Legally Speaking: Seventh circuit reversal on PPP loans — it ain’t over till it’s over

In April 2021, Shafer & Associates, in conjunction with four other law firms, filed suit in the U.S. District Court for the Eastern District of Wisconsin on behalf of 52 clubs and related entities challenging the Small Business Administration’s (SBA) decision denying clubs access to Second Draw Paycheck Protection Program (“2dPPP”) loans. SBA based its decision on what we call the “Prurience Regulation,” which considers businesses that “present performances of a prurient sexual nature” ineligible for SBA funding.

Despite numerous courts enjoining SBA from using the “Prurience Regulation” in First Draw PPP loans, SBA took the position that because Congress incorporated the Prurience Regulation into the 2dPPP statute, (see 15 U.S.C. § 636(a) (37)(iv)(II)(aa)), those earlier decisions were inapplicable to the 2dPPP. Five months and a judge change later, we won
a preliminary injunction that ordered SBA to fund our clients’ 2dPPP requests if otherwise eligible but for the Prurience Regulation.

The euphoric sensation from the win, however, was short-lived. SBA appealed the decision and filed a motion to stay the lower court’s injunction. Appellate courts typically have motions and merits panels, each composed of three judges. Briefs to the motions panels are limited to 5,200 words. Add first the thick constitutional issues at play and
that as attorneys, we never run out of things to say, and we chewed through that pretty quickly — we had to make difficult decisions on what would stay in and what had to go.

The motion panel, in a 3-0 decision, ruled against us concluding that the lower court made an error of law. Notably, this was the same three-judge panel that, in the first round
of PPP cases, upheld the same lower court’s grant of an injunction 3-0. The only explanation we’ve come up with is that the first case enjoined on both an Administrative Procedures Act (“APA”) basis and several constitutional bases. Since Congress incorporated the Prurience Regulation into the 2dPPP statute, we couldn’t raise an APA challenge here. So, we’re led to believe those judges accepted the APA basis, but not the constitutional basis.

The motion panel’s decision primarily rested on two prongs. First, it concluded, without explanation, that the 2dPPP is akin to a selective subsidy program and not a broad benefits program. This dichotomy decides what level of judicial scrutiny SBA’s decision receives. On the subsidy side, as long as SBA’s decision is not aimed at the suppression
of dangerous ideas, it will be reviewed under what’s called a “rational-relation review.” This is an extremely deferential review that requires the challenger negate all conceivable reasons for the choice made. In this case, SBA argued that Congress chose not to fund adult businesses because of their purported negative secondary effects (e.g. increased crime).

On the other hand, content-based decisions to deny a benefit reeks of targeting and would engender a review under strict scrutiny, the toughest form of review. Under strict scrutiny, SBA would have the responsibility to demonstrate that its decision was the least burdensome option available. Going forward, we plan to highlight the differences between a selective subsidy program, like funding the arts, and the 2dPPP whose broad purpose is to float the economy during the pandemic.

Second, the lower court concluded that excluding adult businesses from the 2dPPP was a form of discrimination aimed at suppressing the “dangerous idea” of sexual expression. The motion panel disagreed and concluded two things that we plan to attack in our merits brief. First, it concluded the choice not to subsidize is not suppression because “the Supreme Court has never struck down a denial of a subsidy on this ground.” Second, it concluded “prurient” simply identifies a category of expressive conduct and excluding a category of conduct from a funding program does not constitute viewpoint-based discrimination.

Content-based decisions to deny a benefit reeks of targeting and would engender a review under strict scrutiny, the toughest form of review. Under strict scrutiny, SBA would have the responsibility to demonstrate that its decision was the least burdensome option available. — Youngsma

We plan to show the court that “prurience” under any definition, is a viewpoint-based decision that must withstand strict scrutiny review. If we can convince the court of that, the subsidy/benefit dichotomy is immaterial because on either end, SBA is prohibited from making viewpoint based decisions. These are not the extent of our arguments, but these arguments must be addressed because they formed the basis of the motion panel’s decision.

SBA has already submitted its merits brief, our response was due on October 18, and oral argument is set for November 1. We’re hopeful for a quick decision thereafter.

Zack Youngsma is an associate at Shafer & Associates, P.C., a Lansing, Michigan-based First Amendment law firm. Zack is a 2019 graduate of the Michigan State College of Law and licensed to practice in Michigan and Nevada. He is a veteran of the War on Terror and spent 2011 in Afghanistan attached to a special- operations task force. Contact Zack Youngsma at (517) 886-6560 or e-mail Zack@BradShaferLaw.com.

All readers should note that this article briefly summarizes very complex legal issues and judicial decisions. The intent of this article is for information purposes only, and is not intended to provide either an exhaustive analysis of these matters or any specific legal advice or recommendation. Any opinions or positions expressed in this article are Mr. Youngsma’s alone and do not necessarily reflect those of any of his clients.