A US appeals court determined on Monday that a US Securities and Exchange Commission rule compelling public companies to disclose whether or not their products contain “conflict minerals” is a violation of their free speech rights.
The rule, Section 1502 of the Dodd-Frank financial regulation bill, has been controversial from its inception. It’s intent is to track where minerals that appear in everyday electronics, such as cell phones, are fueling conflict and supporting armed groups. The corporations that extract the minerals say the new rules place an undue burden on their work and violate their rights.
The court partially agreed. The Securities and Exchange Commission (SEC) rules were not entirely struck down by the ruling. It does represent a minor set-back for the advocates who have campaigned for transparency in the mining sector in conflict-affected countries. The real losers are the corporate lobby groups that brought forward the lawsuit.
“At the end of the day this is a huge loss for the National Association of Manufacturers,” said Laura Seay, assistant professor of Government at Colby College, to Humanosphere. “They still have to file through the SEC whether their supply chains were audited and free of conflict minerals. What has changed is that these companies do not have to disclose to their investors whether or not they are using conflict free minerals. ”
The Enough Project, a Washington DC-based advocacy group who took an active role in crafting and campaigning for 1502, called the ruling a ‘step backward for atrocity prevention.”
“Requiring companies to come clean about whether their materials fuel armed violence is constitutional and reflective of our intolerance as a society for turning a blind eye to human suffering,” said Enough’s Policy Associate Holly Dranginis in a statement. “The court’s proposal that a conflict-free determination is ideological is unfounded and undercuts the power of society’s growing awareness that global markets and security in fragile states are in fact linked.”
— Global Witness (@Global_Witness) April 14, 2014
The lawsuit was brought against the SEC by the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers. They argued that the rules enacted by the SEC violated their rights and put an undue financial and logistical burden on the companies working using minerals from the Congo and elsewhere.
The court disagreed with the companies on whether there is an undue burden, but agreed on the grounds of free speech.
“[I]t is far from clear that the description at issue—whether a product is “conflict free”—is factual and non-ideological. Products and minerals do not fight conflicts,” writes Senior Circuit Judge A. Raymond Randolph in his opinion.
“The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups…By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
The court’s ruling led to some initial head scratching.
@texasinafrica I am so confused by this ruling. So very, very confused.
— Hayes Brown (@HayesBrown) April 14, 2014
There were also early concerns about the potential negative impacts caused by the ruling that go beyond conflict minerals.
The really bad thing about that conflict mineral ruling is it will likely have far reaching implications beyond just Dodd-Frank.
— Kimberly J. Curtis (@curtiskj) April 14, 2014
By making it a free speech issue, it could serve a major blow to CSR & supply chain/labor transparency efforts. Bad development all around.
— Kimberly J. Curtis (@curtiskj) April 14, 2014
A statement from Jonathan Kaufman, co-counsel for Oxfam America and staff attorney at EarthRights International disagreed with the court’s ruling.
“We’re disappointed that the court ultimately found the decision to use the words ‘DRC conflict free’ in their public reporting violated the First Amendment, but we do not believe that this conclusion will affect the SEC’s ability to issue strong rules for transparency in the extractive industries,” said Kaufmann.
While the leading parties in the lawsuit involve corporate interests and human rights activists, 1502 has divided opinions along non-partisan lines. Leading academics have criticized the rule for its design and the underlying belief that the mineral trade in eastern Democratic Republic of the Congo is fueling conflict.
“There is an assumption that rebels are dependent on the money to buy the weapons and ammunition,” explained Seay. ” This is a region where a lot of weapons are available. These groups are not spending a lot of money on the weapons. A lot of the money raised is going to to food, salaries and more. The other misconception is that they didn’t have other ways to make money.”
Little evidence shows that cutting off access to money from mining in the Congo will have a negative affect on the rebel groups. The enacting of 1502 led to a de-facto stoppage of foreign mining in the Congo. It did prevent the rebel groups involved in the trade from making money, but did not cause them to lay down their arms.
Seay pointed to the successful UN-Congolese government military campaign as what brought to an end of the M23 rebellion. That success is what has caused some groups to cease or slow down activities. What is concerning is the effects of potential job losses from slowed down trade.
“Companies will have to prove that they don’t use conflict minerals in their product product. A company that doesn’t want to spend the money to do this has two options: 1) file the form and say that we cannot verify it; 2) or to pull out of Congo altogether,” said Seay.
“It seems that a lot of corporations are going to take the latter option.”
The potential impact of such action could be considerable. There are a few mines that are certified conflict-free in the Congo, but they represent only a small portion of the entire sector in the country.