Three justices from the Seventh Circuit Court of Appeals — one Reagan appointee, one George H.W. Bush appointee and one Obama appointee — squashed the SBA and PPP loans that had previously been approved for adult nightclubs.
These justices ruled on Wednesday, January 26, that the federal government is within its discretion to deny pandemic relief funds to strip clubs, vacating a previous district court decision that ruled in favor of the clubs.
The disputed relief funds were earmarked in the 2020 CARES Act passed by former President Trump’s administration at the onset of the Covid-19 pandemic. The CARES Act included the Paycheck Protection Program, or PPP, which provided businesses with loans backed by the U.S. Small Business Administration, which could be forgiven if the money was used to cover payroll, rent and certain other expenses. The program ended in May 2021.
Three Milwaukee strip clubs and one in Middleton, Wisconsin, sued in April 2020 after they were denied PPP loans due to a 1996 rule that boxes out “businesses that present live performance of a prurient sexual nature” from such SBA programs. (Note: This claim that clubs provide entertainment of a “prurient sexual nature” has also been an issue that the clubs have argued against.) U.S. District Judge Lynn Adelman of the Milwaukee federal court quickly ruled in the clubs’ favor, finding that denying them loans because of the sexual nature of their businesses probably violated their First Amendment free speech rights.
“The problem with plaintiffs’ First Amendment claim and the preliminary injunction here is that Congress is not trying to regulate or suppress plaintiffs’ adult entertainment. It has simply chosen not to subsidize it. Such selective, categorical exclusions from a government subsidy do not offend the First Amendment.” – Justice David Hamilton
When the SBA approved more PPP loans amid the ongoing pandemic for businesses that did not get any funds the first time or those that used up their initial funds and needed a second draw, a new complaint was filed by dozens of strip clubs nationwide who were denied second-draw loans, and Adelman again ruled in their favor.
The government appealed and the issue was argued before the aforementioned Seventh Circuit panel in November. The strip clubs, led by industry attorney Brad Shafer, made the case that the SBA was still violating their rights to free speech by denying them the loans, while the government countered it was not punishing the clubs’ free speech but just deciding not to subsidize it.
Seventh Circuit justice David Hamilton pointed out that the clubs were not the only businesses excluded from the PPP loan program. Other excluded businesses included banks, lenders, private clubs, life insurance companies, and political lobbyists and consultants.
The judge further suggested that businesses engaged in political or lobbying activities “are much closer to the core of the First Amendment than the dances at plaintiffs’ bars and clubs,” but “Congress still chose not to require taxpayers to subsidize them” and there is no constitutional basis to do so if there is no viewpoint discrimination.
“The problem with plaintiffs’ First Amendment claim and the preliminary injunction here is that Congress is not trying to regulate or suppress plaintiffs’ adult entertainment. It has simply chosen not to subsidize it. Such selective, categorical exclusions from a government subsidy do not offend the First Amendment,” Hamilton said.