SAN FRANCISCO—If there's one group of businesses the Small Business Administration would apparently like to forget during the pandemic-caused economic crisis, it's adult businesses, and these businesses have generally not only been barred from securing Paycheck Protection Program (PPP) loans, but 13 California clubs are having similar trouble obtaining a different kind of loan: Emergency Injury Disaster Loans (EIDL), which are another category set up under the CARES Act. But unlike the PPP loans, the adult businesses are in a better legal position to receive EIDLs.
"Unlike the PPP loans, that are generally forgiven, so they're basically grants, these are in fact actual loans, with the exception of the first $10,000," explained Bradley J. Shafer, one of the attorneys for the clubs. "That first $10,000 is a grant; the rest of it is a loan."
On June 15, Shafer and his co-counsel filed suit in the District Court for the Northern District of California for clubs throughout the Ninth Circuit, including Déjà vu and related clubs in San Francisco, Portland, Tacoma, Seattle, Spokane, Lake Springs and Colorado Springs, seeking to "restrain Defendants from discriminating against businesses and workers who are entitled to benefit from Economic Injury Disaster Loans ('EIDL'), especially the 'Emergency EIDL Program' provisions of the Coronavirus, Aid, Relief, and Economic Security Act (the 'CARES Act')."
"While Congress designed and enacted the CARES Act to speed broad relief to the economy through the businesses and workers who have been impacted by the COVID-19 pandemic, the Small Business Administration (the 'SBA') and its Administrator have chosen to saddle those recovery efforts with the irrelevant ballast of decades-old regulations that impermissibly and unconscionably narrow the relief programs," the suit's introduction continues. "Plaintiffs are First Amendment-protected businesses that have been denied EIDLs based on their expressive viewpoint and thereby the ability to participate in economic stabilization. Because their inability to access EIDL funds threatens their very existence, Plaintiffs, on an emergency basis, seek to restrain the SBA from continuing to violate the law and Plaintiffs’ fundamental First Amendment rights." [Citations omitted here and below]
The plaintiffs also requested expedited consideration of the suit and its accompanying Temporary Restraining Order because when the funds set aside for that program are depleted, it was (and continues to be) unclear when or if more funds would be allocated. However, Shafer told AVN that the government has already set aside EIDL funds for the clubs to receive if they win their suit.
The problem appeared at first to be similar to the one facing clubs seeking PPP loans, in that the Code of Federal Regulations, Vol. 13 Sec. 123.301, states in part that, "Your business is not eligible for an economic disaster loan if you (or any principal of the business) fits into any of the categories in §§ 123.101 and 123.201," with Sec. 123.201 stating, similar to the PPP loan exclusion, "You are not eligible if your business presents live performances of a prurient sexual nature or derives directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature."
Strip clubs, of course, don't put on "prurient sexual" performances, with "prurient" having been defined by the Supreme Court in Miller v. California as "a shameful or morbid interest in nudity, sex, or excretion, which goes substantially beyond customary limits of candor in description or representation of such matters and is matter which is utterly without redeeming social importance."
However, what distinguishes the Ninth Circuit suit from the suits in Wisconsin, Michigan and Florida seeking PPP funds is that Shafer, while looking through the voluminous Small Business Administration Act, found that the criteria set forth there for securing EIDLs is substantially different from the "prurient sexual nature" restriction the SBA has applied to PPP loans.
"There's a provision in the Small Business Act that specifically precludes loans to businesses and persons whose materials have been found by a court to be legally obscene," Shafer told AVN in a phone interview, "and what we did was, when I first found this, which was Wednesday morning, I then had my staff research the legislative history and lo and behold, we found the initial draft of this law, which wasn't 'adjudicated by a court of law'; it said 'determine to be obscene,' which meant that the SBA could have determined that. So we also found the conciliation conference history, where the House and Senate reconcile the wording of each chamber's prospective bills, and there's a conference note that specifically says that, 'In order to clarify that the materials have to be devoid of constitutional protections and therefore be legally obscene, we're changing this language so that it's not "determined" to be obscene but it has been found by a court of law to have been obscene.'"
Trouble was, Wednesday was the evening before a scheduled Zoom hearing on the plaintiffs' Preliminary Injunction motion, which took place at 9:30 a.m. yesterday before Magistrate Judge Laurel Beeler, and while some argument on the motion did take place, the judge adjourned the hearing until August 27, but required the attorneys to further supplement the briefing on this issue by next Thursday.
At yesterday's hearing, SBA attorney James Gilligan argued that his client wasn't actually discriminating, but that not allowing EIDLs for adult businesses is "not a restriction on plaintiffs' speech at all."
However, Judge Beeler, who said she found the case "interesting," appeared to have a different view.
"As the government says, it is allowed to decide what it wants to fund. But I'm not unsympathetic to the [plaintiffs'] larger argument that 'we're a business too,'" Judge Beeler said.
In fact, one of the clubs' main arguments in their complaint is that the CARES Act was enacted to provide broad economic relief for businesses and workers who have been impacted by the pandemic, and that the SBA can't "saddle those recovery efforts with the irrelevant ballast of decades-old regulations that impermissibly and unconscionably narrow the relief programs," and that denying clubs emergency loans based on the businesses' expressive viewpoint "threatens their very existence" and their First Amendment rights.
In his argument, Shafer also noted that the lawsuits filed by clubs in Wisconsin and Michigan resulted in the clubs receiving their requested PPP loans, and he told AVN that the only remaining issue in those suits is whether those funds will be forgiven, as they should be as part of the PPP program.
The most recent version of the lawsuit in Déjà vu-San Francisco LLC, et al. v. the U.S. Small Business Administration, et al, may be found here.
