Three completely different and unrelated regulatory events in the past week deserve attention. A confluence of coincidences last Tuesday illustrated the First Amendment to the United States Constitution limits on symbolic rather than functional regulation. At the same time, changed facts and a changed industry justify a change in regulation. Finally, some rules are purely ministerial, but provide an important lesson nonetheless.
Conflict Minerals Demise: First, a panel of the United States Court of Appeals for the District of Columbia Circuit reaffirmed its prior decision vacating the Securities and Exchange Commission (SEC) Conflict Minerals final rule violated the First Amendment of the United States Constitution. Second, Governmental Accountability Office (GAO) reported on the futility of the same final rule. Third, the SEC itself published another disclosure rule that might be challenged yet again on First Amendment grounds.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) required the SEC to issue regulations requiring companies using “conflict minerals” mined in the Democratic Republic of the Congo (DRC) or an adjoining country to investigate and disclose the origin of those minerals. The SEC adopted a final rule in 2012.
Last year, the D.C. Circuit panel held that the statute and regulations violate the First Amendment to the extent they require regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be ‘DRC conflict free.’” The SEC requested rehearing, which the panel granted, in light of the court’s en banc decision in American Meat Institute v. DOA, expanding the factual bases on which disclosures may be required as “forced speech” to avoid fraud and at point of sale. The panel reaffirmed that the statute and SEC rule did not fall within the more relaxed standards applicable for anti-fraud and point-of-sale disclosures on rehearing in National Association of Manufacturers v. SEC.
The SEC acknowledged that the statute and its regulations were “directed at achieving overall social benefits,” that the law was not “intended to generate measurable, direct economic benefits to investors or issuers,” and that the regulatory requirements were “quite different from the economic or investor protection benefits” SEC rules normally seek. Thus, the rules do not address potential deceptive advertising but another set of social issues entirely. Much of the regulation remains intact – companies must continue to conduct due diligence and report to the SEC at substantial costs that the SEC suggested would induce a change in behavior. Companies need not, however, intone a politically substantive mantra of whether their products are “conflict free.”
The court also questioned whether the SEC rule would help diminish the humanitarian crisis that it sought to address, noting that any impact was “entirely unproven and rests on pure speculation.” By chance, GAO released the same day a report finding that 67% of companies were unable to determine whether minerals in their products came from the DRC or adjoining countries, and none could determine whether the minerals financed or benefited armed groups in those countries.
► Further review of the decision is highly unlikely. The D.C. Circuit naturally circulated this panel decision to the full court and a request for en banc review is unlikely to garner sufficient interest. At the same time, the Department of Justice (DOJ)’s Solicitor General is unlikely to commit scarce resources to petition for certiorari to the United States Supreme Court (SCOTUS) of a regulation and statute with only symbolic relevance, a petition with a very narrow chance of success. The question more likely to be raised now is whether the SEC’s slightly less symbolic but still unrelated-to-fraud-or-consumer-disclosure scheme Pay Disclosure rule will survive scrutiny.
Home Health Care Reversal: On the other hand, another panel of the D.C. Circuit reversed a judgment of its district court vacating the Department of Labor (DOL) Application of the Fair Labor Standards Act to Domestic Service final rule. The district court held that DOL overstepped its bounds by adopting a rule that contravened the terms of the underlying Federal Labor Standards Act (FLSA) – a Chevron Step 1-type application of clear language of the statute. The D.C. Circuit disagreed in Home Care Association v. Weil, finding that previous SCOTUS precedent held that the FLSA vests DOL with discretion to apply (or not to apply) the companionship-services and live-in exemptions to employees of third-party agencies. DOL’s decision to extend the FLSA’s protections to third party employers in light of substantial change in the industry, the court held, was grounded in a reasonable interpretation of the statute and was neither arbitrary nor capricious. The D.C. Circuit, therefore, reversed the district court’s vacatur and remanded for the grant of summary judgment to the Department.
► While the district court ended its analysis at Chevron Step 1’s statutory construction and interpretation analysis, SCOTUS rejected that analysis in a case that was, in many ways, diametrically opposed to the issue presented to the district court. Long Island Care at Home, Ltd. v. Coke confirmed that the FLSA vested DOL with discretion to apply (or not to apply) the companionship-services and live-in exemptions to employees of third-party agencies. The ChevronStep 2 result is not that surprising and judges do differ when a court of appeals is reviewing a district court decision de novo.
The impact of the reinstatement of the rule will be substantial, and DOL admitted that as promulgated the impact is economically significant. Several compounding issues may make the rule even more economically significant for insurers and individuals acquiring home care services, including increases in the minimum wage.
Ministerial Removal: The Environmental Protection Agency (EPA) took the proper step last week to remove ministerially from the Code of Federal Regulations specific provisions of its greenhouse gas rules that the federal courts have vacated. In short, after lengthy litigation all the way through SCOTUS, EPA may not treat greenhouse gases as an air pollutant for the specific purpose of determining whether a source is a major source and thus required to obtain a permit. On remand, the D.C. Circuit issued its amended judgment and mandate, making the vacatur of specific regulations final.
As EPA notes, the D.C. Circuit’s judgment requires “the EPA to take steps to rescind and/or revise the applicable provisions of the CFR as expeditiously as practicable.” Some specific vacated provisions can be removed from the CFR without more and this is only a nondiscretionary, ministerial act – no advance notice or opportunity for public comment is required under the Administrative Procedure Act (APA). Other affected provisions may not so easily be removed and require a proposed and final rule.
► The step EPA completed and the step EPA is about to begin a critical steps in the regulatory process. When a specific regulation is vacated and the court’s judgment becomes final, the regulation has no effect, but it remains in the CFR. The agency must take the necessary steps to remove the regulation and even the non-discretionary recognition of that legal fact, as EPA recognizes here, requires a final rule. Some agencies have not completed that final step and the Code of Federal Regulations contains a number of examples of void regulations that may mislead the public and even agency attorneys. EPA is doing the right thing and other agencies should follow EPA’s lead.