National Association of Manufacturers v. Securities and Exchange Commission, No. 13-5252 (D.C. Cir. Apr. 14, 2014)
If we needed an example of how the First Amendment can reinstate Lochner, this would be a good one. Here we have a regulation, whose merits are debatable, which easily survives APA challenges because Congress is allowed to make rules even if the rules are dumb and the SEC just did what Congress told it to do. But then a substantial chunk of it founders because the output of the regulation is a disclosure. Argh.
In response to horrific human rights violations in the Congo, where war is financed by selling several minerals, Congress enacted a law requiring the SEC to issue regulations requiring firms using “conflict minerals” to investigate and disclose the origin of those minerals. The required annual report to the SEC needs to disclose whether conflict minerals originated in the Congo or an adjoining country, describe the due diligence measures taken to establish the source and chain of custody of conflict minerals, and list “the products manufactured or contracted to be manufactured that are not DRC conflict free.” A product is “DRC conflict free” if its necessary conflict minerals did not “directly or indirectly finance or benefit armed groups” in the covered countries. There’s no exception for de minimis uses, or for issuers who only contract for the manufacture of products made with conflict minerals.
The SEC estimated that the rule would be expensive–$3-4 billion to begin with, then roughly $200-600 million annually thereafter. It was unable to quantify the benefits of reduced violence in the Congo, because it couldn’t assess how effective the rule would be. Instead, the SEC relied on Congress’s judgment that supply-chain transparency would promote peace and stability by reducing the flow of money to armed groups, a judgment that undergirded the SEC’s discretionary choices in favor of greater transparency.
The court rejected the APA-based claims. E.g., the SEC had the authority to create an exception for de minimis uses of conflict minerals, but given that Congress knew that conflict minerals are often used in very small quantities, the SEC was not arbitrary and capricious in determining that such an exception would conflict with Congress’s purpose.
The plaintiffs alleged that the SEC failed adequately to analyze the benefits of the final rule by failing to determine whether the rule would achieve its intended purpose. But the plaintiffs were objecting to Congress’s purpose, not to the SEC’s process:
[W]e find it difficult to see what the Commission could have done better. The Commission determined that Congress intended the rule to achieve “compelling social benefits,” but it was “unable to readily quantify” those benefits because it lacked data about the rule’s effects.
That determination was reasonable. An agency is not required “to measure the immeasurable,” and need not conduct a “rigorous, quantitative economic analysis” unless the statute explicitly directs it to do so. . Here, the rule’s benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the Commission has no particular expertise. Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule—measured in dollars—would create an apples-to-bricks comparison.
Congress told the SEC to make a rule despite the lack of data. The SEC could rely on Congress’s determination that the costs were necessary and appropriate in light of the goals. “Congress did conclude, as a general matter, that transparency and disclosure would benefit the Congo. the Commission invoked that general principle to justify each of its discretionary choices. What the Commission did not do, despite many comments suggesting it, was question the basic premise that a disclosure regime would help promote peace and stability in the Congo.” The SEC was not supposed to second-guess Congress on this point; if it had found that disclosure wouldn’t work, it couldn’t have adopted any rule, and that would’ve been contrary to Congress’s explicit direction.
But wait! There’s also a First Amendment claim based on the requirement that an issuer must describe certain products as not “DRC conflict free” in the report it files with the SEC and on its website. The majority agreed that this was unconstitutionally compelled speech under Central Hudson. (The plaintiff didn’t challenge other disclosures required by the regulation. What result if it did?)
The SEC argued that rational basis review was appropriate because the disclosure involved purely factual non-ideological information. But Zaudereris limited to cases in which disclosure requirements are reasonably related to the prevention of deception, and this requirement isn’t. (But see Am. Meat Inst. v. USDA, No. 13-5281, 2014 WL 1257959, at *4-7 (D.C. Cir. Mar. 28, 2014), vacated and en banc rehearing ordered, Order, No. 13-5281 (D.C. Cir. Apr. 4, 2014) (en banc).)
The factual nature of the disclosure is insufficient because speakers also have a right to avoid disclosing facts they don’t want to. Also, it was “far from clear” that “conflict free” was factual and non-ideological, since “[p]roducts and minerals do not fight conflicts.” “Conflict free” was 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.” Issuers might disagree with that assessment of their moral responsibility, and convey that disagreement through silence. “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.” (Compare the result in the tobacco RICO case, where statements that the defendants lied—something that is true, but that they don’t really want you to know—were upheld as reasonable corrective measures. “Controversial” is not a good standard for disclosures, and this is why.)
Intervenor Amnesty International argued that SEC v. Wall Street Publishing Institute, Inc., 851 F.2d 365 (D.C. Cir. 1988), applied rational basis review to securities regulation. That case allowed the SEC to seek an injunction requiring that a magazine disclose the consideration it received in exchange for stock recommendations, but the case didn’t hold that rational basis review governed securities regulation “as such,” but might be “roughly tantamount to the government’s more general power to regulate commercial speech.” Anyway, that was a classic deception rationale governing inherently misleading speech.
To read Wall Street Publishing broadly would allow Congress to easily regulate otherwise protected speech using the guise of securities laws. Why, for example, could Congress not require issuers to disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports? Those examples, obviously repugnant to the First Amendment, should not face relaxed review just because Congress used the “securities” label.
(WTF? Disclosure of labor conditions, at least, is the exact same thing as this regulation. Repeating it doesn’t make it more obvious.)
Once rational basis was out of the picture, the regulation flunked even Central Hudson, since “narrower restrictions on expression would serve [the government’s] interest as well.” Plaintiff suggested that issuers could use their own language to describe their products, or the government could compile its own list of products that it believes are affiliated with the Congo war, based on information the issuers submit to the Commission. The SEC didn’t show that this would be less effective. “[I]f issuers can determine the conflict status of their products from due diligence, then surely the Commission can use the same information to make the same determination. And a centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers.” These “intuitive” alternatives were sufficient to invalidate the rule.
The SEC argued that the rule’s impact was minimal because issuers could explain what “conflict free” meant in their own terms, but almost all compelled speech offers the possibility of explanation, and that’s inadequate to cure a First Amendment violation. Thus, the rule (and the statute) was unconstitutional to the extent that it (they) required regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
The concurrence would’ve waited for the en banc review of the COOL regulations raising this exact issue under Zauderer, and stayed just that part of the SEC’s rule while allowing the rest to go into effect.