CHICAGO (CN) — The Seventh Circuit ruled Wednesday the federal government is within its discretion to deny pandemic relief funds for struggling businesses to strip clubs, vacating a district court decision saying that was likely unconstitutional.
The disputed relief funds were earmarked in the 2020 CARES Act passed by former President Donald Trump’s administration at the onset of the Covid-19 pandemic.
The CARES Act included the Paycheck Protection Program, or PPP, which provided businesses treading water due to the pandemic 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 of last year.
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.
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 Seventh Circuit initially stayed Adelman’s decision before ultimately denying the government an injunction.
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 a Seventh Circuit panel in November. The strip clubs 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.
This key distinction rang true for U.S. Circuit Judge David Hamilton, a Barack Obama appointee who penned the three-judge panel’s decision released Wednesday.
“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.
The U.S. Supreme Court has repeatedly distinguished between regulation of speech and government subsidy of speech, Hamilton said, and “its decisions show that the government is not required to subsidize activity simply because the activity is protected by the First Amendment."
The clubs argued they were victims of viewpoint discrimination under Supreme Court precedent suggesting selective subsidy programs may violate the First Amendment if it is “aimed at the suppression of dangerous ideas.”
But Hamilton responded by reiterating the difference between government suppression of protected activity and denial of a subsidy, disposing of the clubs’ position that, as the judge phrased it, “the denial of a subsidy is itself the act of suppression.”
Hamilton also pointed out that the clubs were hardly 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 explained 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.
Hamilton felt all other factors, including irreparable harm, were either neutral or fell in the government’s favor, vacated the district court’s preliminary injunction and remanded for further proceedings.
U.S. Circuit Judges Ilana Rovner and Michael Kanne—appointed by George H.W. Bush and Ronald Reagan, respectively—rounded out the Seventh Circuit panel.
Bradley Shafer, an attorney who represented the clubs with his namesake firm based in Lansing, Michigan, said at arguments in November he planned to appeal to the Supreme Court if the panel ruled against his clients. Shafer could not immediately be reached for comment on the Seventh Circuit’s decision on Wednesday.
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