In a ruling in API vs. SEC on July 2, 2013, the US District Court for the District of Columbia vacated the SEC’s resource extraction rule and sent it back to the SEC for further proceedings. Observers of NAM vs. SEC are considering what impact the decision in the resource extraction case – and the court’s analysis – may have on the legal challenge to the conflict minerals rule.
As noted in our previous blog post, Challenging the Conflict Minerals Rule – Will the Court of Appeals Decide?, conflict minerals and resource extraction disclosure have been on a parallel path since Congress included them both in the Dodd-Frank Act. Section 1502 of Dodd-Frank required the SEC to issue rules relating to disclosure about the use of conflict minerals that are necessary to the functionality or production of products. Section 1504 of Dodd-Frank required the SEC to issue rules relating to payments made by a resource extraction issuer to foreign governments in connection with the commercial development of oil, natural gas or minerals. Both sections amended Section 13 of the Securities Exchange Act by adding new subsections to the end of the section. The SEC issued the conflict minerals rule and the resource extraction disclosure rule at the same hearing on the same day – August 22, 2012. The SEC went on to require that issuers use the same newly created form – Form SD – for reporting.
The paths of the two rules continued in parallel as each was subject to its own legal challenge. The conflict minerals rule was challenged by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable in NAM vs. SEC. The resource extraction rule was challenged by American Petroleum Institute, the U.S. Chamber of Commerce, the Independent Petroleum Association and the National Foreign Trade Council in API vs. SEC. Both cases took similar procedural routes. Initial hopes that the US Court of Appeals would be the proper venue for a legal challenge were rejected, and each case was sent to the US District Court for consideration. The parties in both cases agreed that the case would be decided on the briefs that had already been filed with the Court of Appeals. Oral argument was heard on cross motions for summary judgment in API vs. SEC on June 7, 2013. Oral argument was heard on cross motions for summary judgment in NAM vs. SEC on July 1, 2013.
On July 2, 2013 (just one day after the oral argument in the conflict minerals challenge), Judge Bates of the US District Court for the District of Columbia issued an opinion in API vs. SEC granting the plaintiffs’ motion for summary judgment, vacating the resource extraction disclosure rule and remanding it to the SEC for further proceedings.
Judge Bates determined that the SEC wrongly concluded that Section 1504 required public disclosure of the resource extraction payment information. He also held that the SEC’s decision to deny any exemption to the rule’s requirements was, given the limited explanation of the SEC’s reasoning for that denial, “arbitrary and capricious.” Having concluded that the SEC’s action was “invalid,” he determined that the proper remedy was to vacate the rule and remand it to the SEC for further proceedings.
Several arguments made in the legal challenge to the conflict minerals rule are similar to those made in API vs. SEC. At the conclusion of Monday’s oral argument in NAM vs. SEC, Judge Wilkins indicated that he would render a decision on the motions for summary judgment as soon as he could do so. It will be interesting to see whether the court’s ruling keeps these two sister rules on a parallel track. It appears that we won’t have long to wonder about the next stage of the legal challenge.