In a decision that has surprised some observers, on July 23rd, the U.S. District Court rejected the National Association of Manufacturers’ legal challenge to the conflict minerals rule. After months of pleadings and procedural activity, the district court in NAM v SEC rejected the petitioners’ claims that elements of the conflict minerals rule were arbitrary and capricious and that the rule violated the First Amendment. So, the conflict minerals rule remains in place and issuers are required to comply with its requirements and make any required filings by May 31, 2014.
Court’s Summary of Petitioners’ Claims
The court summarized the petitioners’ claims as falling into 2 categories:
- SEC’s actions in creating the rule were arbitrary and capricious; and
- Requiring companies to publish their conflict minerals disclosures on their own company websites constitutes compelled speech in violation of the First Amendment.
In its 63-page decision, the court walked through the various areas of dispute, rejecting each one of the petitioners’ claims. A couple of the more important areas of dispute are discussed here.
De Minimis Exception
The petitioners objected to the SEC’s not adopting a de minimis exception to the conflict minerals rule. The court noted that the SEC did not claim that it lacked the authority to issue de minimis exception, but rather, it determined that such an exception would be inappropriate. The court acknowledged that the SEC could have been more thorough but would not conclude that the SEC’s determination was unreasonable. The result is that there is no de minimis exception to the conflict minerals rule.
Contract to Manufacture
The petitioners argued that the conflict minerals rule should not cover companies that contract with others for the manufacture of products. The statute was a bit ambiguous on this subject (including only manufacturers in one place, while including companies that contract with others for manufacturing in other places). But, the SEC described the analysis it used in concluding that “contracting to manufacture” should be covered by the rule. The court determined that the SEC’s decision was not arbitrary or capricious. So, companies that contract with others to manufacture products are included in the rule and are required to make the determinations and file the disclosure – all as required by the final rule.
First Amendment Claim
Finally, the petitioners argued that the conflict minerals rule’s disclosure requirements compel “burdensome and stigmatizing speech” in violation of the First Amendment. First, the court concluded that during the oral argument, the petitioners limited their objections to the requirement that companies make public disclosures on their websites and did not object to the filing of disclosure with the SEC. The court rejected the First Amendment claims, concluding that the government’s interest in this regulation is substantial, the regulation directly advances the government’s interest, and the means is reasonable to accomplish the goals. Specifically, the court concluded that the rule requiring disclosure does address Congress’ interest in peace and security in the DRC. Further, the court was sensitive to giving a deferential judicial review where it saw the conflict minerals rule as an “intersection of national security, foreign policy, and administrative law.”
In reaching its conclusions, the court often returned to the fact that the arguments and issues raised by the petitioners were considered by the SEC during the rule making process (sometimes resulting in changes in the final rule). This fact, and the SEC’s reasoning for reaching certain conclusions about the elements of the rule, made the court conclude that the SEC did exercise its discretion where it deemed appropriate.
The court’s decision was a strongly worded one and disagreed with each of the claims presented by the petitioners. The result is that the final conflict minerals rule continues to apply without change. It is unclear what steps the petitioners will take next. But, it is clear that hopes that the court’s decision would relieve companies of conflict minerals compliance have been dashed – at least for now.