by Michael Vargas, Associate at Rimon
In his Citizens United v. FEC dissent, Justice Clarence Thomas sent up a signal flare that could have far greater repercussions than the landmark decision itself. In his dissent, Justice Thomas argued that disclosure requirements on corporations were unconstitutional compelled speech because they opened up corporations to public reprisal for the information found in those disclosures, and he steadfastly rejected the argument that these disclosure requirements could be justified on the grounds that they simply “provided voters with additional information.” This startling pronouncement, if applied to all corporate “speech,” would effectively nullify all corporate disclosure laws currently on the books, including most if not all Wall Street regulations. This fear was largely an academic one, until the D.C. Circuit ruled, in National Association of Manufacturers v. SEC, that the Securities and Exchange Commission (SEC) rules on Conflict Minerals were unconstitutional in an opinion that sounds remarkably similar to Justice Thomas’ Citizens United dissent. There can be no doubt that all federal regulation that uses disclosure as a means of oversight is now in very real peril from conservative judges who adhere to Thomas’ beliefs.
The Battle to Prohibit Conflict Minerals
For the people of Zaire, 1996 brought with it the end of the repressive and corrupt dictatorship of Joseph Mabutu, and the beginning of a series of civil wars that continue to rage today. The country, renamed the Democratic Republic of the Congo (DRC) in 1997, is a humanitarian nightmare, as warlords and mercenaries use rape and murder to enslave the population and put them to work in mines extracting minerals such as gold, tin, tungsten and tantalite (3TG). These 3TG minerals, used to manufacture many high-tech devices such as cellphones and computers, are then sold in western markets with the proceeds used to finance the civil war in the DRC. International human rights organizations and even the United Nations have long identified these “conflict minerals” as one of the most important humanitarian crises in the world today.
Responding to this humanitarian crisis, Congress added a provision to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that required any company using 3TG minerals to make certain disclosures about where they obtained those minerals, and whether the company could confirm that they did not come from the DRC. Congress justified this requirement by arguing that consumers had a right to know whether their products were supporting a civil war, and that requiring disclosure and extended supply chain due diligence would discourage companies from purchasing materials from the DRC. Congress entrusted enforcement of this provision to the Securities and Exchange Commission, an agency familiar with corporate disclosures, and the final rules were issued in 2014. Importantly, those final rules required corporations to state whether their products were “DRC conflict free” or “not found to be DRC conflict free.” However, corporations were further permitted to explain the determination in narrative form.
A Startling Pronouncement: National Association of Manufacturers v. SEC
The National Association of Manufacturers (NAM) challenged these rules, specifically the requirement that a corporation disclose when its products are “not found to be DRC conflict free,” on the grounds that this amounted to compelled speech in violation of the First Amendment. A divided panel of the DC Circuit agreed, and struck down the SEC’s final rules. The decision is remarkable for a number of reasons, and all of them are rooted in the philosophy Justice Thomas championed in Citizens United.
A Higher Standard of Review for Corporate Disclosures
Corporate speech is normally reviewed under one of the “commercial speech” doctrines. Citizens United, and even its predecessor Buckley v. Valeo, represented a radical departure from this tradition. However, most restrictions on corporate speech are reviewed under the familiar doctrine of Central Hudson v. Public Service Commission, which held that restrictions on commercial speech must “directly advance” a “substantial” government interest. The Court reasoned that protecting commercial speech has First Amendment value because commercial speech informs consumers. Given this reasoning, it was not surprising that when the court subsequently addressed the mirror issue of compelled commercial speech, in Zauderer v. Office of Disciplinary Counsel, the justices applied a much lower rational basis test again reasoning that government mandated disclosure of purely “factual and uncontroversial” information to consumers furthers the First Amendment interest of informing consumers identified in Central Hudson. Thus, where government seeks to limit commercial speech, it must meet a higher burden, but where government seeks to compel commercial speech to benefit consumers, the burden is lower.
In NAM v. SEC, a case involving compelled disclosures, one would have expected the court to apply Zauderer’s less stringent standard. Instead, however, the court stripped Zauderer of all its meaning, holding that the case was limited only to “advertising,” and then argued that the right of consumers recognized in Central Hudson and Zauderer was outweighed by the company’s interest in concealing “statements of fact the [company] would rather avoid.” Just as Justice Thomas rejected the interest of informed voters in Citizens United, the DC Circuit rejected the interest of informed consumers in NAM v. SEC. This gross distortion of the commercial speech doctrine means that all required corporate disclosures must now pass heightened judicial scrutiny, a standard that has never been applied before to this common and widely accepted regulatory mechanism.
Fear of Informed Consumers
On the merits of the case, the majority was equally hostile to informed consumers. In what is arguably dicta, the Court chastised Congress and the SEC for forcing companies to “confess blood on their hands.” The Court argued:
“The label ‘[not] conflict free’ is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups.”
We see here the clearest evidence that the principle concern of the majority is a fear of an informed consumer, but that informed consumer is precisely what the commercial speech doctrine in Central Hudson and Zauderer were designed to protect. Indeed, a consumer who reads that a company’s products were produced using minerals that finance a bloody civil war would undoubtedly view such products as “ethically tainted,” but companies do not enjoy a First Amendment right to conceal facts that are embarrassing or cast their products into disrepute. On the contrary, that is the risk you run by competing in a capital market. It would not be a great exaggeration, and the dissenting judge does so in no uncertain terms, to point out that the majority’s opinion sounds quite similar to the discredited views of Lochner v. New York. At the very least, however, the idea that companies have a First Amendment right to be free from consumer reprisal is wholly foreign to the commercial speech doctrine, which was designed to protect consumers from deception, not permit companies to withhold information from them.
The Special Vulnerability of Securities Laws
With NAM v. SEC now requiring heightened scrutiny for mandatory disclosures and a categorical rejection of protecting informed consumers as the basis for commercial speech, many disclosure-based regulatory regimes are in grave danger of being overturned. Perhaps the most vulnerable is modern securities law, one of the greatest accomplishments of the New Deal era. Federal securities regulation arose out of the staggering corruption and fraud in the sale and trading of stocks and bonds (also called “securities”) during the Gilded Age. The Securities Act of 1933 brought transparency and reliability to the sale of securities and the Securities Exchange Act of 1934 ensured that the public markets were free of fraud and accountable to investors. These laws have been so successful that we take them for granted today, yet anyone with an e-trade account, a retirement account or a pension can thank the Securities and Exchange Acts for ensuring that their investments are free of fraud and insider trading.
The Securities and Exchange Acts are particularly vulnerable for three reasons. First, the Acts rely exclusively on disclosures. Under NAM v. SEC, all rules issued under these laws are now subject to heightened scrutiny, and with it a much greater chance that they will be struck down. Second, mandatory disclosures under securities laws and regulations are premised on the idea of keeping the “reasonable investor” informed about “material” information. Under NAM v. SEC, the informed investor is no longer a sufficient government interest to justify regulation. Therefore, when subjected to heightened scrutiny it is unlikely that any securities regulation can survive because the guiding principle of securities law is no longer a sufficient government interest.
Finally, the Securities and Exchange Acts are particularly vulnerable because the Supreme Court has never conclusively ruled on the constitutionality of these laws. Rather the first challenge to the Acts came just months after the famous “switch in time that saved nine,” and the Court sidestepped the issue of constitutionality. Since the constitutionality of the Acts has never been tested, a case challenging the Acts on First Amendment grounds would not face the hurdle of stare decisis. This would free the DC Circuit, and possibly even a conservative Supreme Court, to review them in the first instance and potentially strike down one of the most effective consumer protection regimes in American history. Justice Thomas may not have prevailed in Citizens United, but his reactionary vision of the First Amendment is being applied through the lower courts and greatly imperils the progressive regulatory state.