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Future of Country of Origin Labeling Rule Remains Uncertain Despite Court Validation

Future of Country of Origin Labeling Rule Remains Uncertain Despite Court Validation

Roger A. McEowen and Kristine A. Tidgren

August 1, 2014

American Meat Institute v. United States Department of Agriculture, No. 13-5281, 2014 U.S. App. LEXIS 14398 (D.C. Cir. Jul. 29, 2014)

Overview

While the question remains pending before the World Trade Organization (WTO)[i]as to whether a 2013 United States Department of Agriculture (USDA) country-of-origin labeling (COOL) rule violates the United States’ WTO commitments, the United States Court of Appeals for the District of Columbia has upheld the constitutionality of the rule and denied an injunction stopping enforcement of the rule. Nonetheless, its future remains uncertain.

Country-of-Origin Rule History

Congress first codified the COOL requirements as part of the 2002 Farm Bill and tasked the USDA with implementing the law. Rules that first went into effect in 2009 required meat to be labeled with its country of origin. The label, however, allowed for “commingling” of countries, meaning that if the animal had been born in Canada, yet raised and slaughtered in the United States, the label could read simply, “Product of the United States and Canada.”

WTO Challenge

Canada and Mexico challenged the rules before the WTO, arguing that they violated WTO commitments agreed to by the United States by treating imported meat less favorably than domestic meat. Canada specifically argued that the costs of the labeling laws were onerous and that they reduced the demand for Canadian exports because to comply with the labeling requirements, American processors were required to separate and then slaughter Canadian animals apart from U.S. animals. Consequently, Canada argued that the U.S. demand for Canadian livestock had dwindled.

The WTO dispute settlement panel found that the rule violated the WTO Agreement on Technical Barriers to Trade, treating imported livestock less favorably than domestic livestock. It also found that the rules failed to meet the legitimate objective of providing information to consumers on the origin of meat products. The United States appealed the ruling, and the WTO’s Appellate Body upheld the panel’s ruling that the COOL provisions treated imported livestock less favorably than like domestic livestock. The Appellate Body, however, reversed the panel’s finding that the rules did not completely fulfill its legitimate objective to provide consumers with information on origin. The WTO’s Dispute Settlement Body (DSB) adopted the ruling, and the United States became bound by the determination. In making its ruling, the DSB did not state what the United States must do to fully comply with the decision, but it did give the United States until May 23, 2013, to comply.

New COOL Rules

The USDA, contending that the WTO ruling affirmed its right “to require country of origin labeling for meat products,” responded to the decision by releasing a new proposed COOL rule on March 12, 2013. After a 30-day public comment period, it published the final rule in the Federal Register on May 24, 2013. That same day, the United States informed the WTO DSB that it had brought its rule into compliance with WTO findings. The rule went into effect six months later.

Interestingly, rather than lessening regulatory requirements, the new rule imposed more stringent labeling requirements than the first rule. The new rule eliminated the flexible commingling approach and instead required labels to inform consumers of the specific location of where the livestock was born, raised, and slaughtered. A prior label that could have read, “Product of the United States and Canada,” would under the new rule state, “Born and Raised in Canada, Slaughtered in the United States.” The born, raised, and slaughtered requirements unquestionably impose even greater costs on processors than the prior rules.

The USDA argued that the new rule complied with WTO guidance because it addressed the WTO’s concern that under the original rule recordkeeping costs were disproportionate to the information conveyed by the labels. By increasing the amount of information required on the labels, the USDA asserted that it had brought the rule in compliance. Opponents—including Canada and Mexico—strongly disagreed, arguing that the new rules are even more discriminatory to foreign livestock, which was the WTO’s overarching concern. In August of 2013, Canada and Mexico requested that a WTO Compliance Panel determine whether the new rule complies with WTO obligations. In late June of 2014, the Compliance Panel issued a confidential report to the three parties. After a period for comment, the final report will be made public. Although U.S. officials have declined to comment publicly, Canadian officials have suggested that the report is favorable to their side. If the final report determines that the COOL rule is not compliant with WTO obligations, the United States could face retaliatory tariffs for their exports to Canada and Mexico. By some estimates, damages could reach between $1 billion and $2 billion. Arbitration would no doubt ensue.

Court Challenge

While Canada and Mexico have been challenging the rule through the WTO dispute process, the meat industry has been challenging the rule in the courts. The lawsuit, filed July 8, 2013, by eight groups representing meatpacking and processing industries from North America, alleged that the rule violated the First Amendment by compelling commercial speech without a substantial governmental interest. The plaintiffs sought to enjoin implementation and enforcement of the rule, which they alleged imposed onerous costs and burdens not justified by mere “consumer curiosity.” The United States District Court for the District of Columbia and a three-judge panel from the United States Court of Appeals for the District of Columbia rejected the claims. After agreeing to hear the case en banc, the full U.S. Court of Appeals for the District of Columbia affirmed.

The en banc panel found that the new COOL rule passed constitutional scrutiny, noting that the COOL legislation was similar to other labeling legislation such as the Wool Products Labeling Act of 1939, the Textile Fiber Products Identification Act of 1960, the American Automobile Labeling Act of 1992, and many other laws and regulations that require country of origin labeling for various products. In its 9-2 ruling, the court found that the case was governed by the principles that the U.S. Supreme Court set forth in Zauderer v. Office of Disciplinary Co., 471 U.S. 626 (1985). In Zauderer, the Supreme Court had upheld discipline imposed upon an attorney for failing to disclose in his advertising information regarding a client’s liability for litigation costs. The Court held that while disclosure requirements did implicate the First Amendment, an advertiser’s rights were adequately protected as long as disclosure requirements were reasonably related to the State’s interest in preventing deception of consumers. In other words, where the State interest was to protect consumers from deception, the State would only need to show that the disclosure requirements were reasonably related to that interest. The Court in Zauderer distinguished its facts from those in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York, 447 U.S. 557 (1980), where the Court had ruled that commercial speech that was not deceptive or misleading could only be restricted in the service of a substantial governmental interest, and only through means that directly advanced that interest. While Central Hudson required the regulation to be narrowly tailored to advance the interest (in practice, the Central Hudson rule is often characterized as intermediate scrutiny), Zauderer appeared to require only a rational basis for the rule.

The en banc panel found that the holding of Zauderer reached “beyond problems of deception, sufficiently to encompass the disclosure mandates at issue.” The court focused on the Supreme Court’s language acknowledging "material differences between disclosure requirements and outright prohibitions on speech.” The court stated that under Zauderer, a speaker’s interest in opposing forced disclosure of “uncontroversial” and “factual” information was "minimal." The court also stated that to the extent other cases within its jurisdiction limited Zauderer to cases in which the government points to an interest in correcting deception, those cases were overruled.

Substantial Interest

Unfortunately, the court’s application of Zauderer was less than clear .The court first analyzed the adequacy of the interest “motivating the labeling scheme” and found that giving consumers information with which they could make informed choices was an adequate State interest going beyond merely satisfying consumers’ “idle curiosity.” In an interesting twist, the court stated that although the agency had clearly stated during rulemaking that COOL rules were not about health and safety, the legislative history behind the rules demonstrated that one of the purposes of the law was to allow consumers to know whether the United States had at all times supervised the safety and hygiene of the products being labeled. The court stated that it did not want “perfectly adequate legislative interests properly stated by congressional proponents” to be “doomed by agency fumbling.” Rather than “fumbling,” the agency was likely intentionally careful to avoid stating positions that would hinder its WTO position. Looking beyond the agency’s own assertions and combing through legislative history on its own was an unusual move by the court (a move that the dissent harshly criticized). The court noted that Zauderer gives little indication of what type of interest might suffice and that it was not clear whether Zauderer would permit government reliance on interests that do not qualify as substantial under Central Hudson, a standard the court called “elusive.” Nonetheless, the court concluded without analysis that the interest motivating the rule (providing information to consumers) and promoting the U.S. livestock industry (as pointed out by a concurring opinion) was a substantial one. What remains elusive is exactly how the court made that determination.

Means / Ends Relationship

The waters became even murkier when the court turned to the second phase of the required analysis: assessing the relationship between the government’s identified means and its chosen ends. The court stated that under Central Hudson, a court must determine whether the chosen means "directly advance the state interest involved" and whether they are “narrowly tailored to serve that end.” The court then stated that Zauderer’s method of evaluating fit differs in wording, though perhaps not significantly in substance.

The court reasoned that “Zauderer, like the doctrine of res ipsa loquitur (Latin for “the thing itself speaks”), identifies specific circumstances where a party carried part of its evidentiary burden in a way different from the customary one.” In res ipsa loquitur, a plaintiff proves negligence by meeting the specified criteria (such as proving the defendant’s exclusive control over the agency causing the injury). Under Zauderer, the court found that by acting only through a “reasonably crafted disclosure mandate,” the government could meet its burden of showing that the mandate advances its interest by making the "purely factual and uncontroversial information" accessible to the recipients. To match Zauderer logically, the court stated that the disclosure mandated must relate to the good or service offered by the regulated party. The court stated that this particular method of achieving a government interest “will almost always demonstrate a reasonable means-ends relationship, absent a showing that the disclosure is unduly burdensome in a way that chills protected commercial speech.” Because under the court’s purported standard no further analysis is required, the court sustained the COOL rule which it found compelled only “purely factual and uncontroversial information.” There was apparently no need to further consider whether the COOL rule was—as Zauderer required—a “reasonably crafted disclosure mandate.”

Dissent

In a stinging dissent, Circuit Judge Brown stated, “A business owner no longer has a constitutionally protected right to refrain from speaking, as long as the government wants to use the company’s product to convey ‘purely factual and uncontroversial’ information.” The justice continued, “But, tossing aside longstanding administrative law principles is only the beginning of the lengths to which the court goes to bust the mainspring of commercial speech jurisprudence. What began as robust protection from government coercion has now been reduced to an eerie echo of a supermarket tabloid’s vacuous motto: the government may compel citizens to provide, against their will, whatever information "[i]nquiring minds want to know!" Judge Brown concluded her dissent by stating, “AMI’s counsel began the en banc argument by positing an absurdity no sensible court could countenance—that Zauderer somehow permits the government to compel speech based on ‘any interest, no matter how articulated, no matter how speculative.’ Today, the court’s commitment to country-of-origin labeling leads it to willfully distort the fundamental holding and limitations of Zauderer and a virtually unbroken line of Supreme Court precedent to do exactly that—a perniciously Procrustean solution that hacks the First Amendment down to fit in the government’s hip pocket. I will not join the carnage.”

Conclusion

Given the sweeping language of the en banc panel’s opinion, it is difficult to imagine that businesses in the D.C. Circuit retain any Constitutional protection against government-compelled disclosure of anything the government deems to be “factual and uncontroversial.”

Regardless of whether the COOL rule violates the meat processors’ First Amendment rights, the court opinion offers little support for its position that it does not. This decision does not provide a clear analytical framework under which courts can decide future compelled speech cases. Rather, it appears to offer several conclusory principles. First, if the commercial speech is “factual and uncontroversial,” the government will have a substantial interest in requiring the disclosure of that information by stating that “consumers want to know that information.” No detailed analysis or evaluation of that interest or of the true value of the disclosed information to consumers will be required. Second, with the substantial interest in tow, the government can establish a reasonable means-ends relationship simply by showing that the disclosure relates to goods or services offered by the business. No doubt, this truism will never create an obstacle.

Should the government be the author of companies’ communications to their customers? If a company’s existing communications are deceptive or the product potentially harmful in the absence of certain disclosures, the government interest would clearly trump an asserted First Amendment right to be silent. If, however, the government interest is merely to provide interesting information to consumers, First Amendment protections should kick in. The government interest in this case seems to lie somewhere in between. While not clearly articulated by the court, the legislative history of the COOL law reveals that the main purposes of the law were to assure consumers of their food safety, to favor American producers, and to prevent consumers from believing that all meats bearing a USDA label were U.S.-produced. In any event, if consumer demand for information is indeed great, the marketplace will demand that the companies provide it. That’s the case where consumers have full and accurate information about the products at issue. Arguably, that wasn’t satisfied with respect to the manner in which meat products were labeled before the COOL requirements. Thus, the marketplace couldn’t send appropriate signals to consumers. However, First Amendment protections are trampled when the government is allowed to rewrite a company’s marketing plan. The imprecision of the en banc panel’s opinion rolls out the carpet for trampling in future cases. For instance, there is now speculation that the recent conflict minerals case in which a panel from the D.C. Circuit overturned Securities and Exchange Commission (SEC) disclosure rules as impinging companies’ First Amendment rights will be reviewed en banc and overturned in light of the en banc panel’s COOL decision. The SEC case is Nat’l Ass’n of Mfrs. v. SEC, 748 F.3d 359, 2014 U.S. App. LEXIS 6840, 44 Envtl. L. Rep. 20087, Fed. Sec. L. Rep. (CCH) P97924 (D.C. Cir. 2014).

Although the en banc panel’s decision is important for the First Amendment law it now imposes upon the D.C. Circuit, it may have less impact on the future of the COOL rule at issue. It appears likely that the rule will fail WTO scrutiny (at least in part) and that further revisions will ensue. The fear of WTO fall-out is probably the reason why the USDA, in the litigation, did not vigorously argue that it had a clear interest in supporting the U.S. livestock industry. This is a point the dissent hammered home when stating, “There is no limiting principle for such a flimsy interest as the government asserted in this case.” Similarly, one of the judges that concurred in the majority opinion wrote separately to state that the majority opinion was unclear and “could result in confusion unless the Supreme Court clears things up.”

After reading this case, we could all use some clarity.