Court upholds conflict minerals rule

Clock is ticking for companies to query their supply chains and otherwise bring themselves into compliance

A district court has upheld the validity of the conflict minerals rule established under the Dodd-Frank Act, confirming that the rule as adopted by the SEC continues to be in effect. That means time is running out for companies to bring themselves into compliance. 

In its ruling on July 23, the Washington DC District Court rejected all the plaintiffs’ claims and denied their motion for summary judgment while granting a similar motion by the SEC. 

The plaintiffs, the National Association of Manufacturers (NAM), the US Chamber of Commerce and Business Roundtable, had challenged various aspects of the SEC’s final rule, claiming they are arbitrary and capricious under the Administrative Procedure Act. 

They also attacked both the rule and section 1502 of Dodd-Frank, saying the disclosures required by the SEC and by Congress violate companies’ First Amendment rights. 

The court concluded the plaintiffs’ claims lacked merit, finding no problems with the SEC’s rulemaking and arguing that the disclosure requirements don’t compromise any First Amendment rights.

As a result, there is still no de minimus exception under the rule, while retailers and other firms that only contract to manufacture products containing the identified metals remain subject to the rule as long as they have some actual influence over the manufacture of their products beyond just adding a logo or brand to generic products.

‘Many companies have been sitting on the sidelines waiting for a decision before ramping up their conflict minerals rule compliance programs,’ says Michael Littenberg, a partner at Schulte Roth & Zabel, who has been holding seminars in various cities to help prepare companies for the change.

‘[With this ruling,] I think companies no longer have the luxury to do that irrespective of whether the case is appealed or where it comes out on appeal,’ he says. ‘The clock is starting to run out. People still have enough time to deal with compliance, but that may not be the case if they wait another three, four, five months.’

If the plaintiffs opt to appeal, there’s no certainty as to how long it would take for the case to get onto an appellate court docket and it could be close to the end of 2013 before a final resolution is made, he warns.

To be in compliance, there’s a list of things companies need to do, including reaching out to their supply chains for information and evaluating whether metals they’re sourcing are coming from the Democratic Republic of the Congo and therefore likely helping finance armed conflict in that country. Companies also need to put in place a due diligence framework to handle these tasks and then need to compile and prepare a report for submission by the end of May 2014, which in some cases may require an external audit as well.

‘Most companies are still at the earlier stages of this, figuring out what their in-scope products are, starting to do their vendor outreach,’ Littenberg says. ‘Very few companies are particularly far along with this at this point.’

It’s interesting that a related conflict minerals challenge case concerning disclosure of resource extraction payments to foreign governments that was argued in the same district court before a different judge reached the opposite conclusion three weeks ago. The court decided to vacate the statute based on procedural defects when the SEC adopted it.

‘That case entailed different arguments and was based on different factors not relevant here,’ says Littenberg. There had also been a First Amendment challenge by the plaintiffs in that case, but the decision to vacate the statute meant that the constitutional challenge was never considered.

One reason trade and business associations such as NAM have been working so hard to oppose the conflict minerals rule is the added cost companies would incur in trying to comply with the rule. The SEC’s estimate, based on third-party data, was that initial compliance would cost between $3 billion and $4 billion in aggregate for all public companies, with ongoing costs projected at roughly $400 million a year. Some commentators have calculated costs as high as $16 billion in aggregate, while other estimates are below that of the SEC, says Littenberg.

‘The spend by companies on this is frankly all over the place. Some bigger companies are spending a lot because the complication of collecting and processing data and information from their supply chains is expensive,’ he says. ‘Some smaller companies are doing this on a shoestring.’

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