United States District Court, District of Columbia
NATIONAL ASSOCIATION OF MANUFACTURERS, CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, and BUSINESS ROUNDTABLE, Plaintiffs,
SECURITIES AND EXCHANGE COMMISSION, Defendant, AMNESTY INTERNATIONAL USA, and AMNESTY INTERNATIONAL LTD., Intervenor-Defendants
[Copyrighted Material Omitted]
For NATIONAL ASSOCIATION OF MANUFACTURERS, BUSINESS ROUNDTABLE, Petitioners: Jonathan F. Cohn, LEAD ATTORNEY, SIDLEY AUSTIN LLP, Washington, DC; Peter Douglas Keisler, LEAD ATTORNEY, SIDLEY AUSTIN, LLP, Washington, DC.
For CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, Petitioner: Jonathan F. Cohn, LEAD ATTORNEY, SIDLEY AUSTIN LLP, Washington, DC; Peter Douglas Keisler, LEAD ATTORNEY, SIDLEY AUSTIN, LLP, Washington, DC; Rachel Lee Brand, LEAD ATTORNEY, U.S. CHAMBER OF COMMERCE, National Chamber Litigation Center, Washington, DC.
For SECURITIES AND EXCHANGE COMMISSION, Respondent: Tracey A. Hardin, LEAD ATTORNEY, Benjamin Lawrence Schiffrin, U.S. SECURITIES & EXCHANGE COMMISSION, Office of the General Counsel, Washington, DC; Daniel Staroselsky, UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Office of General Counsel, Washington, DC.
For EXPERTS ON THE DEMOCRATIC REPUBLIC OF THE CONGO, Amicus: Sarah M. Harris, LEAD ATTORNEY, ARNOLD & PORTER, LLP, Washington, DC.
For FRED ROBARTS, GLOBAL WITNESS LIMITED, GREGORY MTHEMBU-SALTER, Amicus: Jodi Westbrook Flowers, LEAD ATTORNEY, PRO HAC VICE, MOTLEY RICE LLC, Mount Pleasant, SC; Nathan David Finch, LEAD ATTORNEY, MOTLEY RICE, Washington, DC.
For BETTER MARKETS, INC., Amicus: Dennis M. Kelleher, LEAD ATTORNEY, BETTER MARKETS, INC., Washington, DC; Stephen W. Hall, LEAD ATTORNEY, BETTER MARKETS, INCORPORATED, Washington, DC.
For AMERICAN COATINGS ASSOCIATION, INC., SOCIETY OF THE PLASTICS INDUSTRY, INC., PRECISION MACHINED PRODUCTS ASSOCIATION, NATIONAL RETAIL FEDERATION, CONSUMER SPECIALTY PRODUCTS ASSOCIATION, INC., CAN MANUFACTURERS INSTITUTE, AMERICAN CHEMISTRY COUNCIL, Amicus: Eric P. Gotting, LEAD ATTORNEY, KELLER & HECKMAN, LLP, Washington, DC; Eric Gordon Lasker, LEAD ATTORNEY, HOLLINGSWORTH LLP, Litigation, Washington, DC.
For KEITH ELLISON, WILLIAM LACY CLAY, HOWARD L. BERMAN, RUSSELL D. FEINGOLD, DICK DURBIN, BARBARA BOXER, MAXINE WATERS, GWEN MOORE, JIM MCDERMOTT, EDWARD J. MARKEY, JOHN LEWIS, RAUL GRIJALVA, Amicus: Agnieszka M. Fryszman, LEAD ATTORNEY, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, DC.
For AMNESTY INTERNATIONAL USA, AMNESTY INTERNATIONAL LIMITED, Intervenors: Julie A. Murray, LEAD ATTORNEY, PRO HAC VICE, Adina Rosenbaum, PUBLIC CITIZEN LITIGATION GROUP, Washington, DC.
ROBERT L. WILKINS, United States District Judge.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (" Dodd-Frank" ), the Securities and Exchange Commission promulgated a rule imposing certain disclosure requirements for companies that use " conflict minerals" originating in and around the Democratic Republic of the Congo (" DRC" ). Conflict Minerals, 77 Fed. Reg. 56,274 (Sept. 12, 2012) (codified at 17 C.F.R. § § 240, 249B) (the " Conflict Minerals Rule," " Final Rule," or " Rule" ). The plaintiffs in this action--the National Association of Manufacturers (" NAM" ), the Chamber of Commerce, and Business Roundtable (collectively, " Plaintiffs" )--challenge various aspects of the SEC's Final Rule as arbitrary and capricious under the Administrative Procedure Act (" APA" ), 5 U.S.C. § § 701, et seq.  Plaintiffs also mount a constitutional attack against both the Rule and Dodd-Frank § 1502, claiming that the disclosures required by the SEC and by Congress run afoul of the First Amendment. Finding no problems with the SEC's rulemaking and disagreeing that the " conflict minerals" disclosure scheme transgresses the First Amendment, the Court concludes that Plaintiffs' claims lack merit. Accordingly, upon careful consideration of the parties' briefing and the arguments of counsel, along with a thorough review of the Joint Appendix the parties relied upon as the administrative record in this case, the Court, for the reasons that follow, will DENY Plaintiffs' Motion for Summary Judgment (Dkt. No. 14) and will GRANT the Commission's and Intervenors' Cross-Motions for Summary Judgment (Dkt. Nos. 15, 16).
A. Statutory and Regulatory Framework
1. Dodd-Frank Act § 1502
Responding to the national financial downturn, Congress enacted the Dodd-Frank Act on July 21, 2010, and introduced a broad range of new measures designed to improve the troubled securities markets. As relevant here, Section 1502 of Dodd-Frank directed the SEC to develop and promulgate a rule requiring greater transparency and disclosure regarding the use of " conflict minerals" coming out of the DRC and its neighboring countries. Congress believed that " the exploitation and trade of conflict minerals originating in the [DRC] is helping to finance conflict characterized by extreme levels of violence in the eastern [DRC], particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation." Dodd-Frank § 1502(a), 124 Stat. 2213. In Congress's view, requiring companies " to make public and disclose annually to the Securities and Exchange Commission if the minerals in their products originated or may have originated in Congo" will help " to ensure activities involving such minerals did not finance or benefit armed groups." 156 Cong. Rec. S3976 (May 19, 2010) (statement of Sen. Feingold). Put another way, Congress concluded that this disclosure scheme was " a reasonable step to shed some light on this literally life-and-death issue," and believed that it would " encourage companies using these minerals to source them responsibly." 156 Cong. Rec. S3817 (May 17, 2010) (statement of Sen. Durbin).
Dodd-Frank added Section 13(p) to the Securities and Exchange Act of 1934. See 15 U.S.C. § 78m(p). The statute directs the SEC to adopt regulations requiring companies that use " conflict minerals" that are " necessary to the functionality or production" of their products, id. § 78m(p)(2)(B), to disclose to the Commission whether those minerals originated in the DRC or an adjoining country, id. § 78m(p)(1)(A). If such " conflict minerals" --tantalum, tin, tungsten, and gold--did originate in the DRC or an adjoining country, then companies must also submit an additional report to the Commission containing a " description of the measures taken . . . to exercise due diligence on the source and chain of custody of such minerals," and " a description of the products manufactured or contracted to be manufactured that are not DRC conflict free." Id. § 78m(p)(1)(A)(i)-(ii). Under the statute, " DRC conflict free" means that a product " does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the [DRC] or an adjoining country." Id. § 78m(p)(1)(D). The report must also describe " the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity." Id. § 78m(p)(1)(A)(ii). Notably, the statute additionally requires that any disclosures or reports provided to the SEC under these provisions must be made publicly available on the companies' own Internet websites. Id. § 78m(p)(1)(E).
Along with the SEC, Section 1502 also created responsibilities for other federal agencies. For example, the statute requires the Comptroller General to submit regular reports to Congress assessing " the rate of sexual- and gender-based violence in war-torn areas" in and around the DRC, and " the effectiveness of section 13(p) . . . in promoting peace and security" in the DRC and surrounding countries. Dodd-Frank § 1502(d)(1)-(2), 124 Stat. 2216-17. In addition, the Secretary of State is required to produce and make publicly available " a map of mineral-rich zones, trade routes, and areas under the control of armed groups" in the DRC and adjoining countries, and must also prepare and submit to Congress " a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products." Id. § 1502(c)(1)-(2), 124 Stat. 2215-16.
2.The Conflict Minerals Rule
Following the passage of Dodd-Frank, the Commission published its proposed
rule a few months later in December 2010. See Conflict Minerals, 75 Fed. Reg. 80,948 (Dec. 23, 2010). During the rulemaking process, the SEC received more than 13,000 comment letters, and it also convened a public roundtable to solicit feedback from interested stakeholders and industry representatives; following the roundtable, the Commission requested additional comments. See 77 Fed. Reg. at 56,277-56,278. Ultimately, the SEC adopted the Final Rule (Rule 13p-1) by a 3-2 vote on August 22, 2012, and published its Adopting Release--which spans nearly 100 pages in the Federal Register--on September 12, 2012. Id. at 56,274-56,365.
a) Overview of the Final Rule
As set out in the Adopting Release, the SEC's Conflict Minerals Rule can be broken down into three overall steps, which the Court summarizes in turn.
At " Step One," and as a threshold matter, companies must first determine whether they are covered by the Rule's requirements at all. The Final Rule only applies to " reporting" companies--i.e., companies that " file reports with the Commission under Section 13(a) or Section 15(c) of the Exchange Act," 77 Fed. Reg. at 56,287--for which " conflict minerals are necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured," id. at 56,290. It bears mentioning that the Commission considered extending the Rule's reach farther--observing that the statute " could be interpreted to apply to a wide range of private companies not previously subject to [the SEC's] disclosure and reporting rules," id. at 56,285--but ultimately thought the more reasonable interpretation was to limit the Rule's application to reporting issuers. The SEC also considered several other factors bearing on the Rule's scope. As relevant to this case, the Commission concluded that the Rule should not be limited to issuers that directly manufacture products with necessary conflict minerals, but should also reach issuers who contract to manufacture such products; the Commission also declined to adopt any type of categorical de minimis exception to the Rule's coverage. See id. at 56,288-56,292, 56,295, 56,298.
After applying these coverage standards, issuers that are subject to the Conflict Minerals Rule must proceed to " Step Two," which requires covered issuers to conduct a " reasonable country of origin inquiry" regarding their conflict minerals. Id. at 56,311. The Rule does not precisely define what constitutes a " reasonable country of origin inquiry," noting that it can " differ among issuers based on the issuer's size, products, relationships with suppliers, or other factors," and " depend[ing] on the available infrastructure at a given time." Id. But the Rule does provide some guidance. The inquiry " must be reasonably designed to determine whether the issuer's conflict minerals did originate in the Covered Countries, or did come from recycled or scrap sources, and it must be performed in good faith." Id. at 56,312. As explained in the Adopting Release, the Commission would " view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations" --" either directly from that
facility or indirectly from the issuer's immediate suppliers" --" indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources." Id.  The Rule also confirms that an " issuer is not required to receive representations from all of its suppliers," emphasizing that the " standard focuses on reasonable design and good faith inquiry." Id.  The SEC, instead, expects issuers to take into account " warning signs" and " red flags" suggesting that their minerals may have originated in the Covered Countries, or otherwise " casting doubt" on the source of their minerals. Id. at 56,311-56,312 & n.448.
Depending on the results of a company's reasonable country of origin inquiry, it may or may not be required to proceed to the Rule's third step. On the one hand, if, through its reasonable country of origin inquiry, an issuer: (1) " determines that its necessary conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources," or (2) " has no reason to believe that its conflict minerals may have originated in the Covered Countries or reasonably believes that its conflict minerals are from recycled or scrap sources," then the issuer's tracing obligations end there. Id. at 56,313 (emphasis added). The Rule simply requires that the issuer disclose its determination to the Commission, briefly describing the scope and results of its reasonable country of origin inquiry on a newly-created " Form SD." Id. On the other hand, if the issuer: (1) " knows" that its conflict minerals " originated in the Covered Countries and did not come from recycled or scrap sources," or (2) " has reason to believe" that its minerals " may have originated in the Covered Countries (and may not have come from recycled or scrap sources)," then the issuer must proceed to the Rule's third step. Id.
At " Step Three," issuers must exercise " due diligence" in an effort to more definitively
determine " the source and chain of custody" of their conflict minerals. Id. While the SEC did not expressly spell out the steps that must be taken to qualify as " due diligence," the Final Rule does require an issuer " to use a nationally or internationally recognized due diligence framework, if such a framework is available for the specific conflict mineral." Id. at 56,326. Specifically, the Commission confirmed that the OECD due diligence guidance " satisfies [its] criteria and may be used as a framework for purposes of satisfying the final rule's requirement that an issuer exercise due diligence in determining the source and chain of custody of its conflict minerals." Id. (citing OECD Due Diligence Guidance). Further, the Adopting Release confirms that a " critical component of due diligence" is an independent, private sector audit designed to ensure that the issuer's due diligence " is in conformity with . . . [a] nationally or internationally recognized due diligence framework," and that the issuer's actual due diligence efforts comport with the due diligence approach described in its report. Id. at 56,320, 56,329. Depending on the information uncovered during the due diligence process, an issuer may then be required to prepare a Conflict Minerals Report. If, following due diligence, " an issuer determines that its conflict minerals did not originate in the Covered Countries or that its conflict minerals did come from recycled or scrap sources, then no Conflict Minerals Report is required." Id. at 56,312 (emphasis added). The issuer must still, however, prepare and submit a Form SD to the Commission describing the scope and results of its due diligence efforts. Id. By contrast, if the issuer's due diligence reveals that its minerals did originate in the Covered Countries and did not come from recycled or scrap sources--or if the issuer cannot determine the source of its conflict minerals through due diligence--then the issuer must prepare and submit a Conflict Minerals Report to the SEC. Id. at 56,313.
The Conflict Minerals Report must include, among other matters, " a description of the measures the issuer has taken to exercise due diligence on the source and chain of custody of [its] conflict minerals," accompanied by " a certified independent private sector audit." Id. at 56,320. In addition, unless the issuer's products can be identified as " DRC conflict free," the report must set forth " a description of the facilities used to process those conflict minerals, the country of origin of those conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity." Id. An issuer's Conflict Minerals Report must also include a description of its products that have " not been found to be 'DRC conflict free,'" although issuers can include additional explanatory information they believe necessary or appropriate. Id. at 56,322 (" [I]ssuers can add disclosure or clarification," which " allows issuers to include the statutory definition of 'DRC conflict free' in the disclosure to make clear that 'DRC conflict free' has a very specific meaning, or to otherwise address their particular situation." ). On this last point, the Commission also authorized a temporary transition period allowing companies
unable to determine the origin of their conflict minerals to describe those minerals as " DRC conflict undeterminable," rather than as having " not been found to be 'DRC conflict free.'" Id. at 56,321. The Rule allows this alternative description for a two-year period for all reporting issuers, and for a four-year period for " smaller" companies. Id. at 56,321-56,322.
Significantly, the Rule does not require that companies place any type of label or disclosure on products. Id. at 56,323 (" We note that many commentators appeared to believe that the proposed rules would require that an issuer physically label its products as " DRC conflict free" or not " DRC conflict free" . . . . The final rule does not require a physical label on any product." ). Rather, these descriptions must be set forth in an issuer's Conflict Minerals Report, if at all, although a copy of the Conflict Minerals Report must also be publicly posted on the company's website, as well. See 15 U.S.C. § 78m(p)(1)(E); 77 Fed. Reg. at 56,362-56,363.
The Final Rule became effective on November 13, 2012, and the first reports and disclosures it requires are due to be filed with the SEC by May 31, 2014. 77 Fed. Reg. at 56,274.
b) Significant Comments and Issues Considered by the Commission
Insofar as they are relevant to the claims Plaintiffs press in this case, the Court summarizes some of the more significant comments and issues considered--and in some cases, adopted--by the Commission during the rulemaking process.
First, many commentators urged the Commission to adopt a de minimis exception to the Rule's coverage, submitting a wide variety of proposed threshold amounts for the SEC's consideration. See 77 Fed. Reg. at 56,295, 56,298. For example, some commentators suggested that an issuer should be exempt from coverage if the cost of conflict minerals in its products makes up less than 1% of the issuer's total production costs. Id. at 56,295. Some other stakeholders recommended a de minimis exception applicable to " trace, nominal, or insignificant amounts of conflict minerals" that are part of a company's products. Id. And still other commentators proposed the adoption of a de minimis exception in circumstances " when the issuer is unable to determine the origin of only 5% of the product's minerals," " for products containing less than 0.1% by weight of a conflict mineral," and/or " if an issuer's global usage of conflict minerals comprised less than 0.01% of its materials." Id. Ultimately, the Commission declined to adopt any categorical de minimis exception as part of the Final Rule. Id. at 56,298. In its view, a de minimis threshold would have been contrary to the Rule's purpose, given that the standard " focuses on whether the conflict mineral is 'necessary'
to a product's functionality or production," rather than " the amount of a conflict mineral contained in the product." Id. The SEC, in reaching this decision, also relied upon commentators' indications that conflict minerals " are often used in products in very limited quantities," as well as the Commission's own " understand[ing] that there are instances in which only a minute amount of conflict minerals is necessary for the functionality or production of a product." Id.
In addition, the SEC received a number of comments encouraging the Commission not to apply the Final Rule to companies that " contract to manufacture" products containing necessary conflict minerals, but that do not " manufacture" such products directly. Id. at 56,289-56,290. Despite the urging of those commentators, the Commission ultimately determined that the Rule should apply to both categories of issuers--those that directly manufacture products containing necessary conflict minerals, as well as those that contract to manufacture such products. Id. at 56,290. In so doing, the Commission declined to define " contract to manufacture" in the Final Rule, believing such a definition would prove " unworkable." Id. at 56,290-56,291. But the Adopting Release does offer guidance. The SEC explained that the term " contract to manufacture" only " include[s] issuers that have some actual influence over the manufacture of their products." Id. at 56,291. Consequently, the Commission explained that an issuer would not be viewed as " contracting to manufacture a product" if " its actions involve no more than" : (a) " [s]pecifying or negotiating contractual terms . . . that do not directly relate to the manufacturing of the product, such as training or technical support, price, insurance, indemnity, intellectual property rights, dispute resolution, or other like terms . . ." ; (b) " [a]ffixing its brand, marks, logo, or label to a generic product manufactured by a third party" ; or (c) " [s]ervicing, maintaining, or repairing a product manufactured by a third party." Id. In the Commission's view, this approach avoids sweeping " pure retailer[s]" into the Rule's scope, given that companies simply " offer[ing] a generic product under [their] own brand name or a separate brand name" generally do not " exert a sufficient degree of influence" over the manufacturing process. Id. at 56,292.
As another key point, the proposed rule would have required an issuer to undertake full-blown due diligence efforts if, based on its reasonable country of origin inquiry, it was " unable to determine that its conflict minerals did not originate in the Covered Countries." Id. at 56,312. Believing this framework would unreasonably require issuers to " prove a negative," the Commission ultimately concluded that such an " approach would arguably be more burdensome than necessary to accomplish the [Rule's] purpose," and that " requiring a certainty in this setting would not be reasonable and may impose undue costs." Id. at 56,312-56,313. As a result, the Final Rule incorporates the standard outlined above, whereby an issuer is excused from due diligence obligations so long as it " has no reason to believe that its conflict minerals may have originated in the Covered Countries," or " reasonably believes that its conflict minerals are from recycled or scrap sources." Id. at 56,313. In the SEC's view, this procedure struck the appropriate balance: " This revised approach does not require an issuer to prove a negative to avoid moving to [due diligence], but it also does not allow an issuer to ignore or be willfully blind to warning signs or other circumstances indicating that its conflict minerals may have originated in the Covered Countries." Id.
Separately, the terms of the proposed rule also would have required issuers unable to determine the source of their conflict minerals to describe their products in the Conflict Minerals Report as " not DRC conflict free." Id. at 56,317. Responding to commentators' concerns that it " would impose an unfair stigma" on companies that are forced to describe products as " not DRC conflict free," " particularly on issuers that did not know whether their minerals directly or indirectly financed or benefited armed groups in the Covered Countries," the Commission modified the applicable language in the Final Rule. Id. at 56,322. Instead, issuers must now explain that such products have " not been found to be 'DRC conflict free'" (unless they rely upon the alternative disclaimer of " DRC conflict undeterminable" during the temporary transition period). Id. In the Commission's view, this approach avoids incentivizing issuers to " avoid determining the origins of the conflict minerals that they use," while remaining faithful to " Congress's directive in Section 1502" of Dodd-Frank. Id. at 56,321.
B. Procedural History
Plaintiffs initially filed this action with the U.S. Court of Appeals for the D.C. Circuit, invoking 15 U.S.C. § 78y as the direct jurisdictional springboard to the Court of Appeals. While the case was pending with the appellate court, however, the D.C. Circuit issued its decision in American Petroleum Institute v. SEC,714 F.3d 1329, 404 U.S. App. D.C. 407 (D.C. Cir. 2013), concluding that it lacked jurisdiction over a direct challenge to a different SEC rule issued under Dodd-Frank. Id. at 1333. The D.C. Circuit held that its original jurisdiction under Section 25 of the Exchange Act is limited to challenges to " final orders issued by the Commission" and to challenges to " rules promulgated pursuant to enumerated sections of the Act." Id. Outside of those limited circumstances, the Circuit explained, " a party must first proceed by filing suit in district court" under the APA. Id. The American Petroleum decision was issued on April 26, 2013; four days later--apparently ...