The U.S. Court of Appeals for the District of Columbia Circuit demonstrated its support for responsible sourcing by U.S.-listed companies in its ruling to uphold legislation designed to prevent the trade in conflict minerals.
Yesterday’s ruling on Section 1502 of the Dodd-Frank Act, known as the conflict minerals provision, unanimously upheld the majority of the Securities and Exchange Commission’s (SEC) regulation and rejected legal challenges put forth by industry groups arguing that the regulation was ‘arbitrary and capricious.’ However, in a disappointing and damaging move, the Court also found the regulation’s requirement that issuers describe their products as 'not been found to be DRC conflict-free', to be a violation of the First Amendment’s right to free speech.
The conflict minerals provision is a landmark piece of legislation that aims to disrupt the trade in Congolese conflict minerals, which has provided significant funding to abusive armed groups operating in the eastern region of the Democratic Republic of the Congo (DRC). The law, requiring U.S.-listed companies who use tin, tantalum, tungsten or gold to find out whether their purchases are inadvertently funding armed groups in the DRC, is impacting the way that companies scrutinize their supply chains and has catalyzed important reforms in eastern DRC and neighboring countries.
The Court’s ruling unanimously upheld several key aspects of the SEC’s rule, including the absence of a de minimis exemption, the scope of the due diligence requirement and the SEC’s cost-side analysis.
“This decision sends a strong signal to companies that they must take responsibility to ensure their supply chains are not fueling conflict in the DRC.” said Corinna Gilfillan, Head of Global Witness’ Washington, D.C. office.
However, two of the three judges on the panel also found the rule’s requirement that companies describe their products as 'not been found to be DRC conflict-free’, to be a violation of the First Amendment.
“Global Witness strongly disagrees with Judges Randolph and Sentelle’s opinion that the SEC’s requirement that companies report on whether or not their products are conflict-free, violates the First Amendment,” said Gilfillan. “This type of factual disclosure is critical information for investors and consumers seeking to assess due diligence carried out by companies whose purchases may have fuelled human rights abuses and conflict.”
Judge Srinivasan, the third judge on the panel, issued an opinion calling the First Amendment ruling premature and declined to join the First Amendment ruling. He urged the Court to wait for an en banc decision on another case looking at a similar legal issue, American Meat Institute (AMI) v. U.S. Department of Agriculture, due to be heard by all of the active judges of the D.C. Circuit on May 19, 2014.
“The Court ruling did not vacate the rule or issue a stay in the reporting requirement,” said Gilfillan. “Companies covered by Section 1502 are still required to submit their first reports to the SEC by the May 31, 2014 deadline. Companies’ continued compliance with this law is crucial. Section 1502 has already catalyzed positive changes in the way that U.S.-listed companies approach the sourcing of metals.”
One year into the implementation of Section 1502, U.S.-listed firms have begun to trace their mineral supply chains. In January, Intel announced that all of their microprocessors are now conflict-free, and in February, Apple published a comprehensive list of conflict-free and non conflict-free smelters in its supply chain. Since the law was passed in 2010, U.S.-listed firms have made significant investments in ‘conflict-free’ responsible sourcing initiatives in the Great Lakes region.
Section 1502 has also prompted the Congolese government to take action to prevent conflict mineral trading. In 2012, the DRC government introduced legislation requiring companies to meet international due diligence standards set by the OECD, and the first company reports are due to be published this month. The Congolese government has also taken steps to demilitarize mining areas.
Global Witness filed a friend of the court brief in this appeal to raise awareness of these issues and to support the regulation as enacted by the SEC. Global Witness will continue to follow this important litigation as it proceeds through the court system. It is critical that the District Court take action to ensure that free speech laws are not used to thwart the disclosure by companies of key human rights information
Corinna Gilfillan, Washington, D.C.
+1 202 621 6665
+1 202 725 8705
Annie Dunnebacke, London
+44 207 492 5897
+44 791 251 7127
Section 1502 requires U.S.-listed companies to determine whether or not they use minerals sourced from the DRC or surrounding countries and if so, to conduct checks—or due diligence—on their supply chains to ensure they are not indirectly financing human rights abuses. Companies must annually disclose their due diligence efforts in public reports to the SEC.
The legal challenge refers to a lawsuit brought against the SEC in October 2012 by three industry associations—the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable—who argued the rule issued by the SEC was overly burdensome and costly for companies to implement. In July 2013, the D.C. District Court upheld the law, citing industry groups’ arguments as over-exaggerated and capricious. The industry groups appealed the judgment in August 2013.
In March 2014, the European Commission introduced a legislative proposal for the responsible sourcing of minerals in the European Union. Draft legislation has also been introduced in Canada to require companies to conduct due diligence on their supply chains.