Is It Unconstitutional To Compel Extractive Industry Firms To Publish What They Pay?

Publish What You Pay” (PWYP) is the slogan of the international civil society movement to promote transparency and accountability in the extractive industry sector (oil, gas, minerals, etc.). The idea is to get firms to disclose what they pay to governments, and to get governments to disclose what they receive, in connection with extraction projects. Viewing voluntary programs like the Extractive Industries Transparency Initiative as insufficient, the PWYP movement has been pressing for mandatory disclosure requirements. But would such requirements violate the right to free speech protected by the First Amendment of the U.S. Constitution?

That question may seem absurd. Requiring truthful disclosures by commercial firms of payments to foreign governments may or may not be an effective anticorruption measure, but is it even plausible that such requirements would violate the constitutional guarantee of free speech? I think the answer should be no. But alas, as is often the case, it’s not clear that my view is shared by the federal judges who are likely to decide this issue. Indeed, there are worrisome signs that the powerful D.C. Circuit Court of Appeals may endorse an absurdly expansive conception of the First Amendment that would block any effective PWYP mandate.

First, a bit more background: The impetus behind PWYP is the fact that corruption in the extractive sector is rampant, particularly in developing countries with weak governance institutions; extractive industry corruption may be particularly destructive in these countries, as it enables corrupt elites to exploit their access to revenue streams derived from resource wealth to maintain their hold on power. And foreign firms in the extractive sector may be complicit—or worse—in perpetuating these corrupt systems. The idea behind PWYP is that, even though transparency is no panacea, disclosing more accurate information about the money changing hands in extractive industry transactions can promote accountability and help deter corruption.

PWYP appeared to achieved a dramatic victory in 2010, when the Dodd-Frank Act included a section that instructed the Securities & Exchange Commission to make a rule requiring any resource extraction firm listed on a U.S. exchange “to include in an annual report … information relating to any payment made … to a foreign government … for the purpose of the commercial development of oil, natural gas, or minerals,” broken down by project, government, and payment type, in a form that is easily searchable online. Pursuant to this legislative mandate, the SEC went ahead and promulgated a rule in 2012.

But it’s been all downhill from there: D.C. District Court Judge John Bates vacated the SEC’s rule in 2013 on the grounds that the SEC’s rule was irrational (and therefore unlawful) in failing to provide any exemptions from the disclosure requirement, and that the SEC misread the Dodd-Frank Act in believing that it was required to make the reports public. The SEC decided not to appeal, and is currently working (I presume) on revising the rule (or its justification for the rule). I didn’t find Judge Bates’ opinion terribly persuasive, but that’s not my focus here. More interesting – and worrisome – is the industry’s argument that requiring firms to disclose truthful, factual information about their payments would amount to “compelled speech,” violating their First Amendment rights. If and when the SEC finalizes a revised version of the rule, the industry is almost certain to again raise this constitutional objection.

Is there any chance they would win? Until recently I would have said no, because the argument seems so inane, and to sweep so broadly (on the industry’s theory, virtually any disclosure requirement other than those narrowly focused on consumer deception would seem to be unconstitutional). But just two weeks ago the D.C. Circuit decided a case called National Association of Manufacturers v. SEC, which struck down as unconstitutional a rule under a different portion of the Dodd-Frank Act – this one requiring disclosure by firms if they cannot certify that their products contain minerals that may be “conflict minerals” exported from the Democratic Republic of Congo (DRC). The SEC Rule required firms to state in their reports to SEC and on their websites that their products were not “DRC Conflict Free” if the firms were unable to make the requisite certifications.  The D.C. Circuit held that this is unconstitutional “compelled speech.”

In reaching this conclusion, the court first ruled that a higher standard of review (one more difficult for the government to meet) was appropriate here because the conflict mineral rule was not “related to preventing consumer deception” (a special category where, the Supreme Court has ruled, the government has more leeway to compel disclosures). The D.C. Circuit then rejected the idea that the fact that the “compelled speech” was “factual” rather than “ideological” did not make it acceptable, because of the idea that a speaker has the right to tailor his or her (or in this case its) message, including how it presents (or does not present) factual information. And, the court reasoned, the message “DRC conflict free” (or “Not DRC conflict free”) is not purely factual, because “[t]he label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war.”

If the analysis in the National Association of Manufacturers case stands (and it may not – the D.C. Circuit is going to consider whether a lower First Amendment standard is appropriate for commercial disclosures that do not involve consumer deception in another pending case, American Meat Institute v. U.S. Department of Agriculture), then the SEC’s PWYP rule may be in trouble, even if the SEC revises the rule to address the deficiencies that Judge Bates identified. And if that happens, it may be a disaster for the PWYP movement more generally.

To be clear, I agree that there should be some constitutional protections against compelled speech, even for commercial entities. But it would seem to me that in the case of (1) a commercial entity, where (2) the required disclosure is factual (like an amount of money paid), and (3) the disclosure is reasonably related to the achievement of an important governmental purpose (and fighting corruption by promoting transparency and accountability would surely qualify), then the First Amendment should pose to bar.

But, again, federal judges have an annoying tendency to disagree with me.

2 thoughts on “Is It Unconstitutional To Compel Extractive Industry Firms To Publish What They Pay?

  1. Fascinating. The case reminds me of another recent CADC decision regarding compelled commercial speech — RJ Reynolds Tobacco v. FDA, in which the DC Circuit struck down the FDA’s rule requiring graphic warnings on cigarette packs. If memory serves, the court there was particularly critical of both (1) the debatable factual nature of the images, and (2) the social science research the FDA used to justify the images’ effectiveness. If the court doesn’t apply a lower standard, it certainly sounds like these concerns will kick in again. And having the courts review the social scientific basis for the effectiveness of any particular disclosure-based market intervention particularly seems to put a lot of power in the court system.

    An interesting element of this issue is that agencies seem to be using disclosure more and more to “nudge” consumers as part of market-based approaches to regulation. If First Amendment doctrine develops to limit the degree to which they can do so, regulators may have to choose between more strongly interventionist policies and nothing at all.

  2. One should not ignore four instances (there are numerous others) where the idea of compelling firms in the extractive industry to “publish what they pay” will have any significant impact on bribery or corruption (regardless of form).

    First, when the authorities in essence “own” the relevant natural resource, they earn income irrespective of the price paid for the relevant resources and the issue of bribes/corruption need not arise. The only variable is the amount they receive.

    Second, if the authorities benefit from the payment of duties, licensing fees, or export licenses for the “right” to extract natural resources, if the amount of such payments are sufficiently high under the relevant legislation/regulations, bribery/corruption need not be involved.

    Third, if the authorities benefit directly or indirectly from the extractive activity, if it results in the use of particular third parties (it need not be a single entity and nationality of the entity does not matter as the beneficial owners of such entities may not be readily ascertainable) in the extractive process that they either control or one of their favorites control, again bribery will not appear on the radar screen. I have in mind engineering firms, suppliers of various items (including food, housing, transportation etc.) to the entities involved.

    Fourth, the hiring of particular individuals when undertaking extractive activities. Indeed, it is hard to define (much less determine) who qualifies as a “relative,” nor should we forget the old adage that “God gives us our relatives, we choose our friends.”

    The court decisions are a reminder that things are often more complex than they originally appear.

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