SBA rightly denied loans to strip clubs, magistrate indicates

SAN FRANCISCO -- The U.S. Small Business Administration can bar certain businesses from receiving emergency federal loans during the COVID-19 pandemic as long as it does so based on content and not to advance a particular perspective, a Justice Department attorney told a U.S. magistrate Thursday.

James Giligan argued 15 strip clubs in California, Nevada and Washington were not discriminated against when they did not receive loans under the Paycheck Protection Program because they were ineligible under a rule excluding businesses that present live performances or sell products of a "prurient sexual nature."

"The government is entitled to make funding choices," he said.

Despite rulings from two federal judges going the other way in identical lawsuits, U.S. Magistrate Judge Laurel Beeler said she is inclined to agree with the agency's interpretation of its powers.

Plaintiffs seek a temporary restraining order to access the aid. They alleged violations of the First Amendment free speech and freedom of association protections and the Fifth Amendment equal protection and occupational liberty rights. Deja Vu-San Francisco LLC v. United States Small Business Administration, 20-cv-03982 (N.D. Cal., filed June 15, 2020).

Representing the strip clubs during the Thursday Zoom video hearing, Michigan attorney Bradley Shafer said the Small Business Administration is restricting speech by choosing which businesses to support.

Beeler pushed back on Shafer's characterization. The government is arguing businesses can express their views but it's not obligated to fund them, the judge said.

Shafer responded that favoring certain types of speech is the same as suppression. "You have to be neutral in the marketplace of ideas," he said.

Providing what he called the "boots on the ground" perspective, fellow plaintiffs' attorney Douglas Melton argued Congress intended the Coronavirus Aid Relief, and Economic Security Act to be blind in which speech it supports. It was meant, he said, to rescue businesses.

"This isn't about speech but about whether almost 500 jobs will stay intact when this is over," the Long & Levit LLP attorney said.

But Giligan argued the federal agency's "prurient" standard is neutral, because it "doesn't single out viewpoints for discrimination."

For example, he said, a nonprofit distributing videotapes of a sexual nature to heighten awareness of wanton sexuality would not be entitled to a loan. An author writing fiction of a sexual nature to highlight the dangers of prostitution, he continued, would similarly be prohibited.

"It's not the perspective but the content," he summarized.

Giligan emphasized the distinction in cases in which the government is challenged as a regulator of speech and those in which it's challenged as a funder of speech.

"This case falls into that latter side," he said.

Regardless of the legality of the "prurient" rule, Giligan claimed plaintiffs would still be ineligible for the loans since they are under a larger business, Deja Vu, that has more than 500 employees. He asked for a pause in proceedings to determine whether they would qualify.

"The whole point of a preliminary injunction is to do it as fast as possible," Beeler replied. "I don't know if the $10 billion [in the program will even last that long."

Courts have split on the Small Business Administration's authority on the issue.

Federal judges in Wisconsin and Michigan ordered the government to make the loans available to strip clubs. One wrote that Congress did not intend for "certain forms of small businesses to be less deserving of the government's 'limited resources' than others."

A federal judge in New York denied a strip club a preliminary injunction in June, finding the government can make "content-based distinctions when it subsidizes speech."