(Adds background, comments from trade groups and legal experts)
By Sarah N. Lynch and Lawrence Hurley
WASHINGTON, April 14 (Reuters) - A U.S. appeals court on Monday struck down parts of a regulation that forces public companies to disclose if their products contain “conflict minerals” from a war-torn part of Africa, saying it violates free speech rights.
The ruling by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit marks a partial victory for the three business groups that had filed the original lawsuit, which claimed that the regulation violated companies’ free speech rights under the U.S. Constitution’s First Amendment by in essence forcing them to condemn their own products.
The appeals court upheld other parts of the U.S. Securities and Exchange Commission rule, which requires publicly traded manufacturers to disclose to investors whether any tantalum, tin, gold or tungsten used in their products may have originated from the conflict-ridden Democratic Republic of Congo.
The case is one of several in recent years in which industry groups have, with mixed success, made free speech objections to government regulations. Others include challenges to meat labeling requirements and a rule that required extractive industries to disclose payments to foreign governments.
The same appeals court is due to issue a key ruling on the free speech issue when it rehears the meat labeling case next month.
If the federal government requests it, that case could be consolidated with a rehearing of the conflict minerals case, the court indicated in Monday’s ruling.
Alternatively, the appeals court said the SEC’s case could be remanded back to a lower court for further proceedings. If the SEC pursued that option, a district court judge would need to decide whether wording in the SEC’s rule itself, or wording in the actual law, is at the root of the free speech problem.
An SEC spokeswoman said the agency was still reviewing the court’s decision.
The part of the conflict minerals rule that the appeals court found fault with requires companies to state that their products are not “DRC conflict free” if their internal investigations lead to that conclusion.
Human rights groups had worked to persuade Congress to include the conflict minerals provision in the 2010 Dodd-Frank Wall Street reform law, saying the disclosures would help consumers who want to avoid products that encourage mining in areas gripped by rebel violence and humanitarian conflict.
But the appeals court questioned why the SEC is forcing companies to make such statements, suggesting it might make more sense for the government to collect the data on conflict minerals and publish a list itself.
Senior Circuit Judge A. Raymond Randolph cited both the Dodd-Frank law and the SEC regulation in his ruling, writing that they “violate the First Amendment to the extent the statute and rule require regulated entities to report ... on their website that any of their products have not been found to be ... conflict free.”
Another judge on the panel, Sri Srinivasan, wrote a separate opinion stating that the court should have delayed ruling on the free speech issue until it rehears the meat-labeling case.
Last month, a three-judge panel upheld the regulation challenged by meat producers on free speech grounds. The rule specifies labeling requirements for certain meat products.
A week later, in a sign of the importance of the legal question, the court agreed to rehear the case “en banc,” meaning all the court’s judges will participate. Oral arguments are scheduled for May 19.
Srinivasan wrote on Monday that the conflict minerals decision could “effectively be undercut by the en banc court in relatively short order.”
Although the future of the regulation on conflict minerals is in doubt, Monday’s ruling marks a partial victory for the SEC, which has lost a long string of legal challenges to its rules.
“Although the commission adopted an expansive rule, it did not go as far as it might have,” Randolph wrote, noting that the SEC “exhaustively analyzed” the final rule’s costs.
The three groups that filed the lawsuit -- the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers -- had argued that the SEC conducted a flawed rulemaking and failed to weigh the costs of new regulations.
In a joint statement, the three said they were pleased with the court’s finding. “We understand the seriousness of the humanitarian situation in the Democratic Republic of Congo,” they said, “but this rule was not the appropriate way to address this problem.”
Human rights groups said they were disappointed but remained optimistic the regulation will ultimately survive.
“It’s kind of a mixed bag,” Jonathan Kaufman, an attorney with human rights group Earthrights International, said of the ruling, noting that despite the free speech finding the rest of the ruling made it clear the SEC can require companies to carry out due diligence and report findings to the agency.
The ruling places companies in an uncertain position, because the deadline to begin compliance is June 2.
So far, the groups that filed the lawsuit have not asked for a stay and the SEC has not voluntarily offered to grant one.
Scott Kimpel, a partner at Hunton & Williams who formerly worked at the SEC, said he believes the ruling will put pressure on the regulators to give companies more time.
“I anticipate that in the very near term the SEC will issue a public clarification of what registrants should do with respect to the June 2 deadline,” Kimpel said. (Reporting by Sarah N. Lynch and Lawrence Hurley; Additional reporting by Aruna Viswanatha; Editing by Howard Goller and Leslie Adler)