Two decisions issued a little over two weeks apart by separate U.S. Court of Appeals for the D.C. Circuit three-judge panels have created significant uncertainty on a critically important First Amendment issue. The court’s forthcoming actions in these cases will have a major impact on government regulation and on regulated industries as diverse as livestock, food, tobacco, smartphones, and medical devices.
The issue in both cases before the court is when can government compel businesses to provide information about their products or themselves. The U.S. Supreme Court held in Zauderer v. Office of Disciplinary Counsel that government can constitutionally require disclosures of a “purely factual” nature which are “reasonably related to the State’s interest in preventing deception of consumers.” The Court has repeatedly reaffirmed Zauderer, most recently in the 2010 case Milavetz, Gallop & Milavetz, P.A. v. U.S., where Justice Sotomayor wrote for a unanimous Court that a low level of scrutiny applies only in cases where the compelled speech is “directed at misleading commercial speech” (italics in opinion).
Country of Origin Labeling Rule. On March 28, a three-judge panel of Senior Judge Williams, Chief Judge Garland, and Judge Srinivasan upheld the Department of Agriculture’s country-of-origin labeling (COOL) rule in American Meat Institute v. U.S. Dept. of Agriculture. AMI argued that the compelled origin disclosure impinged on its members’ First Amendment rights, and because the information was not meant to prevent deception, the court should review the rule under the heightened scrutiny of Central Hudson v. Public Service Commission, and not the “reasonableness” standard of Zauderer. In upholding the COOL rule, the panel concluded that Zauderer encompassed government interests beyond just preventing consumer confusion, and thus it applied the minimal scrutiny of Zauderer rather than Central Hudson.
That conclusion rejected years of D.C. Circuit precedent (including last year’s R.J. Reynolds Tobacco Co. v. FDA) and instead embraced rulings from the First and Second Circuits. The panel acknowledged in a footnote that “reasonable judges” may read Reynolds as limiting Zauderer review to deception, and suggested en banc review for American Meat Institute. On April 4, the D.C. Circuit sua sponte vacated the panel decision and ordered en banc review. Oral argument is set for May 19.
conflict minerals
Rare Earth Minerals SEC Rule. On April 14, another D.C. Circuit panel decided National Assoc. of Manufacturers v. Securities and Exchange Commission. NAM and others had challenged SEC’s rule requiring businesses to investigate whether their products contain rare earth minerals, sales of which have fueled armed conflict in the Democratic Republic of the Congo (DRC). If a business’s investigation cannot establish that a product was “DRC conflict free,” it must disclose that conclusion to SEC and to the public on the company’s website. NAM argued that such a disclosure was not factual, but ideological in nature, and that it was not targeted at preventing consumer deception. It urged the court to review SEC’s “conflict minerals” rule under heightened First Amendment scrutiny.
Senior Judge Randolph, joined by Senior Judge Sentelle, agreed with NAM that Zauderer review was limited to non-controversial disclosures aimed at misleading speech, and applied Central Hudson to invalidate the rule. Judge Srinivasan did not join the panel’s First Amendment analysis, arguing instead that in light of the pending American Meat Institute en banc review, the court should have held that issue in abeyance. The majority opinion explained in a footnote that deciding the case “now provides an opportunity for the parties in the case to participate in the court’s en banc consideration” of American Meat Institute.
Concurrently with the opinion’s release, the Clerk of the D.C. Circuit issued an order staying the mandate in National Assoc. of Manufacturers until seven days after disposition of a request for rehearing or rehearing en banc. This means that the court’s decision has not yet taken legal effect. Because NAM’s Administrative Procedures Act challenge failed, it is possible that both parties could seek rehearing. So far, neither has.
Legal Limbo and Uncertainty Reigns. The Clerk’s stay of the mandate in National Assoc. of Manufacturers leaves both the SEC and regulated entities in legal limbo. Companies have until June 2 to file their conflict mineral compliance disclosures with SEC. The parties in National Assoc. of Manufacturers have 45 days to file a rehearing petition and if either or both take the full amount of time and decline appeal, the mandate will issue after the compliance deadline. Private lawyers are already counseling clients to ignore the ruling and stay the course of compliance.
Meanwhile, uncertainty reigns for all businesses concerned with mandated commercial speech. What happens next in both American Meat Institute and National Assoc. of Manufacturers will impact developments such as states’ push to impose mandatory “genetically modified organisms” labeling on food products. Vermont’s governor is poised to sign such a measure, and a constitutional challenge will no doubt follow. An en banc D.C. Circuit holding expanding the reach of Zauderer will undercut a 1996 Second Circuit precedent which held that a consumer’s “right to know” is not a sufficient government interest to trigger Zauderer scrutiny.
The amount of power government has to compel commercial speech is an issue that is likely to split along ideological lines. And given the D.C. Circuit’s current ideological makeup, it is fair to predict that an en banc panel will embrace the First Amendment ruling in American Meat Institute. Such a ruling, however, need not dictate an identical outcome in National Assoc. of Manufacturers if that case is also reheard. Unlike in American Meat Institute, the compelled disclosure in that case was highly controversial, and clearly not “purely factual.” Even if an en banc panel rules that SEC need not prove that “not DRC conflict-free” was aimed at consumer confusion (which SEC admits it is not), an en banc panel will be hard pressed to find that the disclosure is “purely factual.” Both requirements must be met for a court to evaluate compelled speech under Zauderer instead of under heightened First Amendment scrutiny.
Also posted at WLF’s Forbes.com contributor page