Implicit Holding of Conflict Minerals Rule Case Overruled: Zauderer Review Broadened

We have posted many entries (a few are here and here) on the complex legal fight over the validity of the SEC’s conflict minerals rule (the “Rule”).  And now it is time for another as the recent decision in American Meat Institute v. USDA overturns an implicit holding of that case—specifically that Zauderer rational basis review applies only to disclosures aimed at preventing consumer deception.

As was discussed in earlier posts, while the SEC largely prevailed in the fight over the validity of the Rule, it lost the First Amendment argument when NAM v SEC reached the DC Court of Appeals.  The National Association of Manufacturers had challenged the Rule’s requirement that an issuer describe its products as not “DRC conflict free” in its conflict minerals report, claiming that the requirement unconstitutionally compels speech.

In deciding NAM v SEC the Court noted that Zauderer v. Office of Disciplinary Counsel, which allowed rational basis review to  be applied to compelled disclosure requirements, was limited to cases in which such requirements are "reasonably related to the State’s interest in preventing deception of consumers" and pointed out that “[n]o party has suggested that the conflict minerals rule is related to preventing consumer deception. In the district court the Commission admitted that it was not.”  The Court made this statement even though the scope of Zauderer was very much at issue.

In American Meat, the DC Court of Appeals, sitting en banc, took up the question of whether country of origin labeling rules violated the First Amendment.  Of key importance was the application of Zauderer.  The Court noted that all parties agreed that:

Zauderer applies to government mandates requiring disclosure of “purely factual and uncontroversial information” appropriate to prevent deception in the regulated party’s commercial speech. The key question for us is whether the principles articulated in Zauderer apply more broadly to factual and uncontroversial disclosures required to serve other government interests.

Zauderer had left open the “key question” but the Court of Appeals found that:

The language with which Zauderer justified its approach, however, sweeps far more broadly than the interest in remedying deception. After recounting the elements of Central Hudson, Zauderer rejected that test as unnecessary in light of the “material differences between disclosure requirements and outright prohibitions on speech.” Zauderer, 471 U.S. at 650. Later in the opinion, the Court observed that “the First Amendment interests implicated by disclosure requirements are substantially weaker than those at stake when speech is actually suppressed.” Id. at 652 n.14. After noting that the disclosure took the form of “purely factual and uncontroversial information about the terms under which [the] services will be available,” the Court characterized the speaker’s interest as “minimal”: “Because the extension of First Amendment protection to commercial speech is justified principally by the value to consumers of the information such speech provides, appellant’s constitutionally protected interest in not providing any particular factual information in his advertising is minimal.” Id. at 651 (citation omitted). All told, Zauderer’s characterization of the speaker’s interest in

opposing forced disclosure of such information as “minimal” seems inherently applicable beyond the problem of deception, as other circuits have found. (citations omitted).

To be sure that there could be no confusion over its holding that Zauderer rational review is not limited to disclosure requirements aimed at preventing consumer deception the Court expressly stated:

To the extent that other cases in this circuit may be read as holding to the contrary and limiting Zauderer to cases in which the government points to an interest in correcting deception, we now overrule them.1See, e.g., Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359, 370-71 (D.C. Cir. 2014); Nat’l Ass’n of Mfrs. v. NLRB, 717 F.3d 947, 959 n.18 (D.C. Cir.2013); R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 1205, 1214 (D.C. Cir. 2012).

This does not mean that the Rule will now withstand First Amendment scrutiny.  American Meat makes clear that rational review extends to disclosure requirements that do more than aim to prevent deception but also makes clear that it applies only when such requirements call for disclosure of “purely factual and uncontroversial information.”  In NAM v. SEC the DC Court of Appeals also found that the requirement of the Rule that issuers state when their products were not “conflict free” went beyond this type of statement. 

Specifically, the Court of Appeals asserted:

• At all events, it 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. 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. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” See Hurley, 515 U.S. at 573. By compelling an issuer to confess blood on its hands, the statute interferes with that exercise. 

Further, American Meat makes clear that even if Zauderer review is applied, not all disclosure requirements will pass muster.  The test in Zauderer states “commercial speech that is not false or deceptive and does not concern unlawful activities may be restricted only in the service of a substantial governmental interest, and only through means that directly advance that interest.”  It does not define “substantial governmental interest” and the court in American Meat agreed that “[b]eyond the interest in correcting misleading or confusing commercial speech, Zauderer gives little indication of what type of interest might suffice. In particular, the Supreme Court has not made clear whether Zauderer would permit government reliance on interests that do not qualify as substantial under Central Hudson’s standard, a standard that itself seems elusive.”

While the American Meat court found the governmental interest in the country of origin labeling rules to be sufficiently substantial to justify the required disclosure, it is unclear whether the Rule would be found to be compelled by such substantial interests.  Thus, it is entirely likely that the requirement that issuers describe certain product as “non-conflict free” would still be found to be in violation of the First Amendment.  

Still, American Meat has important implications for the Rule and beyond.  With respect to the Rule, it is possible, according to Peter Bible, chief risk officer for accounting firm EisnerAmper, that “[c]ompanies that use these minerals in their products may decide it’s better to issue reports to the federal government that most consumers won’t see rather than face the prospect of having to put a label on their products saying they contain minerals from conflict zones.”

“That would be more powerful to consumers and might compel some of them to put a product back,” Mr. Bible said. “If you think the consumer is going to reject your product because of the disclosure, obviously you will want to stay with the conflict rules as they are presently written. The safe thing to say is this is a spark. Whether it ignites we have yet to see, but clearly this will result in some follow-on effects or consequences… and companies are going to have to follow this.”

Beyond its impact on NAM v. SEC, American Meat is of great importance in its clear statement that Zauderer review extends beyond disclosure requirements aimed at preventing consumer deception.  Those fighting against disclosure requirements will now have to work harder than if Zauderer had been so limited. For those who feared that NAM v. SEC would significantly limit the use of disclosure regulation not aimed at preventing deception, American Meat sounds a far more hopeful note