D.C Circuit finds SEC’s conflict mineral disclosure rule violates First Amendment

April 15

The D0dd-Frank Wall Street Reform and Consumer Protection Act instructs the Securities and Exchange Commission to issue regulations requiring companies to disclose whether they obtained various rare minerals from war-torn regions in central Africa.  On Monday, a divided panel of the U.S. Court of Appeals for the D.C. Circuit held that the SEC’s “conflict mineral” disclosure rules were unconstitutional.  Specifically, in National Association of Manufacturers v. Securities and Exchange Commission, the court found that requiring companies to declare whether their products are “DRC conflict free,” the regulations unconstitutionally compelled commercial speech, thus violating the First Amendment.

In an opinion by Judge Raymond Randolph (joined by Judge David Sentelle), the court concluded that compelled disclosures of commercial information are subject to the same level of First Amendment scrutiny as are other regulations of commercial speech (under the Central Hudson test), unless the disclosures are limited to “purely factual and uncontroversial information” and the mandatory disclosure is “reasonably related to the State’s interest in preventing deception of consumers.”

Because, as the SEC conceded, the conflict mineral disclosure requirements have nothing to do with preventing consumer deception, the court concluded the rules should be evaluated under Central Hudson.  Under this test, the requirements must serve a substantial government interest, directly advance that interest, and be narrowly tailored. Whether or not the SEC could demonstrate that its conflict mineral disclosure rule satisfies a substantial government interest, the court found the SEC offered no evidence that its rule was narrowly tailored.  On this basis the court struck down the requirement that companies declare that products “have not been found to be ‘DRC conflict free.’”  Insofar as Dodd-Frank requires other disclosures, including reports to the SEC, such requirements were upheld.

[The court also noted that the SEC conceded it was 'unable to readily quantify" any "compelling social benefits" from a rule estimated to cost up to $4 billion to implement initially, and between $207 million and $609 million annually thereafter.  To my mind, this suggests the rule does not directly advance the government's interests either, but the court did not rest its holding on this ground.]

The NAM decision comes on the heels of another significant compelled commercial speech decision: American Meat Institute v. USDA. As I discussed here, on March 28 a separate panel of the D.C. Circuit upheld the Agriculture Department’s country-of-origin-labeling regulations against a similar First Amendment challenge, concluding that regulations requiring disclosure of non-controversial, factual information need only satisfy rational basis scrutiny, even if the disclosure is not intended to prevent potential consumer deception.  One week later, however, the full court voted to rehear the AMI case en banc to reconsider the basis for its decision.  

As I discussed in my prior post, the AMI panel erred in concluding that compelled factual disclosures should always receive a lesser degree of scrutiny.  Judge Sri Srinivasan, who was also on the AMI panel, dissented-in-part from the conflicts mineral disclosure decision, arguing that the panel should have stayed its hand on the constitutional question until AMI is decided en banc.  Randolph responded that deciding the question now was consistent with court practice and “provides an opportunity for the parties to participate in the court’s en banc consideration of this important First Amendment question.”

As the conflicts minerals case shows, forcing the disclosure of facts about goods or services is rarely a value-neutral act.  There are always a near-infinite number of facts about a good or service that may be of interest to consumers, and yet there is only limited space to communicate such information.  Label space is limited, as is the attention span of consumers.  There can be too little information about a product, but also too much.  When the government mandates the disclosure of specific information it is declaring that such information is more important — and is entitled to greater consideration — than other potentially relevant information about the good or service.  So, for instance, when the government mandates conflict mineral disclosure, it is suggesting that consumers should care more about this than, say, the sustainability of the products, the source of labor used, the company’s environmental record or charitable giving, and so on.  This is not a neutral act, and thus should be subject to constitutional scrutiny.

Requiring government disclosure requirements to meet the standard commercial speech test of Central Hudson does not threaten most disclosure requirements.  Under Central Hudson, the government must identify a substantial governmental interest in order to regulate commercial speech.  Disclosure or labeling requirements that serve to prevent consumer deception or prevent unwitting harms easily meet this requirement.  Indeed, Central Hudson makes clear that commercial speech is only protected if it concerns lawful activity and is non-deceptive. So understood, most SEC financial disclosure rules, FDA and USDA food labeling requirements, consumer safety warnings, and the like are likely constitutional.  The sorts of disclosure requirements put at risk by such a rule are only those, like conflicts mineral disclosure, that seek to force producers or retailers to stigmatize products so as to discourage consumers from buying them.  If the government wants to influence consumer behavior in this way, it can do so with its own speech — such as through advertising campaigns and consumer education.

Private groups may also encourage disclosures and producers remain free to voluntarily disclose information — such as whether a product is “organic,” “cruelty-free” or even “DRC conflict free” — that may make their products more appealing than those of their competitors. What the First Amendment should limit, however, is the government’s ability to commandeer private speech to support such a cause.

For more on the NAM decision, see these three posts on ProfessorBainbridge.com.

Jonathan H. Adler teaches courses in constitutional, administrative, and environmental law at the Case Western University School of Law, where he is the inaugural Johan Verheij Memorial Professor of Law and Director of the Center for Business Law and Regulation.
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