D.C. Circuit Largely Upholds SEC’s Conflict Minerals Rule But Supports First Amendment Challenge

iStock_000013609814XSmall-e1374781449214On April 14, the D.C. Circuit Court of Appeals issued an opinion in National Association of Manufacturers v. SEC, a case that sought to challenge the conflict minerals rule released by the Securities and Exchange Commission (“SEC”) in August 2012.

The Court largely rejected the plaintiffs’ challenges, holding that the SEC did not act arbitrarily or capriciously in adopting the due diligence and disclosure requirements of the rule and in deciding not to include a de minimis exception. The Court also stated that it “did not see any problems with the Commission’s cost-benefit analysis.”

The Court, however, did hold that the Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the conflict minerals rule violate the First Amendment of the U.S. Constitution to the extent the statute and the rule require issuers to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’” In colorful language, the Court said: “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”

At this time, the case has been remanded to the D.C. District Court for further proceedings.

In the immediate aftermath of the Court’s decision, all companies subject to the rule should continue to prepare their disclosures in light of the June 2, 2014 deadline. The Court’s opinion has no legal effect until seven days after the Court has addressed any petitions for rehearing. After addressing any petitions for rehearing, the Court will issue its mandate — the earliest date on which that could occur will be in June, unless the Court decides to take earlier action.

Looking ahead, there are a range of potential scenarios. The Court could grant a petition for rehearing en banc. The SEC could decide to stay enforcement of the rule, pending the final outcome of the litigation, or could issue an interpretive order modifying the required terminology. The District Court could decide to stay all, or part, of the rule or the statute. Any stay issued by the District Court could be quite narrow – e.g., relieving companies only of the obligation to use the specific term “not DRC conflict free.”

What is clear, despite some early reports, is that the conflict minerals rule — which is estimated to impact nearly 6,000 SEC-reporting issuers and their suppliers – still stands. This is not a “pencils down” moment for those required to make the necessary disclosures.

Foley Hoag Authors Good Practice Note on Indigenous Peoples’ Rights and Free, Prior, and Informed Consent

Indigenous handsThe U.N. Global Compact recently released a Good Practice Note on Indigenous Peoples’ Rights and the Role of Free, Prior, and Informed Consent (“FPIC”) authored by Amy Lehr, an associate in Foley Hoag’s Corporate Social Responsibility practice. The Note complements the U.N. Global Compact’s release of a longer Business Reference Guide to the U.N. Declaration on the Rights of Indigenous Peoples. 

The Good Practice Note identifies:

  • the business case for obtaining FPIC;
  • the challenges likely to arise in such a process;
  • current good practice; and
  • emerging practices.

The Good Practice Note builds on a longer report drafted by Ms. Lehr and Gare Smith, Chair of the firm’s Corporate Social Responsibility practice, that discusses corporate best practice with regard to the rights of indigenous peoples in more detail. 

The Note describes the legal basis for the standard of FPIC, as well as the frequent conflicts between states’ international commitments and their national regulatory requirements. Conflicts between national laws and host states’ international obligations have, in some instances, led to court decisions finding that the award of concessions to private companies violated governmental obligations. As a result, in certain jurisdictions, companies face potential legal risk if they or the host government fail to conduct robust consultation with indigenous communities or do not obtain consent in the context of determining whether to move ahead with certain commercial activities.

At the end of the day, the reasons for obtaining consent for projects go beyond legal risk. In order to obtain funding from investors such as the International Finance Corporation or the Equator Principles Financial Institutions, companies are expected to obtain FPIC. Unfortunately, the process and minimum depth of documentation required to demonstrate consent are less than crystal clear to date, which has deterred a number of companies from making such a commitment.

Obtaining FPIC can provide other material benefits. Companies that obtain FPIC through a well-documented process that meets international standards can know and show, not merely believe, that they have a social license to operate. This provides critical capacity to engage critics effectively, as companies can demonstrate that they followed an international best practice leading to explicit agreement from the affected indigenous peoples, rather than arguing that they believe they have broad community support due to a lack of open opposition.

As set forth in the Good Practice Note, companies should be aware that international standards call for consent processes to be:

  • Free: Companies should not place communities under duress, and should seek to prevent governments and local actors from doing so as well. They should seek to prevent the presence of public security in the vicinity of the indigenous peoples’ communities while a consent process is underway.
  • Prior: The exact time at which a consent process should occur is not completely clear. The U.N. Declaration on the Rights of Indigenous Peoples is often understood to call for governments to obtain consent before concessions are awarded, and certainly before exploration begins. The Inter-American Court on Human Rights has used a more subjective test to identify when consent is required.  It has called for consent for activities with “significant impact,” which it has ruled sometimes includes exploration. To be safe, companies that make a commitment to FPIC would be advised to obtain consent before exploration.
  • Informed: Companies should share with indigenous peoples the potential positive and negative impacts of a project in a format that is culturally appropriate.
  • Consent: Companies — or governments – should obtain consent in a written form, based on a process to which the indigenous peoples agreed and that incorporates traditional decision-making processes.  For companies, an inherent challenge is that a consent process might vary depending on the indigenous peoples involved and their decision-making traditions.

A copy of the Good Practice Note is available here.

Mandatory Social and Financial Reporting: Coming Soon to the European Union

Flag_of_Europe.svgCorporate social responsibility (“CSR”) may have its roots in voluntary efforts by businesses to address their broader impacts on society, but the trend towards CSR becoming mandatory advanced significantly this week under a deal that will soon require all large European companies to begin issuing annual social and environmental performance reports.

On February 26, the European Council and the European Commission reached an agreement that all but guarantees that the forthcoming European directive on corporate social responsibility will require all publicly traded companies with more than 500 employees to report their performance on a number of non-financial metrics every year.

Specifically, companies will be required to provide “relevant and useful information” concerning their human rights impacts, environmental performance, anti-corruption measures, and diversity programs in their annual reports. Such reports are to be based on recognized CSR frameworks such as the U.N. Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

The new European Union reporting requirements may not go quite as far as some activists had been hoping, but they nevertheless mark the most significant effort to date to mandate non-financial reporting on companies across all sectors of the economy. Most prior efforts to mandate non-financial reporting have concerned either a particular form of economic activity (such as the Dodd-Frank conflict minerals rule in the United States) or have consisted of purely national efforts (such as Denmark’s 2008 Financial Statements Act).

It is not entirely clear yet whether the new reporting requirements will apply only to large companies listed on EU stock exchanges, or if they will apply to all publicly traded companies with more than 500 European employees. If the latter comes to pass, the new EU rules will require practically all large multinationals to begin issuing social and environmental performance reports on an annual basis.

Either way, the new EU rules are an important development for at least three related reasons:

  • First, the reporting requirement will force companies that haven’t already done so to start paying close attention to the social and environmental impacts of their business — if only because they will soon have to quantify and disclose such impacts.
  • Second, once companies are aware of their relatively poor performance, the new reporting rules provide a powerful incentive to improve such performance to avoid the negative publicity associated with publicly disclosing such facts.
  • Third, the wealth of information provided by the new reports will allow socially responsible investors and activist groups to bring various forms of pressure to bear on companies whose reports show them to be laggards rather than leaders.

Yaiguaje v. Chevron: Blurring the Lines between Parents and Subsidiaries in Ontario

GavelA recent ruling by Ontario’s highest court clarifying the law governing the enforcement of foreign judgments may turn Canada’s most populous province into an attractive forum for plaintiffs seeking to collect on judgments against multinational corporations.

On December 17, the Ontario Court of Appeal overturned a stay issued by the Ontario Superior Court of Justice in an enforcement action brought against Chevron and its Canadian subsidiary by a group of Ecuadorian plaintiffs. The plaintiffs has previously won a $9.5 billion judgment in Ecuador in a long-running environmental dispute. The decision by the Court of Appeal allows the Ecuadorian plaintiffs to continue litigating the question of whether they should be able to seize Chevron Canada’s assets in satisfaction of the judgment they won in Ecuador, although Chevron and its Canadian subsidiary have until February 18 to file an appeal with the Supreme Court of Canada.

Before both courts, Chevron argued that absent a “real and substantial connection” between the company and the province, the Ontario courts could not exercise jurisdiction over it. The company posited that no such “real and substantial connection” existed because it neither did business in Ontario nor owned any assets there. Chevron Canada, meanwhile, argued that the Ontario courts lacked jurisdiction despite its presence in Ontario as it had not been properly served in the case.

The Superior Court rejected all of these jurisdictional arguments, but it nevertheless stayed the enforcement action against the parent and its subsidiary because (1) Chevron itself had no assets in Ontario and (2) Chevron Canada’s assets and activities in Ontario could not be attributed to Chevron unless the plaintiffs successfully demonstrated that the subsidiary was the “alter ego” of the parent.

In an unanimous ruling, the Ontario Court of Appeal found that the Superior Court lacked the statutory authority to stay the proceedings and deny the Ecuadorian plaintiffs the “opportunity to attempt to enforce the Ecuadorian judgment in a court where Chevron will have to respond to the merits.” More significantly, however, the Court of Appeal ruled that jurisdiction over Chevron could be founded on the “economically significant relationship between Chevron and Chevron Canada” even though Chevron Canada is a seventh-level indirect subsidiary of Chevron.

In reaching this jurisdictional conclusion, the Court of Appeal found it significant that “Chevron’s income is wholly derived from indirect subsidiaries” and that “Chevron guarantees the debt of its indirect subsidiaries.” The Court was quick to note that this did not mean that Chevron Canada’s assets could necessarily be used to satisfy the Ecuadorian judgment against Chevron, but it left this issue to be decided by the Superior Court at trial.

The Ontario Court of Appeal’s ruling makes it much easier for plaintiffs who win large judgments against multinational corporations in jurisdictions where the corporation has few assets to seek the enforcement of such judgments in Canada’s most populous province. In most common law jurisdictions, corporate parents and subsidiaries are assumed to be entirely separate entities for jurisdictional purposes, unless the parent exercises such “domination and control” over the subsidiary as to render it its alter ego.

Indeed, just last month, the Supreme Court of the United States ruled that jurisdiction in California could not be founded over the German automaker Daimler AG based on the activities of its third level subsidiary, Mercedes Benz USA, even though the subsidiary’s sales in California alone account for nearly three percent of Daimler’s global business. By contrast, Chevron Canada has but one office with 13 employees in Ontario, yet this was sufficient to support a finding of proper jurisdiction over the parent company in Ontario.

In view of the opposite directions that courts in Canada and the United States seem to be heading on jurisdictional questions concerning corporations with complex structures, plaintiffs seeking to enforce on foreign judgments may well be seen heading north with increasing frequency in the future.

Categories: Human Rights, Litigation Comments Trackbacks

Protests Against Surveillance and New Rules on Transparency

Protection concept: circuit board with Closed PadlockToday, February 11, is a digital day of protest against surveillance by the National Security Agency. Billed ‘The Day We Fight Back“, participants in the protest range from activist groups to the Reform Government Surveillance Coalition, an business entity which includes Google, Microsoft, LinkedIn, Twitter, Facebook, Yahoo!, and AOL. Protesters’ demands include Congressional support for the Freedom Act, proposed legislation which would limit the collection of Americans’ data under existing surveillance statutes.

Corporate participation in this protest highlights a key challenge facing Internet companies today. Companies must comply with lawful requests from governments for access to user data. At the same time, companies must also build and maintain the trust of their users by operating as responsible stewards of that data. When companies are restricted with regard to what they can say about national security requests received from the U.S. Government, they face the challenge of earning trust without being transparent. In this context, establishing credibility requires active and continued efforts to engage proactively with users and other stakeholders, including policymakers, regarding what can — and cannot — be said.

Several companies – including Google, Microsoft, Yahoo!, Facebook, and LinkedIn — have sought to reduce the extent of the U.S. Government’s non-disclosure requirements through motions for declaratory relief filed with the Foreign Intelligence Surveillance Court. In January, in response to these petitions, the U.S. Department of Justice released new rules with regard to disclosures of national security requests, and the companies agreed to dismissed their claims, without prejudice.

Historically, companies have been prohibited from providing any information regarding requests received pursuant to U.S. national security laws. Pursuant to the new rules, companies may disclose at six-month intervals, and in bands of 1000, the following information:

  • the number of national security letter requests that they have received;
  • the number of customer accounts affected by national security letters;
  • the number of Foreign Intelligence Surveillance Act (“FISA”) orders for content that they have received;
  • the number of customer selectors targeted under FISA content orders;
  • the number of FISA orders for non-content that they received; and
  • the number of customer selectors targeted under FISA non-content orders.

Alternatively, companies can disclose, in bands of 250:

  • the total number of all national security letter and FISA requests received; and
  • the total number of customer selectors targeted by national security letter and FISA requests.

Since the new rules were released, several companies have updated their transparency reports with regard to government requests for user data. For example, for the period January to June 2012, Google stated that it received between 0-999 requests under FISA for content data that involved 9000-9999 user accounts. For the same period, LinkedIn stated that it received 0-249 national security requests involving 0-249 user accounts.

Notably, the new rules maintain restrictions on what can be said with regard to new platforms, products, or services.  Requests specific to a new platform, product, or service cannot be disclosed for two years.

Ultimately, these disclosures represent greater — but still significantly limited — transparency, and at least one company, Twitter, has stated that it may pursue further legal action seeking reduced restrictions. Ultimately, these new rules alter, ever so slightly, the platform for debate regarding the balance that must be struck between civil liberties and national security. Companies are an essential participant in that dialogue as they navigate both compliance challenges and the need to respect the privacy rights of their users.

After the Super Bowl: Human Trafficking Occurs More Than Once a Year

stadium in lights and flashesOver the past week, significant attention has been paid to the risks of sex trafficking associated with the Super Bowl. Law enforcement resources were dedicated to identifying traffickers and ensuring that services are available for victims, and companies in both the airline and hotel industries took action to ensure that their facilities were not used to facilitate trafficking activities.

All of these actions are laudable, but it is important to ask: what happens after the Super Bowl?

Several commentators have noted the risks of focusing too much attention on the trafficking risks associated with a single event when, in reality, trafficking occurs every day throughout the United States and abroad. To address the problem in a meaningful way, it is important to focus both public and private attention on the larger systemic issues at hand.

To be sure, large sporting events like the Super Bowl have been shown to foster criminal activity including sex trafficking. At a Congressional hearing on January 27, Rep. Chris Smith (R-N.J.) noted specific efforts that are being taken to address trafficking in connection with the 2014 World Cup and the 2016 Summer Olympics. Notably, the trafficking risks associated with such events include both sex trafficking and labor trafficking. Corporations linked to such events, including sponsors, hospitality industry companies, and construction firms should take action to mitigate the risk that human trafficking will occur in connection with their activities.

Beyond large-scale events, trafficking exists on the margins of many other business activities. A recent NPR piece noted that sex trafficking has increased in North Dakota, alongside the growth of the state’s oil fields and population. Another recent article, in the Wall Street Journal, highlighted the risks of labor trafficking in industries ranging from electronics to agriculture.

Companies are increasingly being asked to report on their efforts to address the risks of trafficking in connection with their corporate supply chains. The Wall Street Journal article cited above noted that the reporting requirements of the California Transparency in Supply Chains Act have pushed companies to conduct more thorough due diligence regarding the trafficking risks in their supply chains. The Executive Order Strengthening Protections Against Trafficking in Persons in Federal Contracts has been another driver for corporate efforts to address the risks of both sex and labor trafficking.

In this context, what actions can companies taken to address the potential that their operations may be linked to human trafficking? Companies should consider:

  1. Conducting due diligence to evaluate the risks of human trafficking associated with the company’s operations, including its supply chain. This due diligence could include an evaluation of the relative risk level of the countries in which the company has direct operations or suppliers. This due diligence could be integrated with other due diligence efforts, including due diligence with regard to corruption-related risks.
  2. Developing stand-alone policies and standards on human trafficking, or ensuring that prohibitions on human trafficking are incorporated into existing human rights policies and standards.
  3. Ensuring that prohibitions on human trafficking and forced labor are included in contractual requirements for contractors and suppliers.
  4. Providing training to managers and employees on how to identify and report indicators of human trafficking and forced labor.
  5. Identifying and engaging with relevant industry initiatives and other potential partners that can provide critical support for company training and risk assessment efforts.