DC District Court Upholds SEC's Conflict Mineral Due Diligence And Reporting Rule

On July 23, 2013, the United States District Court for the District of Columbia (District Court) rejected an industry challenge to a rule (the Rule) issued in August 2012 by the Securities and Exchange Commission (SEC or Commission), which implemented certain "conflict mineral" disclosure requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).1 Section 1502 of Dodd-Frank manifests Congress' intent to eliminate the minerals trade as a source of funding that, for decades, has enabled and perpetuated widespread armed violence in the Democratic Republic of the Congo (DRC) and its neighboring countries. Through Section 1502, Congress sought to accomplish this goal by amending the Securities Exchange Act of 1934 (Exchange Act)2 to require SEC registrants to make annual disclosures if they manufacture or contract for the manufacture of products that contain or are reasonably believed to contain certain "conflict minerals"-tin, tantalum, gold and tungsten- sourced from a covered country.3

The National Association of Manufacturers, the US Chamber of Commerce and the Business Roundtable (collectively, Plaintiffs) initially filed suit challenging the Rule with the District of Columbia Circuit Court of Appeals (Circuit Court). However, after the Circuit Court ruled in a separate case involving a similar challenge to an SEC rule implementing Section 1504 of Dodd-Frank that jurisdiction properly resided with the lower court,4 Plaintiffs requested transfer of the instant case to the District Court. Proceeding on an expedited basis, the District Court heard summary judgment motions based on briefs filed in the Circuit Court involving multiple claims under the Administrative Procedures Act (APA) and the US Constitution. Specifically, Plaintiffs asserted that in issuing the Rule, the SEC disregarded its statutory obligations under the Exchange Act, that the rulemaking proceeding was arbitrary and capricious in multiple other respects, and that the public disclosures required by both the Rule and Section 1502 of Dodd-Frank compelled speech in violation of the First Amendment.

In an extensive and detailed opinion summarized below, the District Court denied summary judgment sought by Plaintiffs, instead finding that the SEC pursued the rulemaking in a manner that was neither arbitrary nor capricious, and that nothing about the Rule or the underlying statute infringed on Plaintiffs' First Amendment rights. Given the uncertain time frame and outcome of any appeal, SEC reporting companies would be well advised to forge ahead with efforts to implement conflict minerals compliance programs in anticipation of the May 31, 2014 deadline for the first...