IMPACT OF CONFLICT MINERALS RULING BEGINS TO BE SEEN

Many posts on this blog have discussed Nat’l Ass’n of Mfrs. v. SEC (“NAM”) ( see here, here, and here).  Perhaps the most important result of the long and tortured legal proceedings in that case is the ultimate finding that the requirement that issuers in certain circumstances must label their products as “non-DRC conflict free” violates their First Amendment rights.  At the time the ruling came out I postulated that it might open a door for many other challenges to compelled corporate disclosure and that very thing has already come to pass.

On October 24, just before the Fair Pay and Safe Workplaces Final Rule (“Fair Pay Rule”) was scheduled to go into effect, Judge Marcia A. Crone in the Eastern District of Texas issued a nationwide preliminary injunction prohibiting key provisions of the rule from taking effect. In the absence of an injunction, the so-called “blacklisting” rule would have mandated, among other things, that companies bidding on certain federal contracts and subcontracts publicly disclose information regarding “labor law violations” as part of the bidding process.  The court found that this was compelled speech because it

• Impose[d] an immediate disclosure requirement that obligates federal contractors and their subcontractors for the first time to report for public disclosure any “violations” of the fourteen federal labor laws occurring since October 25, 2015, regardless of whether such alleged violations occurred while performing government contracts, and without regard to whether such violations have been finally adjudicated after a hearing or settled without a hearing, or even occurred at all.
• Far from being narrowly tailored, the disclosure requirement forces contractors to disclose a list of court actions, arbitrations, and “administrative merits determinations,” even where there has been no final adjudication of any violation at all, and regardless of the severity of the alleged violation.
• [T]housands of “administrative merits determinations” are issued against employers of all types each year, many of which are later dismissed or settled and most of which are issued without benefit of a hearing or review by any court. The arbitration decisions and civil determinations, including preliminary injunctions, that will have to be reported under the FAR Rule are likewise not final and are subject to appeal. The Executive Order’s unprecedented requirement, as implemented by the FAR Rule and DOL Guidance, thus compels contractors to engage in public speech on matters of considerable controversy adversely affecting their public reputations and thereby infringing on the contractors’ rights under the First Amendment. 

The court found support for its position by citing to NAM, specifically calling out the most problematic findings of that case.  Taking them one by one:

Disclosure of “controversial” information warrants heighted scrutiny

NAM said that if the compelled disclosure required communication of “controversial information” the government bore a heavy burden to prove that forcing businesses to speak publicly about such activities in the form of public reports was narrowly tailored to advance a substantial government interest.

With respect to the Fair Pay Rule the court found that

• contractors are not being required to disclose purely non-controversial, factual information. By defining “labor law violation” to include “administrative merits determinations,” the government is requiring the disclosure of merely the opinions of agency employees who chose to issue notices, send letters, issue citations, or lodge complaints accusing a contractor of violating a labor law as if those opinions were actually labor law violations. These allegations are certainly controversial in nature, and they may prove not to be factual at all, if, after full exhaustion of the administrative and judicial remedies afforded employers by the statutes, the contractor is absolved of liability and found not to have violated the labor laws. 

NAM requires evidence that the required disclosures will achieve its stated goal

In NAM the court found that for a compelled disclosure to pass constitutional muster it must be shown that the required disclosures will achieve the stated goal—a hurdle the conflict minerals rule could not get over.  Similarly, the Fair Pay court found

• It must also be noted that the FAR Council and the DOL have failed to support the basic premise of the Executive Order and the new Rule, namely that public disclosure of non-adjudicated determinations of labor law violations on private projects correlates in any way to poor performance on government contracts. The studies cited by the FAR Council for this premise did not examine the universe of administrative merits determinations, regardless of severity. 81 Fed.
• None of the studies purported to show a relationship between mere nonadjudicated, unresolved allegations of labor law violations and government contract performance. Instead, the various studies cited in the Rule’s preamble, with few exceptions, rely on the most severe findings of labor violations by agencies and courts, which have been closed and penalties paid. In any event, the Executive Order, FAR Rule, and DOL guidance have expanded their reach far beyond any claimed impact on government procurement and instead rely entirely on speculation in claiming that the burdensome new disclosures of non-final determinations demonstrate any likelihood of poor performance on government contract

NAM PROHIBITS DISCLOSURES THAT REQUIRE COMPANIES TO STIGMATIZE THEMSELVES 

In NAM the court said the conflict minerals rule essentially required issuers to confess to “blood on their hands” and stated “[r]equiring a company to publicly condemn itself is undoubtedly a more ‘effective’ way for the government to stigmatize and shape behavior than for the government to have to convey its views itself, but that makes the requirement more constitutionally offensive, not less so.” 

The Fair Pay court found: 

• The Executive Order, FAR Rule, and DOL Guidance share the same constitutional defect as the conflict minerals rule in NAM, only more so. The Order, Rule, and Guidance compel government contractors to “publicly condemn” themselves by stating that they have violated one or more labor or employment laws. The reports must be filed with regard to merely alleged violations, which the contractor may be vigorously contesting or has instead chosen to settle without an admission of guilt, and, therefore, without a hearing or final adjudication. 

It is likely that this decision will be appealed to the Fifth Circuit.  What will happen there is anyone’s guess.  If that circuit agrees with the NAM court it will add powerful ammunition to those who want to curtail the use of compelled disclosures beyond their original purpose.