By Sarah N. Lynch
WASHINGTON (Reuters) - A U.S. appeals court on Monday struck down parts of a regulation that forces public companies to disclose if their products contain "conflict minerals" from a war-torn part of Africa, saying it violates free speech rights.
The ruling by the U.S. Court of Appeals for the District of Columbia Circuit marks a partial victory for the three business groups that had filed the original lawsuit, which claimed that the regulation violated companies' free speech rights by in essence forcing them to condemn their own products.
But the appeals court stopped short of striking down the rule entirely.
The Securities and Exchange Commission's rule requires publicly traded manufacturers to disclose to investors whether any tantalum, tin, gold or tungsten used in their products may have originated from the conflict-ridden Democratic Republic of Congo.
Human rights groups had worked to convince Congress to include the conflict minerals provision in the 2010 Dodd-Frank Wall Street reform law, saying the disclosures would help consumers who want to avoid products that encourage mining in areas gripped by rebel violence and humanitarian conflict.
Senior Circuit Judge A. Raymond Randolph cited both the Dodd-Frank law and the SEC regulation in his ruling, writing that they "violate the First Amendment to the extent the statute and rule require regulated entities to report...on their website that any of their products have not been found to be...conflict free."
But he rejected claims by the three groups that filed the lawsuit -- the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers -- that the SEC conducted a flawed rulemaking and failed to weigh the costs of new regulations.
Randolph said the rule will now go back to a lower court to determine whether the wording in the SEC's rule, or the Dodd-Frank Wall Street reform law underpinning it, is to blame for the free speech violations.
The business groups in their lawsuit argued that the rule should be tossed out, saying that the SEC made numerous errors in its rule-making procedures, including a failure to weigh the costs and benefits to businesses.
The U.S. Chamber of Commerce and the Business Roundtable on Monday said they were not ready to comment on the judge's ruling because they were still reviewing it.
One human rights group voiced some disappointment, but said it remains hopeful about regulations on conflict minerals.
"We're disappointed that the court ultimately found the decision to use the words 'DRC conflict free' in their public reporting violated the First Amendment, but we do not believe that this conclusion will affect the SEC's ability to issue strong rules for transparency in the extractive industries," Jonathan Kaufman, co-counsel for Oxfam America and staff attorney at EarthRights International, said in a statement.
Although the future of the rule is in doubt, Monday's ruling marks a partial victory for the SEC, which has lost a long string of prior legal challenges to its rules.
"Although the commission adopted an expansive rule, it did not go as far as it might have," Randolph wrote, noting that the SEC "exhaustively analyzed" the final rule's costs.
An SEC spokesman did not immediately respond to a request for comment.
(Reporting by Sarah N. Lynch; additional reporting by Lawrence Hurley and Aruna Viswanatha; Editing by Leslie Adler)