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Feds argue against giving pandemic relief money to strip clubs

The U.S. Small Business Administration appealed after it was blocked from denying pandemic relief funds to a group of Wisconsin strip clubs.

CHICAGO (CN) — The Seventh Circuit heard oral arguments Monday in a dispute over whether a group of strip clubs in Wisconsin can be excluded from federal pandemic relief funds meant for struggling businesses.

The funds were authorized by the sweeping 2020 CARES Act, which was passed by Congress and signed into law by former President Donald Trump at the onset of the ongoing Covid-19 pandemic.

Included in the CARES Act was the Paycheck Protection Program, or PPP, which provided businesses with loans backed by the U.S. Small Business Administration. The loans were meant to keep businesses afloat during lockdowns in the early part of the pandemic, and in many cases could be forgiven entirely if the money was used to cover payroll, rent and certain other expenses. The program ended on May 31 of this year.

The owners of three Milwaukee clubs and one club in Middleton, Wisconsin, all operating as Silk Exotic Gentlemen’s Club, sued in April 2020 after they were denied PPP loans based on a 1996 rule that prohibits “businesses that present live performances of a prurient sexual nature” from taking advantage of SBA programs.

Ruling in favor of the strip clubs in May 2020, a federal judge found that they they could not be denied PPP loans because the SBA’s regulation likely violates the First Amendment. The agency then appealed to the Chicago-based Seventh Circuit.

During a roughly 30-minute hearing Monday, SBA attorney Courtney Dixon from the Justice Department told the three-judge panel that nothing about the loan denials violates the free speech rights of the strip clubs.

“Congress has not restricted or regulated plaintiffs’ speech, it has merely decided not to subsidize it out of taxpayer dollars,” Dixon said. “That decision is subject to only a rational basis review, and it was rational for Congress to decide that it was not the best use of taxpayer dollars to subsidize businesses such as plaintiffs, at this time.”

Dixon was echoing an argument she made in her brief filed with the court.

“As already established, the statute at issue does not prohibit or regulate plaintiffs’ speech—it merely sets the terms on which the government will exercise its discretion to subsidize (or not subsidize) certain speech through a government loan program,” she wrote in the 27-page filing.

Arguing on behalf of the strip clubs, attorney Bradley Shafer countered that the SBA’s denial based upon the “prurient sexual nature” of his clients’ businesses is an infringement of their free speech rights.

U.S. Circuit Judge Ilana Rovner, a George H.W. Bush appointee, asked Shafer why his clients did not take up the SBA’s offer to review the loan denial.

“We don’t have to undergo an unconstitutional standard, a standardless, completely discretionary process,” Shafer said, claiming the SBA makes its decisions without looking at the exact type of entertainment offered by businesses like the plaintiffs.  

In a brief filed with the court, another one of the strip clubs' lawyers, Chicago attorney Reed Lee, argued that excluding them from the pandemic relief is a violation of the so-called unconstitutional conditions doctrine.

“Under these circumstances, the categorical exclusion of small business operations of a 'prurient sexual nature' from PPP loan eligibility violates the unconstitutional conditions doctrine; and it cannot be justified as a limitation on a speech subsidy under the government speech doctrine,” Lee wrote.

The SBA was granted a stay after the district court’s ruling, meaning it is currently still holding the funds pending the final resolution of the case.

The fate of the money came into question after Shafer expressed concerns about what would happen if the Seventh Circuit panel rules against his clients, because if it does he plans to appeal the case to the U.S. Supreme Court.

Dixon told the court that the SBA would continue to hold the funds.

Rovner was joined on the panel by U.S. Circuit Judges David Hamilton and Michael Kanne, appointed by Barack Obama and Ronald Reagan, respectively.

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