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

• Decision Date: 23 July 2013
• Docket Number: Civil Action No. 13–cv–635 (RLW).
• Court: U.S. District Court — District of Columbia
• Parties: NATIONAL ASSOCIATION OF MANUFACTURERS, Chamber of Commerce of the United States of America, and Business Roundtable, Plaintiffs, v. SECURITIES AND EXCHANGE COMMISSION, Defendant, Amnesty International USA, and Amnesty International Ltd., Intervenor–Defendants.

956 F.Supp.2d 43

NATIONAL ASSOCIATION OF MANUFACTURERS, Chamber of Commerce of the United States of America, and Business Roundtable, Plaintiffs,

v.SECURITIES AND EXCHANGE COMMISSION, Defendant,Amnesty International USA, and Amnesty International Ltd., Intervenor–Defendants.

Civil Action No. 13–cv–635 (RLW).

United States District Court,

District of Columbia.

July 23, 2013.

Jonathan F. Cohn, Peter Douglas Keisler, Sidley Austin LLP, Rachel Lee Brand, U.S. Chamber of Commerce, Washington, DC, for Plaintiffs.

Tracey A. Hardin, Benjamin Lawrence Schiffrin, Daniel Staroselsky, U.S. Securities & Exchange Commission, Washington, DC, for Defendant.

Julie A. Murray, Adina Rosenbaum, Public Citizen Litigation Group, Washington, DC, for Intervenor–Defendants.

MEMORANDUM OPINION

ROBERT L. WILKINS, 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.¹ 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).

BACKGROUND

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. See15 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 ²—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. 2215–16.³

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. See77 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 56,290.⁴ 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. ⁵ 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.⁶ The Rule also confirms...