By: Kaitlin Bruno
A new case before the U.S. Court of Appeals for the District of Columbia poses the important question: to what extent should corporations be held accountable for how their business practices (in this case specially manufacturing supply chains) affect and sometimes help finance conflicts in the developing world? The U.S. Congress and the U.S. Securities and Exchange Commission (SEC) believe companies should be held accountable.
In August 2012, the SEC issued the conflict minerals rule that enacted the general provisions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the promotion of transparency in the use of conflict minerals (tantalum, tin, gold, and tungsten). Conflict minerals are used in products like cellphones, computers, and gaming devices. When enacting Section 1502, Congress stated “that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence . . . particularly sexual and gender-based violence, and contributing to an emergency humanitarian situation therein.” The United Nations and other NGOs have also denounced the use of conflict minerals as helping to fund bloody conflicts that threaten to tear the Democratic Republic of Congo (DRC) and neighboring countries apart.
Under the rule, applicable companies must publicly disclose whether their products are made with conflict minerals from the covered countries. The rule applies to public companies “for whom the conflict minerals are necessary to the functionality or production of a product.” The company must first identify whether any of the minerals came from the covered countries. If the mineral are from the covered countries, then the company must submit a report detailing their due diligence efforts to determine the chain of custody of the conflict minerals. The minerals will be deemed to fall under one of three categories: DRC Conflict Free, DRC Conflict Undeterminable, and Not DRC Conflict Free. The companies must then file a report with the SEC and make the disclosure available on their public website.
The National Association of Manufacturers (NAM), the U.S. Chamber of Commerce, and Business Roundtable have brought a case against the SEC challenging the conflict minerals rule. The trade organizations contest the rule on two grounds. First, under the Administrative Procedure Act, they claim the conflicts mineral rule is arbitrary and capricious. Second, the trade organizations assert that the rule violates companies’ First Amendment rights by compelling companies to state on their public websites that their products are not DRC conflict free. They argue that the rule will force companies to place a “scarlet letter” on their public image as helping to finance human rights violations. However, the issue is far more complex than the three loaded labels of the SEC suggest to consumers. There is still no method to chemically trace minerals to the specific mine so maintaining a clean supply chain can be challenging to say the least.
The U.S. District Court for the District of Columbia in its July 23, 2013 opinion was not persuaded by the trade organizations reasoning. The court highlighted that the companies were not required to physically label their products “DRC conflict free” or “Not DRC conflict free.” The rule at minimum simply requires the companies to put copies of the Form SD or Conflict Minerals Report on their website. The companies are also free to add more qualifications to the reported designation to add further context.
The trade organizations appealed this decision, and the Court of Appeals heard oral arguments on January 7, 2014. Reportedly, two of the judges on the panel seemed concerned over the scope of the conflict minerals rule; but the court may not issue a formal ruling for some time. For now, the conflict minerals rule remains in effect, and companies have until May 31, 2014 to file their initial Form SD.
Not all companies agree with NAM’s characterization of the issue of conflict minerals. IBM recently announced at the Consumer Electronics Show that their processors are now conflict-free. IBM’s announcement is contrary to the appellants’ argument regarding the crippling difficulty to accurately monitor clean supply chains. Though the task is not easy, perhaps with sufficient motivation companies will be incentivized to find innovative solutions to support the developing economy of the DRC and surrounding nations without putting money directly into the hands of the paramilitary groups. The SEC’s conflict minerals rule is a great way to allow concerned consumers to hold these companies accountable and motivate the companies to devise better business practices.