Conflict Minerals Rule Remains In Force After Court Ruling

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July 25, 2013 - Kirsten Wallerstedt

Alert Summary

The D.C. District Court on 23 July 2013 denied the plaintiff’s challenges to the Conflict Minerals Rule. Therefore, the Rule as promulgated by the Securities and Exchange Commission (SEC) will remain in force.

3E Analysis

The civil action, filed by the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable, challenged various aspects of the SEC’s Final Rule on conflict minerals as “arbitrary and capricious,” and claimed that the required disclosures violated the First Amendment. The Court however found “no problems” with the SEC’s rulemaking and concluded that the Plaintiffs’ complaints lacked merit.

The Court held that Plaintiffs’ economic arguments rested on the “false premise” that the Commission failed to assess whether the Conflict Minerals Rule would achieve the benefits Congress identified. “Here, by contrast,” the Court wrote, “the Commission promulgated the Conflict Minerals Rule pursuant to an express, statutory directive from Congress, which was driven by Congress’s determination that the due diligence and disclosure requirements it enacted would help to promote peace and security in the DRC. As a result, the SEC rightly maintains that its role was not to ‘second guess’ Congress’s judgment as to the benefits of disclosure, but to, instead, promulgate a rule that would promote the benefits Congress identified and that would hew closely to that congressional command.”

The court also upheld the reasoning behind the Commission’s decisions to: exclude a de minimis threshold, include issuers that “contract to manufacture” products, establish the standards for the “reasonable country of origin inquiry,” and to adopt different phase-in thresholds, among other provisions.

Whether or not the Plaintiffs will appeal the Court’s decision is not yet known. The Conflict Minerals Rule was established in Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act (2010), and the first reporting deadline is 31 May 2014, covering the 2013 calendar year. The law requires public companies that manufacture or contract to manufacture products to investigate whether conflict minerals (tin, tantalum, tungsten, or gold) in their products originated in the Democratic Republic of the Congo or its adjoining countries.

Business Impact

Many businesses had been delaying full implementation of a conflict minerals program in hopes that the district court would overturn the rule and buy them more time. These companies will now have to implement a program in earnest. With only five months left in the first reportable calendar year, companies may have a lot of work in front of them to develop and implement a supplier communication program, create a system for accepting and managing data received from suppliers, a process for identifying and responding to red flags in their supply chains, and for producing reporting documentation under the due diligence framework requirements.

3E Company has a new Supply Chain Product Compliance Solution with a conflict minerals module. In addition to engaging suppliers to obtain and manage compliance data, the service links your products directly to news alerts like this one that affect your products. For more information, please visit our page on Supply Chain Compliance.