A U.S. Court Jeopardizes Corporate Transparency Rules, in the Name of Free Speech

Transparency is often seen as an important anticorruption tool, perhaps nowhere more than in extractive industries. Notably, an international movement has called on extractive industry firms to “Publish What You Pay” (PWYP). The idea is that if it were public knowledge what these firms had paid for the concessions they receive from governments, the citizens in those countries (as well as journalists, NGOs, and others) would be better able to hold governments accountable for what they did with the money (and would make it harder for governments, or individual government officials, to lie about how much money they received). Many advocates therefore believe that it would be good public policy to enact PWYP rules that would compel these sorts of disclosures. But would such disclosure requirements violate the constitutional principle of freedom of speech? Alas, some U.S. judges seem to think so.

If the whole idea that disclosure requirements of this sort might infringe free speech rights seems bizarre, I’m with you—in my earlier post on this topic, discussing an earlier case that seemed to take this position, I used words like “absurd” and “inane.” Yet last week the U.S. Court of Appeals for the D.C. Circuit issued a new ruling (a follow-up to the earlier decision I ranted about last year) that seemed to strongly endorse a very broad constitutional protection for corporations against “compelled commercial speech,” which bodes ill. Although the most recent opinion, like the one I posted about last year, does not directly address PWYP mandates, the larger themes of the D.C. Circuit opinion are troubling, and suggest that this court (or at least some judges) may be hostile to the whole idea of using mandatory disclosures as a way to advance important public policy goals, including the fight against corruption.

Before proceeding, some quick background on the relevant rules. In 2010, the United States enacted (as part of the Dodd-Frank Act) a statutory provision requiring the Securities and Exchange Commission (SEC) to promulgate a PWYP rule; the SEC did so in 2012. A separate provision of the Dodd-Frank Act was intended to alleviate the brutal conflict in the Democratic Republic of Congo (DRC) by requiring firms to investigate and disclose whether any of their products used “conflict minerals.” The SEC rule implementing this provision requires that if a firm cannot verify that its products did not use any minerals the sale of which benefitted armed groups in or near DRC, the firm must post a disclosure on its website that these products that are “not DRC conflict free.” At least on its face, the DRC conflict minerals rule has a similar structure and mechanism as the PWYP rule: both require firms to disclose information about their commercial transactions, in order to further a social policy goal. And both rules were challenged by industry trade associations, which argued that forcing firms to disclose this information amounted to unconstitutional “compelled speech.” In the case of the PWYP rule, a court vacated the rule on other grounds in 2013 (and so did not address the constitutional issue at that time). The court sent the rule back to the SEC for reconsideration and revision; the rule has been in limbo ever since. (Indeed, Oxfam America has filed a lawsuit seeking to compel the SEC to reissue the rule, as the original statutory deadline has long passed.) But the D.C. Circuit has now ruled (twice) on the constitutional challenge to the DRC conflict minerals rule, and has found that the rule is indeed unconstitutional. (The court’s first ruling was issued in April 2014, but the court agreed to reconsider the case following an intervening court decision on a related legal question. Last week’s decision essentially reaffirms the earlier ruling.)

The legal issues in the case are somewhat complex, involving the careful parsing of prior Supreme Court and circuit court precedent, and I don’t want to get into the issues in much technical detail here. And really, in terms of a legal-doctrinal critique of the majority opinion, I don’t think I could do any better than Judge Srinivasan’s superb dissent. But I did want to highlight the aspects of the majority opinion which I found most troubling:

  • First, although there are plausible arguments for extending free speech protections to so-called “commercial speech,” the majority does not seem to ground its expansive notion of constitutional prohibitions on compelled commercial speech in any convincing underlying justification. The opinion spends some time on how much the rule costs affected companies (both the direct costs of due diligence, and the higher costs associated with avoiding purchasing goods the origin of which can’t be adequately verified), but the costliness of a regulation seems entirely unrelated to the values implicated by free speech. Beyond that, the majority offers only the observation that companies that can’t certify all their products are “DRC conflict free” may be viewed negatively by some consumers or investors. Of course they will – as the dissent observes, that’s the whole point. And if the government required the company to post inaccurate information, or subjective evaluative information (“This company is morally irresponsible”), or even highly contestable factual information with strong moral overtones (“This company’s purchasing practices are prolonging the civil war in the DRC”), then there would be quite a good argument that this is unconstitutional compelled speech. But why is mandating the disclosure of accurate factual information an affront to free speech values? The majority never cogently explains this (despite some over-the-top rhetoric, including gratuitous quotations from both Nineteen Eighty-Four and Darkness at Noonjudges of a certain age and temperament always seem ready to issue veiled warnings about a descent into Stalinism).
  • Second, and perhaps even more troubling, the majority seems skeptical—indeed, downright dismissive—of the idea that corporate transparency is a valuable and legitimate means for pursuing important public policy ends (beyond garden-variety consumer protection). This is evident in the majority’s repeated emphasis on the novelty of the SEC’s justification for the rule, and the various ways in which the court suggests that compelled commercial speech is usually only justifiable when the purpose is preventing misleading advertising or product labeling. Even more troubling is the court’s insistence that, when the compelled disclosure does have some broader objective, the burden is on the government to prove that requiring disclosures will have the predicted benefits-which the majority interprets not only as proving that the rule will reduce purchase of conflict minerals from armed groups, but also that the rule will ultimately prove to be wise public policy. In a display of breathtaking arrogance, the court dismisses the government’s plausible arguments about the rule’s benefits (as well as the standard principle of deference to the judgments of the legislative and executive branches in foreign affairs), by citing a couple of short articles noting some adverse side effects of the rule, and an open letter from a number of DRC academics, politicians, and civil society representatives criticizing the narrow focus on conflict minerals and arguing for a broader, more comprehensive strategy for addressing the conflict in the DRC. (It would seem, by the way, that the court’s constitutional ruling would also bar aspects the alternative comprehensive strategy advocated by the authors of this open letter, but never mind.) Though the court acknowledges that there are also plausible arguments going the other way, the court concludes that this doesn’t matter because whether the rule will work is “speculative” and has not been “proven to the degree required under the First Amendment.” What would it mean, exactly, to “prove” that a disclosure requirement could achieve these goals? It seems impossible, as a practical matter—and it would likely also be impossible to prove that making firms in the extractive industry publish what they pay would reduce corruption. What the court seems to be saying is that disclosure requirements that are intended to promote broader social goals, rather than consumer protection narrowly defined, must satisfy a standard of proof that cannot be met in practice—meaning these sorts of compelled disclosures are never allowed.

All that said, I can see at least one obvious potential distinction between the conflict minerals rule and the PWYP rule (assuming the latter ever gets finalized): The information that the PWYP rule requires can more easily be characterized as purely factual. In the case of the conflict minerals rule, the majority made much of the fact that the statutorily-required wording (“not DRC conflict free”) implies “moral responsibility for the Congo war,” and therefore could not be characterized as a requirement to disclose “purely factual and uncontroversial information.” (In my view, this is probably the majority’s most persuasive argument, though the dissent convincingly responds that companies are free under the rule to expand on the meaning of that language in their disclosures, to make it clearer in context exactly what the term means.) In the PWYP context, the disclosure is simply a number—an amount of money—without any language that is even arguably evaluative. Thus a court might be able to plausibly distinguish the two cases—upholding the constitutionality of PWYP, even if the D.C. Circuit decision on the conflict minerals rule remains binding precedent—if it wants to do so.

On the other hand, the PWYP rule is even more disconnected from the more traditional consumer and investor protection objectives that courts have recognized as legitimate justifications for compelled commercial speech. After all, the conflict mineral rule is still meant to enable consumers to avoid certain products (or investors to avoid certain companies) because of undesirable features of those products. The PWYP rule is different in that the goal isn’t really to inform consumers (or investors) at all; the relevant audience for these disclosures is rather media, citizens, and civil society activists in the foreign country where the concession was issued, so they can better monitor their own governments. That fact might lead an unsympathetic court to view the PWYP rule as even harder to defend against constitutional attack than the conflict minerals rule.

It’s basically impossible to predict how the law on this will develop. It’s possible that the D.C. Circuit panel’s ruling on the conflict mineral case will be overturned, either by the full D.C. Circuit sitting en banc, or by the Supreme Court. It’s also possible, as I noted above, that whatever panel that hears the challenge to the PWYP rule (assuming it’s ever issued) will distinguish the cases and uphold PWYP. But the signals coming out of the D.C. Circuit are troubling, and suggest an overly aggressive conception of the First Amendment, coupled with a dismissive (or at least insufficiently appreciative) view of the ways in which commercial transparency can advance legitimate public ends.

3 thoughts on “A U.S. Court Jeopardizes Corporate Transparency Rules, in the Name of Free Speech

  1. Matthew,

    While I too am uncomfortable with the decision, I always remember somethng Judge Randolph, its author, said when he was Professor Randolph and I was one of his students: “Hard cases make no law.” That was his reply to concerns students expressed when we were studying the then recent case involving the Nixon Administration’s efforts to stop the New York Times from publishing the Pentagon Papers. We students were all recalling the maxim that “hard cases make bad law,” worried that the Pentagon Papers would do much mischief to the press’ efforts to expose government wrongdoing. Forty years later, Professor Randolph seems to have been spot on. The Pentagon Papers case has made no law. .

    The conflict minerals case is a hard case. As Randolph’s opinion recites, the conflict minerals law orders agencies to do things they simply cannot do, requires the collection of data that simply cannot be collected, and while its intent is to reduce the violence the mining of minerals in the DRC is fueling, serious questions about its efficacy have been raised — not only by neutral third parties but by those it is intended to help. Yes, these are issues better left for Congress to address, and yes, one can easily argue that Randolph and his colleague are engaged in a form of judicial policy-making inappropriate for the “least dangerous branch.” But it remains that the case is a hard one and thus if now Judge Randolph follows then Professor Randolph’s maxim, the decision may have no effect on the PWYP litigation.

    • Like many maxims of this type, “hard cases make no law” is true… except when it isn’t. There are plenty of hard cases that, once decided, had essentially no broader impact, but were limited to their particular facts. (Bush v. Gore is another famous example.) But there are also plenty of cases that were hard cases that, once decided, had an enormous impact (for good or ill), and were often read aggressively to cover cases that were plausibly distinguishable. So I don’t really know what will happen here.

      Your comment also implies that the majority decision is more defensible, on legal and policy grounds, than I acknowledged. We might have a simple good faith disagreement on that point. All I’d note here is that exactly the same arguments you raise about why the conflict mineral rules challenge was “hard” (and why the court’s decision is reasonable) can be made about PWYP as well — indeed, it’s exactly that similarity that makes me nervous. There may be good objections to both rules on policy grounds. But to constitutionalize the issue, such that the government can’t require these sorts of disclosures unless it can prove that the rule is all-things-considered good public policy, strikes me as grossly inappropriate, and in no way mandated by the First Amendment or the principles that animate it.

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