Electronics manufacturers and component suppliers seeking guidance from authorities following a recent court ruling striking down a portion of the Conflict Minerals Rule will have to wait a while longer. While an industry organization representing suppliers and distributors believes the ruling may have eliminated the need for compliance with the legislation, some lawyers are advising clients against ignoring the law with the hope that a final resolution could come from the U.S. Supreme Court.
Even the topmost judicial authority in the country may not be able to put the conflict minerals genie back into its box, however. Industry observers say they believe the top electronics companies that have spent hundreds of millions of dollars to achieve compliance will keep monitoring their supply chain to avoid getting it tainted with minerals procured from war zones. These companies will also continue to insist suppliers and other vendors provide evidence they are sourcing raw materials from reputable sources, they noted.
Fern Abrams, director of regulatory affairs and government relations for the IPC --Association Connecting Electronics Industries said there are several reasons why the court decision won’t change the way the electronics industry currently prepares its conflict minerals reporting procedures for the Securities & Exchange Commission (SEC).
“First, the ruling holds intact the vast majority of the requirements, especially the most burdensome provisions of the rule. Second, the ruling upholds the current status quo,” Abrams said. “And thirdly, most of the burden falls on the supply chain, which is driven by the need to meet their customer requirements, not the law.”
That’s not the official position of the Electronics Components Industry Association (ECIA), which believes the August 18 court decision by the U.S. Court of Appeals for the D.C. Circuit, reaffirmed a prior decision that invalidated a part of the SEC’s conflict minerals rule. The court agreed that the conflict minerals reporting requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act violated the First Amendment rights of enterprises that filed the lawsuit. Under section 1502 of the Dodd-Frank Act of 2010, publicly traded companies are required to examine their supply chains and disclose to the SEC whether they manufacture or contract to manufacture products that contain conflict minerals from the DRC.
“The court’s (latest) decision renders the conflict minerals reporting requirement void,” said Robin Gray, COO and general counsel at the ECIA. “The heart of the decision is that the government cannot compel speech.”
Gray also pointed out that the court concluded that there was no basis for the SEC to require the reporting of raw material sources since there were no proofs that the process would help reduce the harm done by warlords in the areas impacted by their operations. He also believes the court’s decision delivers a substantial blow to the Dodd Frank Act’s conflict minerals reporting requirements.
“The ruling will impact all publicly traded electronics component manufacturers that source the proscribed minerals,” Gray said. “This decision will eliminate the costly and unnecessary requirement that has no basis in fact, adds cost to consumers, has counterproductive impact on victims of conflict minerals and is difficult to comply with.”
Others, however, have expressed a different interpretation of the court’s decision. Dynda Thomas, a lawyer at Squire Patton Boggs (US) LLP, advises companies in the electronics industry on the Dodd Frank conflict minerals rule. In her assessment, Thomas said electronics companies must keep in mind that the court’s decision reaffirmed its April 2014 decision in National Association of Manufacturers v. Securities and Exchange Commission. In that decision the court found that disclosure requirements only violate the First Amendment to the extent that companies were required to describe any of their products as “not found to be ‘DRC conflict free.”
Thomas noted that the Dodd Frank law’s conflict minerals rule has many disclosure requirements, but what the court focused on was the labelling of a product – not the physical labeling, but the written description of a product – as being “not found to be ‘DRC conflict free.’”
“That's the part that the court focused on as being a violation of the First Amendment, and the August 2015 decision reaffirms that” Thomas said. “There are many other parts of the rule that talk about other kinds of disclosure – the disclosure describing due diligence, the disclosure describing country of origin, and the disclosure describing the steps that have been taken by the company to gather all of this information.”
Thomas also emphasized that in response to the April 2014 decision the SEC issued a statement indicating that companies didn't have to comply with all parts of the rule and said only the labeling of the products was eliminated or not required. The SEC went on to describe what companies should do in the meantime, until further notice.
“The April 2014 SEC statement clarified what the SEC expected companies to describe, but it did not change any of the steps that companies had to go through to develop their programs and find this information, such as reaching out to their suppliers, analyzing information, and learning what they could about the smelters, their supply chain and country of origin of the conflict minerals that were in their products,” Thomas said. “All of that remains the same, so all of that work the companies had to do was, and still is, the same.”
Thomas warned that because the Court of Appeals’ August 2015 decision reaffirms its earlier April 2014 decision and because the April 2014 SEC statement is still in place by the SEC’s partial stay of the rule, as of today “there is really no change in what companies are expected to do,” Thomas said.
Michael Kirschner, president of Design Chain Associates, LLC, a consulting firm that advises companies in the electronics industry on conflict minerals reporting requirements, said the industry needs more guidance on how to proceed in the months ahead.
“We are seeing disparate interpretations and until there is more clarity on what this court decision actually means it does not seem to me to make sense to just stop dead in the water complying with the SEC’s conflict minerals reporting requirements,” Kirschner said.
Companies like Apple, Intel and Qualcomm Inc., have publicized their efforts to remove conflict minerals from their supply chains and are promoting the measures they’ve taken as a way to publicize their commitment to human right and corporate responsibility.
Walter Alcorn, vice president of environmental affairs at the Consumer Electronics Association (CEA), said consumer electronics companies have taken several initiatives on their own to address the conflict minerals issue, which reflects the importance of the issue to their business.
“Consumer electronics companies recognize the issue of “conflict minerals” as one of the most significant and complex social issues in the global supply chain and our members are complying with federal disclosure requirements,” Alcorn said.
Abrams suggested that because of the leadership role consumer electronics companies have taken in addressing conflict minerals, it may be hard to change course. “[Electronics companies] are not expected to change their behavior based on the ruling,” she said.
Environmental organizations are also weighing in on the decision. Rob Lederer, executive director of the Electronic Industry Citizenship Coalition, (EICC), noted that other efforts such as the Conflict-Free Sourcing Initiative (CFSI) will continue to help companies responsibly source minerals from conflict-affected areas, regardless of any potential changes to the Dodd Frank Act’s conflict minerals provisions.
Members of the EICC, which is comprised of more than 100 electronics companies, and the Global e-Sustainability Initiative, founded the CFSI in 2008. Under the initiative, the Conflict-Free Smelter Program (CFSP) offers companies and their suppliers third-party audits that determine which smelters and refiners can be validated as “conflict-free,” in line with current global standards.
“The recent appellate court ruling does not affect CFSI programs. Our members are committed to this cause and will continue to use CFSI tools such as the conflict minerals reporting template, reasonable country of origin inquiry data, and other information to make informed decisions about conflict minerals in their supply chains,” Lederer said.
Ronald Gilerman, managing director at A&R Merchants, Inc., a supplier of electronics-grade tantalum in the U.S., said the CFSP helps companies comply with SEC conflict minerals reporting requirements. “If a processor is not EICC certified as a CFSP smelter, no one in the industry should or would purchase tantalum from them,” he said.
“The electronics industry understands that mining minerals under horrific conditions is a problem, but the real issue is whether this is the right way to address it,” Kirschner said. “The federal government somehow decided this is the right way to address it and most people I speak with in the industry about this do not agree that some strange indirect approach like the Dodd Frank Act’s disclosure requirements is the way to address the political failure that’s happening in the DRC.”
In the meantime, observers said the electronics industry should brace itself for the possibility of further court decisions down the road.
“The SEC could appeal the case, it could seek a rehearing of the case by the full Court of Appeals, or it could go back and re-craft the rule based on the decision of the court,” Thomas said. “The ruling by the Court of Appeals is not the end of the process.”