Business Groups Challenging Conflict Minerals Rules Provide Some Insight on Potential Arguments and Timing

By Cydney Posner

Several filings, mostly procedural, were made today in the litigation by the Chamber of Commerce, National Association of Manufacturers and the Business Roundtable against the SEC, seeking to put an end to the conflict minerals regulations. You may recall that original petition was not very revealing about the arguments the petitioners were making (although that certainly didn't stop us from speculating).  Some of the filings made today provide insight into the legal arguments anticipated in the challenge and also some concept of possible timing, assuming the court agrees to a motion to expedite.

Among the filings made today is a preliminary statement of issues, which identified the issues as follows:

• Whether the SEC's economic analysis of Rule 13p-1 and Form SD is inadequate;
• Whether the SEC's refusal to adopt a de minimis exception to Rule 13p-1 is erroneous, arbitrary and capricious, or an abuse of discretion;
• Whether the SEC's interpretation of Exchange Act §13(p) as including non-manufacturers who "contract to manufacture" products is erroneous, arbitrary and capricious, or an abuse of discretion;
• Whether the SEC's interpretation of "did originate" in Exchange Act §13(p) as "reason to believe . . . may have originated" is erroneous, arbitrary and capricious, or an abuse of discretion;
• Whether the standard and requirements imposed by Rule 13p-1 's "reasonable country of origin inquiry" are erroneous, arbitrary and capricious, or an abuse of discretion;
• Whether the structure of the transition period established by the rule is erroneous, arbitrary and capricious, or an abuse of discretion;
• Whether Exchange Act §13(p) compels speech in violation of the First Amendment;
• Whether the SEC otherwise acted in a manner that was arbitrary and capricious, an abuse of discretion, unlawful, or contrary to a constitutional right within the meaning of the Administrative Procedure Act or other applicable law in adopting Rule 13p-1 and Form SD.

Petitioners also requested expedited consideration (to which the SEC has consented) of the case, arguing that delay will cause irreparable injury because of the extraordinary costs of implementation of the rules on them, noting that petitioners' members will unavoidably have to incur some portion of those costs while this litigation is ongoing, as the first compliance period begins in less than two months.  (Presumably, these costs would relate to companies efforts to perform some level of analysis and diligence, including in many instances reasonable country-of-origin inquiries.) Under the proposed expedited review schedule, briefing would conclude in March of 2013, which petitioners argue will greatly increase the possibility that the case can be decided before the end of 2013.  According to the motion, the "challenge to the Rule would then be resolved well before the first disclosures and reports under the Rule would be due, in May of 2014, and preferably before the start of the Rule's second compliance period, in January of 2014. If Petitioners' challenge is successful, expedited consideration would help Petitioners avoid the astronomical costs of finalizing compliance infrastructure, preparing disclosures, preparing and obtaining private sector audits of reports, and beginning a second year of compliance."

This motion also provides further insights into the petitioners anticipated legal arguments. For example, the motion contends (predictably, especially in light of the arguments made at the time of adoption by two of the SEC commissioners – see News Brief dated 8/22/12) that a key error by the SEC in its economic analysis was that the SEC "never estimated the benefits of the Rule and even acknowledged that there might be no benefits at all….Furthermore, the Commission misinterpreted Section 1502. For example, it wrongly concluded that the statutory text left it no authority to create a de minimis exception despite its general exemptive authority, wrongly interpreted the term ‘manufacture' as including those who ‘contract to manufacture,' and wrongly interpreted the term ‘did originate' to mean ‘reason to believe ... may have originated.'  In addition, 15 U.S.C. § 78m(p) compels speech in violation of the First Amendment by forcing companies to state that certain of their products are not ‘DRC conflict free.'"

Petitioners also argued that "non-parties and the public at large have an unusual and exceedingly strong interest in prompt disposition of this case. Other companies that are not members of Petitioners will suffer many of the same harms from the Rule discussed above. In fact, non-public companies from all across the globe will incur costs because they are part of the global supply chains that provide products to public companies, and will thus have to participate in the ‘reasonable country of origin inquiry' and ‘due diligence' mandated by the Rule."

Note also that, as indicated in this press release, on Monday, Amnesty International requested leave to intervene in the case. According to the press release, the "reporting requirements are a vital tool to end the conflict in the Congo. The corporate disclosures will bring much-needed transparency to companies' sourcing of conflict minerals and provide critical information to investors and consumers who wish to make socially responsible choices. ‘Amnesty International USA has spent years working to expose and eliminate links between these minerals and violence in the region,' said [Suzanne Nossel, executive director of Amnesty International USA]. ‘Through the voice of our strong membership base, we defended the regulations from corporate attempts to water down and stall the implementation of Section 1502. We will continue to stand with our civil society partners, including Global Witness and the International Corporate Accountability Roundtable, in defending against attacks by corporate industry groups who seek to champion a legacy of profit over people.' "

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