In an opinion released Tuesday, July 23, Judge Robert Wilkins of the D.C. Federal District Court rejected the challenges that several industry groups brought against the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Securities and Exchange Commission (SEC) rule implementing those provisions. For the full text of the court’s opinion, click here. The rule has remained in effect during the pendency of the challenge, and with Tuesday’s ruling the conflict minerals rule and its reporting requirements are likely to remain in effect throughout the first reporting period. However, the long-term outlook remains uncertain in light of the potential for appeal of the ruling to the U.S. Court of Appeals for the D.C. Circuit.

Brief Background

The SEC finalized a rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in August 2012. The rule requires many companies to investigate and disclose details on their use and sourcing of tin, tungsten, tantalum and gold in their products. The first disclosures under the rule, covering calendar year 2013, are due by May 31, 2014. For further information on the requirements in the conflict minerals rule, click here.

District Court Ruling

A coalition of business groups petitioned the U.S. Court of Appeals for the D.C. Circuit for review of the rule. The petitioners argued in part that the SEC failed to properly evaluate the economic effects of the rule, that the SEC acted arbitrarily and capriciously in crafting the rule, and that the rule and the statute violate the First Amendment. The D.C. Circuit sent the challenge down to the District Court for jurisdictional reasons, and it was there that the substance of the challenge was heard. The District Court treated the briefs the parties filed in the D.C. Circuit as cross-motions for summary judgment, which allowed the case to proceed to the merits with minimal delay despite the transfer.

Judge Wilkins held that the SEC met its statutory obligations and otherwise did not act arbitrarily and capriciously in crafting the conflict minerals rule. Specifically, he held that the SEC appropriately considered the economic effects of the rule, but was not required to second-guess Congress’s finding that the conflict minerals reporting requirements furthered the humanitarian goals Congress identified in Dodd-Frank. The court distinguished this case from other recent cases in the D.C. Circuit striking down SEC rules. In those cases, the SEC took it upon itself to undertake the rulemakings; here, the SEC acted under a mandate from Congress.

Further, the Court found the SEC’s determination that a de minimis exception to the rule’s requirements is inappropriate stems from a reasonable interpretation of the statute, as do the rule’s “reasonable country of origin inquiry” (RCOI) and “contract to manufacture” provisions, and the two- and four-year phase-in periods for companies of different sizes. Neither the lack of a de minimisexception, the RCOI, the “contract to manufacture,” nor the phase-in provisions represent an arbitrary or capricious exercise of discretion, given the SEC’s explanation of its consideration of various comments and alternatives in the adopting release for the final rule.

Finally, the Court rejected the plaintiffs’ First Amendment challenges to the statute and the rule. Plaintiffs argued the requirement that companies post their conflict minerals disclosures on their own websites violated the First Amendment’s freedom of expression. The Court agreed that the rule compels speech, but that the requirement passes constitutional muster because it is reasonably designed to directly and materially advance Congress’s legitimate goal of reducing violence in and around the Democratic Republic of Congo.

An appeal of the decision to the D.C. Circuit can be anticipated, although the challengers have made no formal announcement of their intention to do so.