July 10, 2013
That isn’t the case with a particular rule that was finalized last September.
The rule, found at 77 Federal Register 56274-01, requires companies that use certain minerals – specifically, cassiterite, columbite-tantalite, gold, wolframite, or their derivatives (the “3Ts”: tantalum, tin, and tungsten) – to disclose annually whether any of those minerals originated in the Democratic Republic of the Congo (DRC) or an adjoining country.
That by itself probably wouldn’t pique anyone’s interest; but there’s a lot more to the rule than that simple definition.
If any minerals originated from the DRC zone, those affected companies must then file a report with the SEC “that includes a description of the measures taken by the person to exercise due diligence on the minerals’ source and chain of custody (which must also “include an independent private sector audit” of the report).
The point of this report – indeed, this entire rule – is to ensure that all minerals used by U.S. companies subject to SEC regulation are “DRC conflict free.”
The DRC has been a literal warzone for decades, and the conflict has only gotten worse in the past few years. Because the army is poorly trained and poorly paid and the country’s justice system is ineffectual, the government’s authority is weak. This power vacuum has given rise to numerous rebel factions vying for control. The resulting conflict has had a catastrophic impact on the nation and its civilians.
Both the government and the rebels exploit the country’s rich mineral deposits to fund their war machines. Instead of supporting the conflict that has been tearing the country apart, the general international consensus is to refrain from purchasing any minerals that are owned or taxed by any of the warring factions, which often use the funds to commit atrocities on the populace.
U.S. Congress was of the same mind, and in passing the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, required the SEC to issue the rule described above (by April of 2011, but who ever really meets a deadline?).
This rule would still fly under most people’s radar if not for the fact that the “certain minerals” described by the rule are used in a wide array of products.
Cassiterite is the metal ore that is most commonly used to produce tin, which is used in a large number of products; Columbite-tantalite is the metal ore from which tantalum is extracted, and tantalum is used in many different electronic components, including mobile phones, computers, videogame consoles, and digital cameras.; aside from its uses in jewelry, gold is used in electronic, communications, and aerospace equipment; lastly, wolframite is the metal ore that is used to produce tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications.
As such, a large number of companies are affected by this rule, the compliance start date of which was January 1 of this year, with the first reports due May 31, 2014.
However, the last major component of this rule I have yet to discuss is also arguably the most controversial: each company’s annual report is to be made publicly available on the company’s “Internet Web site.”
In other words, companies have to disclose to the public whether their products helped support atrocities in the DRC.
The National Association of Manufacturers and the U.S. Chamber of Commerce – two groups that represent an extensive range of businesses – have sued the SEC seeking that the “rule be modified or set aside in whole or in part.”
The court just heard oral arguments in the case last week, and, according to the attorney for the trade groups, the rule requires the groups “to wear this scarlet letter.”
Regardless of whether you think the literary reference is apt, it’s certainly true that such a disclosure is stigmatizing for those companies.
But these groups argue that these disclosures aren’t simply embarrassing or injuring to their business; rather, they run afoul of the First Amendment by forcing the companies to engage in “politically charged” speech.
Now, I had a whole analysis prepared that discussed how the First Amendment generally prohibits compelled speech, but that, under the Supreme Court’s 1985 Zauderer v. Office of Disciplinary Counsel decision, compelled commercial disclosures only merit rational basis review (which is very easy for the law to survive).
But then I came across American Petroleum Institute v. SEC, which is remarkably similar to the one I’ve been talking about thus far:
Dodd-Frank requires the SEC to create a new rule that requires companies to make disclosures about their minerals. In API, though, the disclosure is about any and all funds paid to foreign governments for mineral (including oil, natural gas, and metals) for extraction rights.
Because of the corruption and instability that often arises from the practice of paying foreign government governments for extraction rights, Congress wanted to curb it by forcing companies to disclose when and how they do it.
A trade group representing a host of businesses (API) sued, arguing, among other things, that the forced disclosure violated the companies’ First Amendment rights.
The court just ruled on this case, vacating the rule and remanding it back to the SEC for reconsideration of two aspects of the rule (but not necessarily changing the rule itself, just providing a fuller explanation).
In its decision, however, the court didn’t touch the First Amendment claim (and hinted at some particular discomfort with the very idea of doing so).
That is likely going to be the outcome here, as well. I’m not necessarily suggesting that the court is going to vacate the DRC rule – in fact, there are significant differences on key points between the two rules to imply that the rule may survive the challenge.
But whichever way the court rules, it’s almost certain that the First Amendment claims will not be addressed.