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Manufacturer’s Corner: SEC’s Final Rule on Conflict Minerals Partially Stricken by D.C. Circuit

We break from our ongoing series on implied warranties to notify you of a recent opinion by the U.S. Court of Appeals for the District of Columbia Circuit.  We will resume our regular series shortly.

In 2010, Congress tasked the SEC with imposing disclosure requirements on reporting company manufacturers[1] if so-called “conflict minerals”[2] are “necessary to the functionality or production of [their] product[s].”  If so, the manufacturer had to (among other things) investigate the source of its minerals to determine if they came from the Democratic Republic of Congo or an adjoining country (“Covered Countries”).  If the manufacturer determined that the minerals came from Covered Countries, or if it could not adequately verify the source, the manufacturer was required to certify to the SEC and disclose on its website that its product was not “DRC conflict free.”

The National Association of Manufacturers challenged various aspects of the final rule implemented by the SEC.  On appeal, the D.C. Circuit upheld most of the rule, but struck the requirement that the manufacturer state to the SEC and the public that its product was not “DRC conflict free.”  Accordingly, most of the final rule – including the due diligence requirement – remains intact.

NAM first challenged the rule on the basis that it was unreasonable and arbitrary, because it did not include a de minimus exception for manufacturers that only used conflict minerals in small quantities.  The Court found that the SEC’s decision not to include a de minimus exception was reasonable, because conflict minerals are often used in small quantities, and such an exception would thwart Congress’ intent.

NAM also challenged the final rule as conflicting with the enabling statute, in that it required manufacturers to conduct due diligence upon “reason to believe” that their conflict minerals “may have originated in” Covered Countries, rather than upon a finding that their conflict minerals did originate in Covered Countries.  But, the Court found this to be a false conflict, stating that the “did originate in” language was limited to the obligation to provide a report, not the obligation to conduct due diligence.  To the contrary, the Court held that the statute was silent as to when a manufacturer must conduct due diligence, and that the SEC acted reasonably in filling that gap the way it did.

Next, NAM challenged the final rule as conflicting with the enabling statute, in that it extended beyond manufacturers to those who contract with manufacturers.  But, the Court found that the SEC’s final rule was consistent with the legislative intent, and did not conflict with the express terms of the statute.

NAM’s final challenge,[3] however, was successful.  NAM argued that the requirement in the final rule that a manufacturer state to the SEC and post on its website that its product was “not DRC conflict free” constituted compelled speech in violation of the First Amendment.  The Court agreed, holding that, even if the statement could be construed as “factual” – though the Court declined to go that far – the SEC presented no evidence that alternative, narrowly tailored means of reaching Congress’ goal would have been less effective.  Accordingly, the Court held that the requirement violated the First Amendment, and reversed and remanded the matter to the District Court.

I suspect this is not the last we have heard of this matter.  We will keep an eye out to see if either or both parties petition the Supreme Court for review, and we will keep you posted.  In the meanwhile, please remember your important obligations under this rule.

[1] The rule also extends to those who contract with manufacturers covered by the rule, but this is the Manufacturer’s Corner, so we’ll focus on the rule as directly applicable to manufacturers.

[2] For practical purposes: tantalum, tungsten, tin, and gold.  Strictly speaking, however, the term is defined to include cassiterite, columbite-tantalite, gold, wolframite, and their respective derivatives.

[3] NAM also argued that the dual phase-in periods were arbitrary and capricious, and that the SEC failed to adequately quantify the benefits of the final rule during the rulemaking process.  The Court made short work of those arguments, and, while interesting to lawyers, the Court’s reasoning is probably not particularly interesting to  manufacturers.