On Aug. 18, 2015, a divided panel of the D.C. Circuit Court of Appeals in National Ass’n of Manufacturers v. U.S. Securities and Exchange Commission (Minerals II) reaffirmed its April 2014 decision that the SEC’s conflict minerals rule, and the underlying provision of the Dodd-Frank Act, violate the First Amendment to the extent they require a company to report to the SEC, and to state on its website, that any of its products have “not been found to be ‘[Democratic Republic of the Congo] conflict free.’”[1] The panel had agreed to reconsider the case because of an intervening en banc decision of the full D.C. Circuit in another case, American Meat Institute v. U.S. Department of Agriculture (Meat II),[2] which raised a similar First Amendment challenge to USDA requirements for labeling meat products.
Taken together, these cases further muddy the landscape for compelled commercial speech jurisprudence, already the subject of doctrinal disputes and circuit splits.[3] As a result, the topic seems ripe for attention from the U.S. Supreme Court. In the meantime, however, both cases present analytical approaches that, if they survive, could open the door to First Amendment challenges to other corporate disclosure requirements and complicate the governmental agency rulemaking process.
At their heart, the Minerals II and Meat II cases present a fundamental disagreement within the D.C. Circuit as to the application of the more relaxed “rational basis” review standard for compelled commercial speech set forth by the Supreme Court in Zauderer, as opposed to the more demanding “intermediate standard” in Central Hudson.[4] In principle, the government can more easily defend a disclosure requirement from constitutional challenge under the Zauderer standard than under the Central Hudson standard.
In Minerals I, a three-judge panel of the D.C. Circuit limited the Zauderer standard to disclosure designed to prevent consumer deception. The subsequent Meat II decision then held that Zauderer applies more broadly and explicitly overruled other D.C. Circuit cases “to the extent that [they] may be read as holding to the contrary and limiting Zauderer to […] correcting deception[.]”[5] In Minerals II, however, the majority (both senior judges who did not participate in the en banc decision in Meat II) continued to limit the reach of Zauderer to cases involving commercial or voluntary advertising (or point-of-sale disclosures). This disagreement alone may give rise to a request for a rehearing of Minerals II en banc or Supreme Court review.
But the potentially more interesting implications for corporate disclosure requirements and rulemaking arise from the alternative basis set forth in the Minerals II decision. Recognizing the “flux and uncertainty of the First Amendment doctrine of commercial speech, and the conflict in the circuits regarding the reach of Zauderer,” the Minerals II majority proceeded to consider the conflict minerals disclosure rule as if “[Meat II’s] view of Zauderer governed the analysis” and still concluded that it violates the First Amendment.[6] And here is where the doctrinal underpinnings of the Meat II and Minerals II decisions surprisingly converge.
The Meat II majority laid out several elements to be considered when applying the Zauderer standard. First, the adequacy of the government interest motivating the disclosure requirement must be assessed. The Meat II majority spent more time on this prong (ultimately finding the government has a sufficient interest in providing consumers with disclosure about a product’s origins); the Minerals II panel, despite noting that the SEC’s supplemental brief “oddly” did not address the subject, cursorily found the government’s interest in ameliorating the humanitarian crisis in the DRC to be sufficient.
Second, the relationship between the government’s identified means and its chosen ends must be assessed. This is where the Zauderer standard is more relaxed with respect to compelled commercial speech, requiring only that the disclosure requirements be reasonably related to the government interest, while the Central Hudson standard would require both that they directly advance the government interest and that they be narrowly drawn. But in Meat II, the court found the two approaches to be essentially the same, at least as applied to the meat labeling requirements at issue,[7] noting that evidence of a measure’s effectiveness “is hardly necessary when the government uses a disclosure mandate to achieve a goal of informing consumers about a particular product trait.”[8]
Following the reasoning in Meat II, the Minerals II majority analyzed the effectiveness of the conflict minerals disclosure requirement in achieving the government’s stated humanitarian interest, but found the record lacking: The SEC was unable to demonstrate that the rule in fact would alleviate the situation in the DRC to a material degree; Congress held no hearings on the likely impact of the rule; the SEC hearings on the topic included conflicting testimony about whether the rule would improve or worsen the situation in the DRC; and the U.S. Government Accountability Office has not assessed the effectiveness of the rule. “[T]he government cannot rest on ‘speculation or conjecture,’” the majority concluded, which “in itself dooms the statute and the SEC’s regulation.”[9]
Asking whether the disclosure requirement is reasonably related to the government’s interest led both courts to draw a distinction between “controversial” and “uncontroversial” disclosure. The Meat II court emphasized that a “reasonable fit” or “reasonable proportion” between means and end will almost always be satisfied if the requirement is “a reasonably crafted mandate to disclose ‘purely factual and uncontroversial information’ about attributes of the product or service being offered,” “absent a showing that the disclosure is ‘unduly burdensome’ in a way that ‘chill[s] protected commercial speech.’”[10] It found the meat labeling requirements met that test: while allowing that the word “slaughter” might convey “a certain innuendo,” since the rule allowed use of “harvested” instead, the court found no substantive claim of controversy.[11]
In contrast, the Minerals II majority concluded that the conflict minerals disclosure formula – “not been found to be DRC conflict free” – is controversial, although it also suggested that the term “uncontroversial” is unclear (and intellectually problematic), while voicing some doubt that the meat labeling disclosures at issue in Meat II are truly uncontroversial. Like Minerals I, it emphasized that the label “[not] conflict free” is a metaphor that conveys moral responsibility for the war in the DRC, essentially requiring a company to state that its products are ethically tainted and to confess blood on its hands, a characterization with which any company may disagree.
This focus on the “controversial” aspect of the conflict minerals disclosure suggests that the most likely application of the Minerals II analysis going forward, if it survives, would be to other efforts to achieve social or humanitarian goals through required “name and shame” disclosures. The Meat II decision leaves this door open as well, with its recognition that a different conclusion might be reached if the state were to “require corporations to carry the messages of third parties, where the messages themselves are biased against or are expressly contrary to the corporation’s views.”[12] The other mining-related disclosure rules mandated by Dodd-Frank (addressing resource extraction payments and mine safety) are the most obvious potential targets, given their stated humanitarian goals.
In fact, a First Amendment challenge was brought against the SEC’s resource extraction payments rule in American Petroleum Institute v. SEC[13] in 2013, although that rule was vacated on other grounds without considering the First Amendment argument. The two Minerals decisions themselves identify disclosure topics on which future rulemaking might be potentially problematic: environmental consequences, fair trade, labor practices and medical studies. Minerals I also points to the “repugnant” possibility that a company could be compelled to disclose the political ideologies of its board members;[14] while this example may be farfetched, it brings to mind the subject of corporate political spending disclosure, which has been considered for potential rulemaking from time to time.
One could also imagine advocates for reporting companies arguing that other mandated terminology is potentially “loaded” language and therefore controversial. For example, disclosure about whether a company’s directors are “independent” could be said to convey a value judgment that is not necessarily justified by the specific tests used to define the term. The requirement that a company use the term “material weakness” to describe particular shortcomings in its internal controls similarly could be challenged on that basis. Litigants might also evaluate whether any First Amendment issue arises from the Sarbanes-Oxley requirement that the CEO and the chief financial officer personally certify the accuracy of Securities Exchange Act filings, using specific, SEC-mandated wording. In future rulemaking, the SEC and other government agencies will need to consider carefully whether any specifically mandated language carries any such “innuendo” or “controversy” – even when only implementing disclosure requirements mandated by Congress.
The focus in Minerals II on the effectiveness of the disclosure requirement to achieve the stated government interest presents another hurdle for the rulemaking process. It may heighten the scrutiny of the required cost-benefit analysis of a proposed regulation, already under fire in SEC rulemaking in the successful challenges to the resource extraction payments rule and the 2010 proxy access rule.[15] Taking Meat II and Minerals II together, it is possible that this added burden will only apply when the government interest in the compelled disclosure is something other than providing investors with information for their use. Indeed, the Minerals II majority recognizes that the conflict minerals rule is “quite different from the economic or investor protection benefits that [SEC] rules ordinarily strive to achieve.”[16] However, the emphasis in Minerals II on the lack of evidence regarding the expected effectiveness of the rule suggests that heightened inquiry in this regard may need to become a part of the legislative and regulatory rulemaking process, even when an agency is simply implementing a congressional mandate. It remains to be seen whether these concerns will also temper the recent political trend toward attempting to achieve social or humanitarian goals through required corporate disclosure.
[1] No. 13-5252, 2015 WL5089667 (D.C. Cir. 2015), rehearing Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359 (D.C. Cir. 2014) (Minerals I). The term “DRC” refers to the Democratic Republic of the Congo. In 2010, Congress enacted Section 1502 of the Dodd-Frank Act, requiring the SEC to adopt the conflict minerals disclosure rule, because of concerns that the exploitation and trade of conflict minerals by armed groups helps finance conflict in the DRC region, contributing to an emergency humanitarian crisis.
[2] 760 F.3d 18 (D.C. Cir. 2014), rehearing en banc Am. Meat Inst. v. U.S. Dep’t of Agric., 746 F.3d 1065 (D.C. Cir. 2014) (Meat I).
[3] See, e.g., the conflicting applications of the rational basis standard in Zauderer v. Office of Disciplinary Counsel for Sup.Ct. of Ohio, 471 U.S. 626 (1985) (holding the First Amendment to be satisfied for compelled commercial speech by “a rational connection between the purpose of a commercial disclosure requirement and the means employed to realize that purpose”) in Nat’l Elec. Mfrs. Ass’n v. Sorrell, 272 F.3d 104, 115 (2d Cir. 2001) (NEMA) (applying Zauderer even when the “compelled disclosure at issue [is] not intended to prevent ‘consumer confusion or deception’ per se”); Entm’t Software Ass’n v. Blagojevich, 469 F.3d 641, 651-53 (7th Cir. 2006) (noting that NEMA’s application of Zauderer to nondeceptive speech “require[d] the inclusion of ‘purely factual and uncontroversial information … as long as disclosure requirements are reasonably related to the States’ interest in preventing deception of consumers’”); Disc. Tobacco City & Lottery, Inc. v. United States, 674 F.3d 509, 559 n.8 (6th Cir. 2012) (rejecting the argument that Zauderer applies only to “purely factual and noncontroversial” disclosures); Dwyer v. Cappell, 762 F.3d 275, 282-85 (3d Cir. 2014) (requiring that there be a reasonable argument that any compelled disclosure “could plausibly dispel the misleading nature of [an] advertisement”).
[4] Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n, 447 U.S. 557 (1980).
[5] Meat II, at 22.
[6] Minerals II, at *4.
[7] “Under Central Hudson, we would determine whether ‘the regulatory technique [is] in proportion to [the] interest,’ an inquiry comprised of assessing whether the chosen means ‘directly advance[s] the state interest involved’ and whether it is narrowly tailored to serve that end. Zauderer’s method of evaluating fit differs in wording, though perhaps not significantly in substance, at least on these facts.” Meat II, at 25-26 (citations omitted).
[8] Id., at 26.
[9] Minerals II, at *5.
[10] Meat II, at 26.
[11] Id., at 27.
[12] Id., at 27.
[13] No. 12-1668 (D.D.C. filed Oct. 10, 2012).
[14] Minerals I, at 372.
[15] Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).
[16] Minerals II, at *2 (quoting the SEC’s release adopting the conflict minerals rule, SEC Rel. No. 34-67716, at 244 (Aug. 22, 2012) (codified as Conflict Minerals, 77 Fed.Reg. 56273, available at https://federalregister.gov/a/2012-21153)).