Nat'l Ass'n of Mfrs. v. Sec. & Exch. Comm'n

• Decision Date: 14 April 2014
• Docket Number: No. 13–5252.,13–5252.
• Citation: 748 F.3d 359
• Parties: NATIONAL ASSOCIATION OF MANUFACTURERS, et al., Appellants v. SECURITIES and EXCHANGE COMMISSION, et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

748 F.3d 359

NATIONAL ASSOCIATION OF MANUFACTURERS, et al., Appellants

v.SECURITIES and EXCHANGE COMMISSION, et al., Appellees.

No. 13–5252.

United States Court of Appeals,District of Columbia Circuit.

Argued Jan. 7, 2014.

Decided April 14, 2014.

Held Unconstitutional

15 U.S.C.A. § 78m(p)(1)(A)(ii), (p)(1)(E); 17 C.F.R. §§ 240.13p-1, 249b.400Appeal from the United States District Court for the District of Columbia (No. 1:13–cv–00635).

Peter D. Keisler argued the cause for appellants. With him on the briefs were Jonathan F. Cohn, Erika L. Myers, Quentin Riegel, Rachel L. Brand, and Steven P. Lehotsky.

Eric P. Gotting and Eric G. Lasker were on the brief for amici curiae American Chemistry Council, et al. in support of appellants.

Eugene Scalia, Thomas M. Johnson Jr., Harry M. Ng, and Peter C. Tolsdorf were on the brief for amicus curiae American Petroleum Institute in support of appellants.

John B. Bellinger III and Sarah M. Harris were on the brief for amicus curiae Experts on the Democratic Republic of the Congo in support of petitioners.

Mark T. Stancil was on the brief for amici curiae Retail Litigation Center, Inc., et al. in support in appellants.

Tracey A. Hardin, Assistant General Counsel, Securities and Exchange Commission, argued the cause for appellee. With her on the brief were Michael A. Conley, Deputy General Counsel, Benjamin L. Schiffrin, Senior Litigation Counsel, and Daniel Staroselsky, Senior Counsel.

Julie A. Murray, Adina H. Rosenbaum, and Scott L. Nelson were on the brief for intervenors-appellees Amnesty International USA, Inc., et al.

Dennis M. Kelleher and Stephen W. Hall were on the brief for amicus curiae Better Markets, Inc. in support of appellee.

Agnieszka Fryszman and Thomas J. Saunders were on the brief for amici curiae Senator Durbin, Congressman McDermott, et al. in support of appellee.

Jodi Westbrook Flowers was on the brief for amici curiae Global Witness, et al. in support of appellee.

Before SRINIVASAN, Circuit Judge, and SENTELLE and RANDOLPH, Senior Circuit Judges.

Opinion for the court filed by Senior Circuit Judge RANDOLPH.

Opinion concurring in part filed by Circuit Judge SRINIVASAN.

RANDOLPH, Senior Circuit Judge:

I.

For the last fifteen years, the Democratic Republic of the Congo has endured war and humanitarian catastrophe. Millions have perished, mostly civilians who died of starvation and disease. Communities have been displaced, rape is a weapon, and human rights violations are widespread.

Armed groups fighting the war finance their operations by exploiting the regional trade in several kinds of minerals. Those minerals—gold, tantalum, tin, and tungsten ¹—are extracted from technologically primitive mining sites in the remote easternCongo. They are sold at regional trading houses, smelted nearby or abroad, and ultimately used to manufacture many different products. ² Armed groups profit by extorting, and in some cases directly managing, the minimally regulated mining operations.

In 2010, Congress devised a response to the Congo war. Section 1502 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111–203, 124 Stat. 1376 (relevant parts codified at 15 U.S.C. §§ 78m(p), 78m note (‘Conflict Minerals')), requires the Securities and Exchange Commission—the agency normally charged with policing America's financial markets—to issue regulations requiring firms using “conflict minerals” to investigate and disclose the origin of those minerals. See15 U.S.C. § 78m(p)(1)(A).

The disclosure regime applies only to “person[s] described” in the Act. See id. A “person is described ... [if] conflict minerals are necessary to the functionality or production of a product manufactured by such person.” Id. § 78m(p)(2). A described person must “disclose annually, whether [its necessary] conflict minerals ... did originate in the [Congo] or an adjoining country.” Id. § 78m(p)(1)(A). If those minerals “did originate” in the Congo or an adjoining country (collectively, “covered countries”) then the person must “submit [a report] to the Commission.” Id. The report must describe the “due diligence” measures taken to establish “the source and chain of custody” of the minerals, including a “private sector audit” of the report. Id. The report must also list “the products manufactured or contracted to be manufactured that are not DRC conflict free.” Id. A product is “DRC conflict free” if its necessary conflict minerals did not “directly or indirectly finance or benefit armed groups” in the covered countries. Id.

In late 2010, the Commission proposed rules for implementing the Act. Conflict Minerals, 75 Fed.Reg. 80,948 (Dec. 23, 2010). Along with the proposed rules, the Commission solicited comments on a range of issues. In response, it received hundreds of individual comments and thousands of form letters. Conflict Minerals, 77 Fed.Reg. 56,274, 56,277–78 (Sept. 12, 2012) (“final rule”) (codified at 17 C.F.R. §§ 240.13p–1, 249b.400). The Commission twice extended the comment period and held a roundtable for interested stakeholders. Id. By a 3–2 vote, it promulgated the final rule, which became effective November 13, 2012. Id. at 56,274. The first reports are due by May 31, 2014. Id.

The final rule adopts a three-step process, which we outline below, omitting some details not pertinent to this appeal. At step one, a firm must determine if the rule covers it. Id. at 56,279, 56,285. The final rule applies only to securities issuers who file reports with the Commission under sections 13(a) or 15(d) of the Exchange Act. Id. at 56,287. The rule excludes issuers if conflict minerals are not necessary to the production or functionality of their products. Id. at 56,297–98. The final rule does not, however, include a de minimis exception, and thus applies to issuers who use very small amounts of conflict minerals. Id. at 56,298. The rule also extends to issuers who only contract for the manufacture of products with conflict minerals, as well as issuers who directly manufacture those products. Id. at 56,290–92.

Step two requires an issuer subject to the rule to conduct a “reasonable country of origin inquiry.” Id. at 56,311. The inquiry is a preliminary investigation reasonably designed to determine whether an issuer's necessary conflict minerals originated in covered countries. Id. at 56,312. If, as a result of the inquiry, an issuer either knows that its necessary conflict minerals originated in covered countries or “has reason to believe” that those minerals “may have originated” in covered countries, then it must proceed to step three and exercise due diligence. Id. at 56,313. ³

An issuer who proceeds to step three must “exercise due diligence on the source and chain of custody of its conflict minerals.” Id. at 56,320. If, after performing due diligence an issuer still has reason to believe its conflict minerals may have originated in covered countries, it must file a conflict minerals report. The report must describe both its due diligence efforts, including a private sector audit,⁴id., and those products that have “not been found to be ‘DRC conflict free,’ ” id. at 56,322 (quoting 15 U.S.C. § 78m(p)(1)(A)(ii)). The report must also provide detailed information about the origin of the minerals used in those products. Id. at 56,320.

The final rule does offer a temporary reprieve. During a two-year phase-in period (four years for smaller issuers), issuers may describe certain products as “DRC conflict undeterminable” instead of conflict-free or not conflict-free. Id. at 56,321–22. That option is available only if the issuer cannot determine through due diligence whether its conflict minerals originated in covered countries, or whether its minerals benefitted armed groups. Id. An issuer taking advantage of the phase-in by describing its products as “DRC conflict undeterminable” must still perform due diligence and file a conflict minerals report, but it need not obtain a private sector audit. Id.

The Commission analyzed in some detail the final rule's costs. Id. at 56,333–54. It estimated the total costs of the final rule would be $3 billion to $4 billion initially, and $207 million to $609 million annually thereafter. Id. at 56,334. To come up with this estimate, the Commission reviewed four cost estimates it received during the comment period, supplemented with its own data. Id. at 56,350–54. Where possible, the Commission also estimated or described the marginal costs of its significant discretionary choices. Id. at 56,342–50.

The Commission was “unable to readily quantify” the “compelling social benefits” the rule was supposed to achieve: reducing violence and promoting peace and stability in the Congo. Id. at 56,350. Lacking quantitative data on those issues, the Commission explained that it could not “assess how effective” the rule would be in achieving any benefits. Id. Instead, the Commission relied on Congress's judgment that supply-chain transparency would promote peace and stability by reducing the flow of money to armed groups. Id. at 56,275–76, 56,350. That judgment grounded many of the Commission's discretionary choices in favor of greater transparency. See, e.g., id. at 56,288, 56,291, 56,298.

The National Association of Manufacturers challenged the final rule, raising Administrative Procedure Act, Exchange Act, and First Amendment claims. ⁵ The district court rejected all of the Association's claims and granted summary judgment for the Commission and intervenor Amnesty International. See Nat'l Ass'n of Mfrs. v. SEC, 956 F.Supp.2d 43, 46 (D.D.C.2013).

II.

Under the Administrative Procedure Act, a court must “hold unlawful and set aside agency action ... found to be[ ] arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law[, or] in excess of statutory jurisdiction.” 5 U.S.C. § 706(2). In making these determinations, we review the administrative record as if the case had come directly to us without first passing through the...