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 Zauderer
is 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.
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