A federal appeals court on Monday struck down a top component of the Dodd-Frank Act requiring companies to disclose whether their products contain minerals from the war-torn Democratic Republic of Congo (DRC).
The second most powerful U.S. court said a provision of the rule forcing companies to publicly report their products as not “conflict-free” violated their First Amendment protections against compelled speech.
In a split decision, the D.C. Circuit Court of Appeals upheld provisions of the rule, concluding that the Securities and Exchange Commission was following statutory language in requiring companies to determine whether any gold, tantalum, tin or tungsten in their products comes from the DRC or adjoining nations.
“The label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups,” according to a majority opinion backed by two members of a three-judge panel.
“By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment,” the judges concluded.
The rule, one of hundreds of regulations spawned from the landmark 2010 financial reform law was assailed from the beginning, with business groups including the National Association of Manufacturers arguing it is costly and unconstitutional.
A federal district court rejected a challenge to the regulations last July, sending the matter to the appeals court. It is unclear whether SEC would ask the Supreme Court to take the matter up.
Monday’s ruling leaves other portions of the rule intact, siding with the agency. For instance, the court found that the SEC did not fail to perform an adequate cost-benefit analysis before imposing the rule.
The SEC estimated the total costs of the final rule would be $3 billion to $4 billion initially, and $207 million to $609 million in subsequent years. The agency said it was unable to quantify the benefits being sought, namely reducing violence in the Congo.
“Here, the rule’s benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the Commission has no particular expertise,” the court found. “Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule — measured in dollars — would create an apples- to-bricks comparison.”
The court remanded the case to a lower court for additional proceedings. The regulations are scheduled to take place next month.
It was not immediately clear how the ruling would affect requirements that companies begin at that time tracking and disclosing the origin of minerals in their products.
As originally drafted, the regulations would apply to roughly 6,000 U.S. businesses.