If you were waiting for legal clarity on the demands of the Securities and Exchange Commission's conflict minerals rule to come from the courts, a ruling issued this week didn't help much. For all involved, it was “win some, lose some.” While a federal appeals court upheld several key elements of the rulemaking, required by the Dodd-Frank Act, it struck down – for now, at least – a key disclosure requirement.

What happens next is in the hands of a lower court now. The big question, in the meantime, is what companies should do now faced with legal uncertainty and a fast-approaching SEC deadline?

What Happened?

The contested rule, mandated by Section 1502 of Dodd-Frank, applies to the mining of tin, tungsten, tantalum, and gold in war-torn Central Africa that is considered a source of funding for militant groups. In October 2012, the National Association of Manufacturers and U.S. Chamber of Commerce sued to stop it.

The ruling authored by the Senior Circuit Judge Raymond Randolph, expressing the majority opinion of a three-judge panel at the U.S. Court of Appeals for the District of Columbia, said the plaintiffs were correct to claim that an SEC requirement that companies report products that contain conflict minerals is unconstitutional compelled speech. The court agreed, with strong words: “The label conflict free is metaphor that conveys 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…By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.”

The SEC, however, prevailed with its defense of the cost-benefit analysis that accompanied the contested rulemaking, with the court dismissing claims the process lacked proper due diligence. The court also took no issue with the SEC's decision not to establish a de minimis threshold, nor its requirement that products a company contracts to another to manufacture are covered by the rule.

What's Next?

The rule will now be sent back to a lower court for a review of whether the SEC's rulemaking, or language in the Dodd-Frank statute itself, is at the root of the free speech conflict. It is unclear how the SEC would proceed based on that determination. “The full implications of this are not known as of today because there are a number of steps that might occur and we don't know which of those will,” says Dynda Thomas, a partner with the law firm Squire Sanders.

Among the possible scenarios: the petitioners could seek a stay of the implementation of the rule in order to push these required filings beyond the June 2 deadline for filing their Form SD and Conflict Minerals Report (the SEC deadline falls on a weekend, so issuers get a 48-hour reprieve); the SEC could appeal the decision; the Commission could issue guidance confirming that it expects companies to file their required disclosure except for the specific product descriptions that drew judicial rebuke; the plaintiff's could appeal those aspects of the SEC rulemaking that were not invalidated; or, the case could eventually wind its way to the Supreme Court.

What's Next for Your Company

Thomas expects that most businesses will opt to declare they are “uncertain” whether the verboten minerals are contained in their products, taking advantage of a one-year grace period the rule provides ahead of a future yes/no declaration. Companies will need to keep from making rash decisions in the meantime. “[The ruling] does run the risk or providing a distraction for companies when really they need to be pushing hard to finish the work they are doing,” Thomas says. “Many of them are working really hard right now and we certainly don't want this ruling to distract them from this important work.

No matter what happens in courtrooms, some form of the rule will likely prevail, Thomas says. “The underpinnings of the congressional statute remain except for that reporting and product description element that was struck down,” she explains. “The statutory directive remains, that has not changed.” The growing list of similar regulations internationally, and pressure from industry groups, activists, and consumers, means that conflict minerals will remain an unavoidable concern.

A similar view was expressed in a client advisory  from law firm Baker & McKenzie. “The decision does not necessarily prevent the SEC from continuing to require reporting by companies going forward, with the exception of the requirement that companies designate products as ‘not DRC conflict free' if their diligence led to such a finding.  We expect the SEC to clarify the impact on 2014 filings in the near future. Pending any additional SEC guidance, companies subject to the rule should assume that the June 2 filing deadline will remain in effect.”

The SEC has yet to issue a formal response that outlines how it will proceed, although it is expected there will be interim guidance.

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