by Cydney Posner

No reason to keep checking the SCOTUS website for the SEC’s cert petition in Natl Assoc. of Manufacturers v. SEC, the conflict minerals case. According to this letter from Attorney General Loretta Lynch to House Speaker Paul Ryan (courtesy of blog), “[a]lthough the Commission defended the constitutionality of the conflict-minerals disclosure regime in the court of appeals, the Department of Justice has decided, in consultation with the Commission, not to file a petition for a writ of certiorari seeking review of the court of appeals’ decision.”

By way of background, in April 2014, a three-judge panel of the D.C. Circuit struck down a portion of the SEC’s conflict minerals rule on First Amendment grounds. In that case, the Court decided that the requirement to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights.  (See this PubCo post.)  Both the SEC and Amnesty International filed petitions with the D.C. Circuit requesting a rehearing en banc regarding the First Amendment issue, but requested that the Court hold the petitions in abeyance pending issuance of the en banc decision regarding the appropriate standard of review for compelled disclosure in American Meat Institute v. U.S. Dept. of Agriculture.  That decision concluded that the more lenient standard of review (announced in Zauderer v. Office of Disciplinary Counsel) applied and specifically overruled the conflict minerals case to the extent that its holding was inconsistent. (For a more complete discussion of these cases and legal standards, see these PubCo posts of 7/16/147/29/14,  9/14/14.)  With AMI decided, the Circuit Court granted the petitions of the SEC and Amnesty to consider the effect of AMI, including whether the mandated conflict minerals disclosure could satisfy the test for “purely factual and uncontroversial” commercial information. In August 2015, a three-judge panel of the D.C. Circuit, by a vote of two to one, reaffirmed its initial judgment that the compelled disclosure in the conflict minerals rule violated companies’ First Amendment rights. In its decision, that Court once again avoided application of the more lenient Zauderer standard of review and concluded that the mandated language “was hardly ‘factual and non-ideological’” (see this PubCo post). In November 2015,  the D.C. Circuit issued a per curiam order denying the petitions of the SEC and Amnesty International for a rehearing en banc in the case. The order left standing the August 2015 decision of the three-judge panel.

Given that the panel viewed the more lenient standard of review for compelled commercial speech under the First Amendment set forth in Zauderer to be applicable only to disclosures in connection with voluntary advertising or product labeling —  a position the SEC asserted in its brief “was unprecedented” —  it’s somewhat surprising that the SEC agreed (assuming that, perhaps inappropriately, that’s what “in consultation with” means) to allow the panel decision to remain without a further challenge. (See this PubCo post  and this PubCo post.)  That holding, the SEC had argued in its petition to the D.C. Circuit, “calls into question the application of Zauderer to many disclosures required under the securities laws, including those aimed at preventing investor deception,” a result that is “in tension with the Supreme Court’s statements that the ‘exchange of information about securities’ is ‘regulated without offending the First Amendment’ and that its commercial speech cases do not ‘cast doubt on the permissibility of these kinds of commercial regulation.’ Ohralik v. Ohio State Bar Ass’n,….” Moreover, when the SEC and Amnesty International filed petitions for en banc rehearing at the DC Circuit,  amici  supporting the petition contended that the conflict minerals case involved important questions, “not just to those concerned about conditions in the Democratic Republic of the Congo, but also to organizations (like amici) that rely on disclosures to foster public health, warn of environmental hazards, and protect the public in a variety of important contexts.” (See this PubCo post.)

Nevertheless, in her letter, AG Lynch wrote regarding the August 2015 panel decision:

“The majority held that the conflict-minerals-disclosure requirement could not satisfy intermediate scrutiny under the Central Hudson test.  But, recognizing doctrinal ‘uncertainty’ and a ‘conflict in the circuits’ about the proper standard of review, the majority also found it ‘prudent to add an alternative ground’ for its decision.  The majority concluded that, even assuming that the required disclosures are governed by a lower standard of scrutiny, the Commission had failed to demonstrate that the forced disclosures would materially alleviate the humanitarian crisis in the DRC.  The majority further found that the required disclosures had not been limited to ‘purely factual and uncontroversial information.’  (citation and quotation marks omitted). In the majority’s view, being required to state that certain products have not been found to be ‘DRC conflict free,’ as defined in the statute and rule, effectively ‘compel[s] an issuer to confess blood on its hands,’ which interferes with the ‘exercise of the freedom of speech under the First Amendment.’ (citation and quotation marks omitted). Finally, the majority noted that its holding of unconstitutionality may apply only to the rule, rather than to the statute itself, depending on whether use of the ‘particular descriptor’ at issue — that a product has ‘not been found to be ‘ DRC conflict free’’ — is compelled by the statute or instead is ‘purely a result of the Commission’ s rule. (citation and quotation marks omitted).’  Judge Srinivasan dissented. He would have applied the more permissive standard of review that the majority rejected, but he also concluded that the rule would ‘satisf[y] even the more demanding standard set forth in Central Hudson’….” [citations omitted]

But why not petition for cert?  Lynch explained that, while there was disagreement between the majority and the dissent on the proper standard of scrutiny to apply to the compelled disclosures in this instance, “because the majority concluded in the alternative that the challenged requirements would be unconstitutional even under the more lenient standard, this would be a poor case in which to seek Supreme Court clarification of the proper standard of scrutiny.”  Further, she expressed concern that case-specific issues — whether the compelled disclosure was “purely factual and uncontroversial information” — could make it difficult for SCOTUS to provide more general guidance that would be applicable to more typical disclosure requirements. Finally, Lynch argues, it’s possible that the matter may be resolved by the SEC’s promulgation of a new compliant rule. To the extent that, after remand, it is determined that the particular descriptor ‘not been found to be “DRC conflict free’” was not mandated by the statute itself, then the SEC “could promulgate an amended disclosure rule that attempts both to fulfill the statutory mandate and to comport with the court of appeals’ view of the First Amendment.” The decision not to petition for cert might allow SEC to take another stab at it, subject to further review of course.

What does this decision mean for the upcoming conflict minerals filings?  Not much at this point.  Until Corp Fin decides to jump in with new guidance — which seems highly improbable, given the timing, for the filings due in 2016 — the guidance that Corp Fin issued in April 2014 will continue to apply.  Specifically, the existing guidance provides in part as follows: “No company is required to describe its products as ‘DRC conflict free,’ having ‘not been found to be ‘DRC conflict free,’’ or ‘DRC conflict undeterminable.’ If a company voluntarily elects to describe any of its products as ‘DRC conflict free’ in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule.” (See this PubCo post.) However, once the question of the extent of the  SEC’s discretion has been resolved, and depending on the result, we may see new rulemaking that seeks to craft rules that comply with the Court’s decision.  Maybe the SEC will even take the opportunity of revisiting the rule to clear up some of the more problematic provisions and the inconsistencies that have become apparent?

Posted by Cydney Posner