add other explanatory information to these disclosures. Amnesty International also noted that the conflict mineral rule’s investigatory and audit requirements are not now subject to First Amendment challenge.

Cacophony of views on Zauderer. The D.C. Circuit has a few options in the conflict minerals case. Conceivably it could deny panel or en banc rehearing based on the full court’s AMI opinion, which overruled the conflict minerals panel decision to the extent it cast Zauderer as limited to consumer deception. But as Judge Brett M. Kavanaugh’s concurring opinion noted in a footnote, the court otherwise upheld the result.

The court also could rehear the conflict minerals case to clarify its interpretation in AMI of the Supreme Court’s Zauderer and Central Hudson opinions. Perhaps the common theme between AMI and the conflict minerals cases is their use of Central Hudson. In AMI, the majority noted the special way thatCentral Hudson loomed over its opinion.

Said the Court, in reference to American Meat Institute’s supplemental brief in the case: “Thus, to the extent that the pre-conditions to application of Zaudererwarrant inferences that the mandate will ‘directly advance’ the government’s interest and show a ‘reasonable fit’ between means and ends, one could think ofZauderer largely as ‘an application of Central Hudson, where several of Central Hudson’s elements have already been established.’”

Just a few paragraphs later, the court spoke of the reach of its AMI opinion regarding Zauderer’s “purely factual and uncontroversial” language. Specifically, the court said AMI was not a case where the labeling requirement was controversial for sending “a message that is controversial for some reason other than dispute about simple factual accuracy.”

The court then pointed readers to the two cases that may challenge the “purely factual and uncontroversial” aspect of Zauderer. The court said parenthetically that the conflict minerals case raised concerns over the nature of the information to be disclosed without deciding if the information was factual and uncontroversial. The court noted another case involving the National Labor Relations Board that it said raised the possibility of disclosures being “so one-sided or incomplete” that they may flunk Zauderer.

The majority in AMI still inspired two concurring opinions. Judge Judith W. Rogers concurred in part in order to distance herself from the majority’s “reformulation” of the Zauderer and Central Hudson tests. Judge Kavanaugh described the choice between a tough Central Hudson test and a “lenient”Zauderer test as a “false choice,” while stating his version of the AMI test to emphasize the points on which he agreed with the majority.

Judges Janice Rogers Brown and Karen LeCraft Henderson both issued strongly-worded dissents. Judge Brown’s 34-page dissent said the majority defangedZauderer and Central Hudson, inaptly relied on legislative history in the absence of an agency administrative record (the agency denied some interests due to international comity), and mistook government interests in protectionism and health and safety for the agency’s favoring one industry sector over another. Judge Brown said the AMI opinion did “carnage” to the First Amendment. Judge Henderson dissented separately to emphasize the majority’s departure from the law-of-the-circuit doctrine and stare decisis.

The panel in the conflict minerals case said the statute and the SEC’s rule ran afoul of Central Hudson’s narrow tailoring requirement, without deciding if strict scrutiny or Central Hudson applied. 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 case is No. 13-5252.

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 Ltd.

Companies: National Association of Manufacturers; Chamber of Commerce of the United States of America; Business Roundtable; Amnesty International of the USA, Inc.; Amnesty International Ltd.

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