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How to Fight Conflict Minerals? Mandatory Disclosure.

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “The World According to Star Wars” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”
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At least in theory, one of the best ways for Congress to protect consumers and investors is by requiring companies to disclose information. Credit card providers must inform you about potential late fees; new cars are sold with fuel-economy stickers; calorie labels are being required at chain restaurants. The Consumer Financial Protection Bureau even has a slogan, which orients much of its work: Know Before You Owe.

Last August, an unreasonably aggressive ruling from a three-judge panel of a federal court of appeals cast doubt on the constitutionality of such disclosure requirements. The full court is now deciding whether to review the panel’s decision. If it refuses to do so, the Supreme Court should intervene.

The case involves a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has a humanitarian purpose. Some minerals are sold to finance war -- thus fueling catastrophe. In response, Congress directed companies to be transparent about any use of such “conflict minerals” in their products.

To implement the law, the Securities and Exchange Commission issued a regulation requiring companies to conduct a “reasonable country of origin inquiry” to determine if their products contain conflict minerals. If they do, companies must inform the public about those products on an SEC website.

In striking down the regulation, the court of appeals acknowledged that the Supreme Court has given the government a lot of room to require companies to disclose “purely factual and uncontroversial information.” But it announced that this principle applies only when the government mandates disclosure in an advertisement or a product label at the point of sale.

Apparently the court thinks it's harder to invoke the goal of consumer protection when advertisements or labels are not involved, and so public officials must meet a very high burden of justification. In particular, they must produce convincing evidence that disclosure will have a beneficial impact. For conflict minerals, Congress held no hearings, and the SEC conceded that it could not quantify any benefits from forced disclosure.

The court added a second objection. In its view, labeling a product as “not conflict-free” is hardly factual and non-ideological. That very label “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.” In the court’s view, the government cannot force companies to taint their own products in that way.

But the Supreme Court has never endorsed this understanding of the Constitution, and it shouldn’t. Does the lower court really want to transform the free speech principle into a kind of all-purpose weapon against disclosure requirements imposed on American companies, authorizing unelected judges to make their own independent judgments about tough empirical questions?

It’s odd to say that Congress has a lot of room to protect consumers and investors by requiring disclosures in connection with advertisements and product labels, while denying Congress that authority when it seeks to inform consumers and investors on publicly maintained websites.

The goal of the conflict minerals law is simple: to inform people that certain products may be helping to finance a war. As Judge Srikanth Srinivasan emphasized in his powerful dissent, the law is meant to promote peace and security in the Democratic Republic of the Congo, “by reducing funding to armed groups in the DRC region from trade in conflict minerals” (his emphasis).

In the face of horrible conflict in that region, the law gives manufacturers an incentive to reduce their reliance on conflict minerals -- and simultaneously enables investors and consumers to bring pressure to bear on manufacturers. Congress’s expectation is that companies will be less likely to use conflict minerals and thus cut their financial support for armed groups. Whether or not it’s proved right, that expectation is reasonable enough.

The free speech principle is designed, above all, to ensure that We the People can govern ourselves. When Congress increases the flow of information by requiring companies to disclose information, courts should be reluctant to stand in its way.

The potential implications of the court’s ruling are far-reaching. Fuel economy labels must contain information about greenhouse gas emissions. Climate change is of course controversial. Are fuel economy labels now unconstitutional, because they force sellers to “taint” their own products?

Under the Occupational Safety and Health Act, employers have long been required to provide safety warnings for employees. Does this requirement invade freedom of speech, because advertising and labels aren't involved?

If you look at your credit card bill, you’ll immediately find a lot of disclosures, and some of them are mandated by law. Is that a constitutional problem, because bills are not product labels?

To be sure, the Supreme Court has struck down some restrictions on commercial advertising, especially when public officials try to deprive consumers of information -- as, for example, by banning advertisements about prescription drugs. At the same time, the high court has been careful not to forbid the government from using disclosure as a regulatory tool.

The conflict minerals ruling is an unjustified intrusion into Congress’ legitimate domain. It should not be allowed to stand.

(Corrects headline and third paragraph to remove reference to diamonds, which aren't covered by the regulation.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Cass R Sunstein at csunstein1@bloomberg.net

To contact the editor responsible for this story:
Christopher Flavelle at cflavelle@bloomberg.net