Strip Clubs Fight Feds Over Pandemic Loan Denials

SAN FRANCISCO (CN) — Lawyers for 15 strip clubs urged a federal judge Thursday to abolish a regulation that makes erotic dance clubs ineligible for emergency business loans, arguing the policy is inconsistent with a recently passed pandemic relief law and unconstitutional on its face.

Déjà vu-San Francisco and 14 other affiliated strip clubs in four Western states are challenging the Small Business Administration’s finding that a 1998 regulation makes businesses that offer “live performances of a prurient sexual nature” ineligible for emergency loans.

They claim the government’s reliance on that policy violates their free speech and freedom of association rights under the First Amendment, and equal protection and occupational liberty rights under the Fifth Amendment. They seek a preliminary injunction to stop the government from enforcing the eligibility requirement.

“They’re trying to exclude the views of my client,” plaintiffs’ attorney Bradley Shafer, of Lansing, Michigan, argued in a virtual court hearing before U.S. Magistrate Judge Laurel Beeler on Thursday.

Beyond arguing that the policy violates free speech, the strip clubs say it contradicts the intent of Congress to make emergency loans available to all small businesses through the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act passed in March.

The law says “business with not more than 500 employees during the covered period should be made eligible for a loan under this title,” Shafer argued. “There is nothing ambiguous about an eligible entity.”

However, the government insists it has no constitutional or legal obligation to subsidize strip clubs.

U.S. Justice Department lawyer James Gilligan said the 22-year-old regulation does not discriminate against viewpoints in violation of the First Amendment. It merely prohibits loans for businesses that offer performances or content of “a prurient sexual nature,” regardless of what kind of messages those businesses are trying to convey about sex, he said.

A nonprofit selling media “of a sexual nature” to promote awareness about the “evils of heightened sexuality” or an author who writes a sexually explicit work of fiction to shine a light on the “evils of prostitution” would not be entitled to a loan under the regulation, he said.

“It says we’re not going to fund speech of a prurient sexual nature, but you are absolutely free to do that with your own funds to your heart’s content,” Gilligan said.

The government cites multiple Supreme Court cases to support its position, including the 2007 ruling in Davenport v. Washington Education Association, which held that “government can make content-based distinctions when it subsidizes speech.”

Shafer replied that the government should not be allowed to deny loans to a business based on that business’s First Amendment activities.

“You have to be neutral in the marketplace of ideas,” he said.

Shafer’s position is supported by two recent federal court rulings in Michigan and Wisconsin. U.S. District Judge Lynn Adelman in Milwaukee ruled in May that the Small Business Act and CARES Act did not “deem certain forms of small businesses to be less deserving of the government’s ‘limited resources’ than others.”

U.S. District Judge Matthew Leitman in Flint, Michigan, also ruled in strip clubs’ favor in May, finding Congress “did not pick winners and losers” when it authorized the Paycheck Protection Program and that it intended the program to apply to “all Americans employed by all small businesses.”

Judicial views on the issue are far from unanimous, however. In June, a federal judge in Buffalo, New York, reached the opposite conclusion when he denied a strip club’s motion for an injunction there.

On Thursday, Judge Beeler gave mixed signals on how she might rule. Early in the hearing, Beeler said she was “preliminarily persuaded” by the government’s statutory argument. But towards the end of the 90-minute hearing, Beeler said denial of an emergency business loan during a pandemic is “more like a death sentence” when compared to situations in cases cited by the government to support its position.

“It’s not a case of picking one speech over another,” Beeler said. “It’s more like, ‘Because of your speech, sorry, no, we’re not going to fund you at all.’”

Late Wednesday night, the plaintiffs filed a supplemental brief on the legislative history of 1994 amendments to the Small Business Act, which they argue show Congress never intended to exclude strip clubs from eligibility for small business loans.

Beeler gave the plaintiffs one week to file an amended complaint with new allegations on the 1994 Small Business Act amendments and ordered the government to file a written response in two weeks.

The judge also ordered the parties to determine if the strip clubs would be ineligible for emergency small business loans for a different reason — because all 15 strip clubs are affiliated with a larger company, Las Vegas-based Déjà vu Services Inc., which employs more than 500 workers.

The 15 strip clubs suing the federal government are in California, Colorado, Oregon and Washington state. 

Beeler scheduled a tentative hearing for additional oral arguments on Aug. 27.

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