As American industry pressed its legal challenge to a new federal rule seeking to cut the links between popular consumer products and bloody conflict in the Congo, federal judges in Washington on Tuesday questioned the government’s right to demand that companies disclose whether their own goods were “conflict-free.”
The questioning by a three-judge bench at the U.S. Circuit Court of Appeals underscored the perils facing the rule, adopted as part of the Dodd-Frank financial reform legislation in 2010 — an unusual attempt to use U.S. securities laws to starve combatants of money in a war estimated to have killed 5 million people since 1998.
Industry groups led by the National Association of Manufacturers have raised a litany of objections to the requirement that retailers and manufacturers disclose whether the goods they sell contain tin, tantalum, tungsten or gold from the Democratic Republic of Congo or any of nine neighboring countries,
In July, a federal judge upheld a disclosure rule the Securities and Exchange Commission adopted in 2012, rejecting industry arguments that the S.E.C. had failed to properly analyze the rules costs and benefits and that the rule violated companies’ First Amendment rights by forcing the disclosures.
But Republican-appointed appellate judges on Tuesday appeared sympathetic to industry arguments that compelling corporations’ speech should be subject to heightened scrutiny under the First Amendment.
“We also object to being compelled to make any public statement that our products have been found to be non conflict-free,” said Peter D. Keisler, a former acting U.S. Attorney General now representing the manufacturers’ association.
“That is an ideological judgment denouncing our products that is frequently going to be false and misleading.”
Tuesday’s arguments came as Intel Corp., the world’s largest manufacturer of computer processors, announced that its products were free of conflict minerals.
Mary Jo White, the recently installed SEC chairwoman, has herself expressed critical reservations about the conflicts rule, telling law students in New York in October that it strayed from the commission’s core function and that such voluminous disclosures could drown investors and regulators in an “information overload.”
A separate Dodd-Frank resource transparency rule — which would have required U.S.-listed oil companies to disclose payments to governments on a per-project basis — was vacated in July by U.S. District Judge John D. Bates, who found that the SEC had misread the law by requiring detailed public disclosure of payments. The commission has yet to draft a new version.
The views underscored the novelty of using U.S. securities laws, normally intended to protect investors, as a means to achieve humanitarian goals or as a check against corruption.
The arguments were heard Tuesday by a three-judge panel comprising Circuit Judge Sri Srinivasan, a former principal deputy solicitor general appointed by President Barack Obama, and Senior Circuit Judges David B. Sentelle and A. Raymond Randolph, both Republican appointees.
The Circuit Court often hears challenges to Executive actions, meaning its ideological makeup can be crucial to the regulatory agenda of the president.
The manufacturer’s association has assailed the rule as overly burdensome, counterproductive and unworkable, saying that trace amounts of the minerals can exist in a vast array of products, such as toothpaste, home pregnancy testing kits, shoe soles and zippers. Citing the S.E.C.’s own calculations, the manufacturer’s association said the conflict minerals rule would initially cost $3 billion to $4 billion and up to $600 million per year thereafter.
The commission has said that reducing the rule’s cost, as industry advocates, would undermine its purpose.
Keisler, representing the manufacturers, argued that trace amounts of minerals should be exempt from the disclosure requirement. He offered the hypothetical example of catalyst minerals that General Motors used to manufacture of seat belts.
“If the catalyst is completely washed away and no residue remains on the seat belt, then it doesn’t have to be traced,” said Keisler. “The only way G.M. would know is if it tested every batch of the product.”
Appearing for the S.E.C., Assistant General Counsel Tracey A. Hardin faced spirited questioning from the bench by Sentelle and Randolph. Hardin stressed that in adopting the conflict minerals rule, her agency was interpreting a law enacted by Congress which was not itself at issue in the industry lawsuit.
“That was the decision that Congress made and we’re not here discussing a challenge to the statute,” she said.
However Randolph returned to the question of compelling companies to make potentially damaging statements about their own goods, asking how the law was meant to achieve its goal.
“Is it because of a boycott of the seat belts by General Motors that Mr. Keisler talked about?” he asked. “The objective is to stigmatize the companies?”
“The objective here is more careful sourcing practices, not an embargo,” said Hardin.
Industry bodies including the American Chemical Council and the Society of the Plastics Industry have lined up as “friends of the court” to support the plaintiffs in their opposition to the rule.
The S.E.C. is supported by the transparency campaigners Global Witness and 12 current and former Democratic senators and members of the House of Representatives. The measure was introduced by former Sen. Sam Brownback, now the Republican governor of Kansas.
A group of three friends of the court billed as experts on the D.R.C. and supporting the industry case, including former Assistant Secretary of State for Africa Jendayi Frazer, are represented by Arnold & Porter LLP, a firm which also represents 100Reporters.