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Yesterday, the U.S. Court of Appeals for the District of Columbia Circuit issued its opinion in the appeal of National Association of Manufacturers, et al., v. Securities and Exchange Commission. The National Association of Manufacturers had challenged the SEC’s conflict minerals disclosure rule, raising Administrative Procedures Act, Exchange Act and First Amendment claims. Last year, the U.S. District Court for the District of Columbia had rejected all of the Association’s claims and granted summary judgment for the SEC and intervenor Amnesty International.

On appeal, the Court of Appeals upheld most aspects of the rules and statute, but held that the statute and rule violate the First Amendment only “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”‘” (In footnote 14 of the Opinion, the Court stated that to the extent that the requirement to use the particular descriptor “not been found to be ‘DRC conflict free'” arises solely as a result of the SEC’s rule rather than the statute, then only the rule and not the statute is unconstitutional.)

More specifically, the Court found that the rule violates the prohibition against compelled speech. The Court held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.” This sort of disclosure, the Court reasoned, was similar to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members” which would be “obviously repugnant to the First Amendment” and should not face a relaxed standard for review just because Congress used the “securities” label.

In a separate opinion concurring in part, Judge Srinivasan did not join the court’s opinion with respect to the First Amendment claim, noting that a central issue with regard to the standard for review in this type of case is awaiting an en banc decision of the Court in another case, American Meat Institute v. United States Department of Agriculture. Judge Srinivasan would have preferred to hold in abeyance the consideration of the First Amendment issue in the conflict minerals case, so as not to risk being undercut by the decision of the en banc court in the American Meat Institute case.

The fact that the Court of Appeals reversed the District Court decision on the First Amendment claim was a surprise to some, given that the First Amendment claim was always talked about as a bit of a long shot. The fact that the Court of Appeals did not invalidate the conflict minerals disclosure rule on the APA or Exchange Act grounds was a disappointment to many, because with this opinion the rule will live on, but perhaps in a slightly modified form.

In our “Conflict Minerals” Practice Area, we are posting the oodles of memos that are pouring in…

What’s Next for the Conflict Minerals Disclosure Rule?

Does yesterday’s decision mean “pencils down” for those preparing their first Form SD? Unfortunately, the answer to that seems to be “no.” The outcome of the opinion is that the Court remanded the case “for further proceedings consistent with this opinion,” so more work will now have to be done by the District Court once the appellate decision is final.

Further, while the Court issued its opinion and judgment today, that decision has no binding legal effect on the parties until the Court issues its “mandate.” In a separate order issued concurrently with the opinion, the Court ordered that issuance of the mandate be withheld until seven days after the Court disposes of any petition for rehearing. The government’s petition for rehearing is not due until 45 days after the Court’s decision, which is May 29. So, unless there is further action by the Court, the earliest that the mandate would issue and the decision could have binding legal effect would be sometime in June, after the June 2, 2014 deadline by which Form SDs are required to be filed. The Court could of course change its mind and decide to issue the mandate earlier–the separate order issued today specifically contemplates that a party may ask for the mandate to be issued earlier for good cause.

It is also possible that the SEC may take some sort of action with regard to the upcoming filing deadline in light of the legal limbo that the Court’s decision creates, although the SEC’s decision to take any such action would undoubtedly be wrapped up with its overall litigation strategy with respect to the case.

Will the SEC Seek Rehearing?

While it is always speculative to try to predict what the government will do, a petition for rehearing en banc seems likely in this case. The question of what level of scrutiny is to be used to decide the First Amendment question is already at issue in another case in which the Court has granted en banc review, as discussed above. In footnote 10 of the opinion, the Court as much as invited an en banc review, noting that “issuing an opinion now provides an opportunity for the parties in this case to participate in the court’s en banc consideration of this important First Amendment question.” At the very least, the government would likely file a petition for rehearing en banc asking the Court to vacate the panel’s opinion in the event that the en banc Court changes the applicable level of scrutiny in the American Meat Institute case.

– Dave Lynn