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Federal Judge Rejects Challenges to SEC Conflict Minerals Rule

In an opinion released Tuesday, July 23, Judge Robert Wilkins of the D.C. Federal District Court rejected the challenges that several industry groups brought against the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Securities and Exchange Commission (SEC) rule implementing those provisions. For the full text of the court’s opinion, click here. The rule has remained in effect during the pendency of the challenge, and with Tuesday’s ruling the conflict minerals rule and its reporting requirements are likely to remain in effect throughout the first reporting period. However, the long-term outlook remains uncertain in light of the potential for appeal of the ruling to the U.S. Court of Appeals for the D.C. Circuit.

Brief Background

The SEC finalized a rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in August 2012. The rule requires many companies to investigate and disclose details on their use and sourcing of tin, tungsten, tantalum and gold in their products. The first disclosures under the rule, covering calendar year 2013, are due by May 31, 2014. For further information on the requirements in the conflict minerals rule, click here.

District Court Ruling

A coalition of business groups petitioned the U.S. Court of Appeals for the D.C. Circuit for review of the rule. The petitioners argued in part that the SEC failed to properly evaluate the economic effects of the rule, that the SEC acted arbitrarily and capriciously in crafting the rule, and that the rule and the statute violate the First Amendment. The D.C. Circuit sent the challenge down to the District Court for jurisdictional reasons, and it was there that the substance of the challenge was heard. The District Court treated the briefs the parties filed in the D.C. Circuit as cross-motions for summary judgment, which allowed the case to proceed to the merits with minimal delay despite the transfer.

Judge Wilkins held that the SEC met its statutory obligations and otherwise did not act arbitrarily and capriciously in crafting the conflict minerals rule. Specifically, he held that the SEC appropriately considered the economic effects of the rule, but was not required to second-guess Congress’s finding that the conflict minerals reporting requirements furthered the humanitarian goals Congress identified in Dodd-Frank. The court distinguished this case from other recent cases in the D.C. Circuit striking down SEC rules. In those cases, the SEC took it upon itself to undertake the rulemakings; here, the SEC acted under a mandate from Congress.

Further, the Court found the SEC’s determination that a de minimis exception to the rule’s requirements is inappropriate stems from a reasonable interpretation of the statute, as do the rule’s “reasonable country of origin inquiry” (RCOI) and “contract to manufacture” provisions, and the two- and four-year phase-in periods for companies of different sizes. Neither the lack of a de minimisexception, the RCOI, the “contract to manufacture,” nor the phase-in provisions represent an arbitrary or capricious exercise of discretion, given the SEC’s explanation of its consideration of various comments and alternatives in the adopting release for the final rule.

Finally, the Court rejected the plaintiffs’ First Amendment challenges to the statute and the rule. Plaintiffs argued the requirement that companies post their conflict minerals disclosures on their own websites violated the First Amendment’s freedom of expression. The Court agreed that the rule compels speech, but that the requirement passes constitutional muster because it is reasonably designed to directly and materially advance Congress’s legitimate goal of reducing violence in and around the Democratic Republic of Congo.

An appeal of the decision to the D.C. Circuit can be anticipated, although the challengers have made no formal announcement of their intention to do so.

© 2020 Beveridge & Diamond PC

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About this Author

Paul E. Hagen, Environmental Attorney, Beveridge Diamond Law Firm
Principal

Paul Hagen practices in the areas of U.S. and international environmental law. He counsels leading multinational corporations and trade associations on environmental compliance and market access requirements related to product design, supply chain management, and resource protection measures in the U.S. and in key markets worldwide. He also advises clients on the negotiation and implementation of regional and global environmental agreements, with a particular emphasis on treaties and related legislation impacting the chemicals, electronics, and pharmaceuticals sectors.

202-789-6022
K. Russell LaMotte, Environmental Law Attorney, Beveridge Diamond Law Firm
Principal

Mr. LaMotte helps multinational companies navigate international environmental regulatory regimes and multi-jurisdictional product compliance regulatory matters.  He served for over ten years as an international lawyer at the U.S. Department of State, representing the U.S. Government in designing, negotiating or implementing most of the major multilateral environmental and oceans agreements.  He also served as a clerk for the Hon. Judith Rogers, U.S. Court of Appeals for the D.C. Circuit.

202-789-6080
Lauren A. Hopkins, Environmental Attorney, Beveridge Diamond Law Firm
Associate

Lauren’s practice focuses primarily on global product stewardship, supply chain due diligence, and environmental advertising and marketing.

In particular, Lauren is well-versed in reporting requirements related to the use of conflict minerals in electronics, medical devices, and other consumer products.  She advises on issues including interpretation and implementation of the U.S. Securities and Exchange Commission’s conflict minerals rule, supply chain due diligence, and the preparation of conflict minerals disclosures.  She also assists...

202-789-6081
Graham C. Zorn, Environmental Law Attorney, Beveridge Diamond Law Firm
Associate

Graham C. Zorn is an Associate in the Washington, D.C. office of Beveridge & Diamond, P.C., with a general litigation, regulatory, and environmental practice.  Graham has represented individual businesses, trade associations, and municipalities in compliance, enforcement, and counseling matters involving the Clean Air Act, the Clean Water Act, CERCLA and other state and federal statutes.  He has worked extensively on a series of complex products liability and toxic tort cases related to alleged groundwater contamination involving a gasoline additive.  Graham has also counseled domestic...

202-789-6024