FLINT, Mich.—As AVN has previously reported, the requirements that the Small Business Administration (SBA) has set regarding who can qualify for either an SBA Economic Injury Disaster loan or a Payroll Protection Program loan state that in order to be eligible for those programs, the applicant may not earn more than a small amount of its income from the sales of products, services, depictions, displays or live performances of a "prurient sexual nature." And now, one of those applicants is suing the SBA, charging that its requirements are discriminatory of speech protected under the First Amendment.
DV Diamond Club of Flint, LLC, an adult cabaret that does business as Little Darlings, filed suit on April 8 through its attorney Bradley Shafer against the SBA and its administrator Jovita Carranza, as well as against the United States itself and its Treasury Secretary, Steven Mnuchin, in an attempt to prevent those entities from denying disaster loans and payroll protection loans to adult businesses because the legal term "prurient" does not apply to any of their businesses.
The law has dealt with the concept of "prurience" mainly in the context of obscenity litigation, and the word has been variously defined in the law as relating to material that is of a "morbid, shameful or unhealthy" interest in sex—which definition clearly does not apply to clubs offering strippers, adult studios creating adult movies (none of which have been prosecuted for obscenity in the past decade), websites offering explicit fare or novelty manufacturers and retailers.
Shafer originally filed the suit on an "emergency basis" and seeking a temporary restraining order against enforcement of the restriction because the SBA will only be given a limited amount of funds to lend to its member banks, which will actually be the ones disbursing the loans if they're approved on a first-come, first-served basis, and adult businesses don't want to be considered the bottom of the barrel if they're even approved at all. (Indeed, the latest news reports indicate that the SBA has already run out of money for the loans and programs—$349 billion so far—and is waiting for Congress and Trump to authorize more.) However, after a telephonic status conference on April 9 with U.S. District Judge Matthew F. Leitman, Shafer withdrew the emergency motion, possibly because Judge Leitman may have agreed to give the case priority scheduling, though no date has yet been set. The following day, attorneys for both the SBA and all United States defendants entered appearances.
After spending several pages quoting from the Payroll Protection Program as set forth in the federal bailout law the CARES Act as well as sections of the SBA Standard Operating Procedure, noting the above-referenced restrictions on eligibility for the loans, the complaint quotes the SBA's references to the Code of Federal Regulations Chapter 13 §120.110, which states, "SBA has determined that financing lawful activities of a prurient sexual nature is not in the public interest. The Lender must consider whether the nature and extent of the sexual component causes the business activity to be prurient." It also requires that if a lender suspects that it has received an application from such a business, it must get approval from the Associate General Counsel for Litigation "for a final Agency decision on eligibility."
"From talking to club owners around the country and other lawyers, there are clubs that banks aren’t even letting file applications, and some are being rejected outright," Shafer told the Detroit News.
Then, after quoting the First and Fifth Amendments to the U.S. Constitution, the complaint states, of plaintiff DV, that "All of the entertainment provided by DV is non-obscene, appeals to healthy human interests and desires, and is in full compliance with the numerous licenses and permits held by DV," and that, "None of the live performances at DV are unlawful or obscene. Neither DV nor any of the entertainers who have performed on its premises have ever been charged, let alone convicted, of any crimes of obscenity." [Emphasis in original] The suit also notes that DV has all of the required licenses and permits to allow its adult business to proceed lawfully, though it is currently closed due to Michigan's "shelter-in-place" order.
DV applied for its SBA loans to Oxford Bank in Lake Orion, Mich., but at the time of the filing of the lawsuit, the bank had yet to either approve or deny DV's application, and paragraph 43 of the suit states, "DV is fully qualified—but for the Regulations and the SOP [Standard Operating Procedures of the SBA] or the SBA’s application thereof—to receive a PPP loan under all relevant statutes, regulations, and procedures. However, DV reasonably believes that its Application will be rejected or fatally delayed due to the SOP and/or the Regulations." The following paragraph notes that other adult businesses have also applied for the SBA loans and have had their Payroll Protection loan applications rejected already.
"In the event that DV is unable to obtain PPP loan," the suit states, "it may lack the staff and/or funds to reopen following the COVID-19 pandemic, resulting in the permanent ruination of its business; the inability of DV to engaged in protected First Amendment activity; and the inability to DV’s staff, entertainers, and customers to continue engaging in or viewing protected First Amendment activity."
The complaint then makes two basic claims of discrimination, under both the First and Fifth Amendments, in the first case charging that the regulations and SOP are "impermissible content-based restrictions on speech and expression that cannot pass muster under strict scrutiny"; "are impermissible content-neutral restrictions and expression that cannot pass muster under intermediate scrutiny"; "fail to conform to the constitutional standards regarding obscenity"; and "are unconstitutionally vague under the vagueness standards for matters impacting speech and expression."
"Certainly, the challenge that Brad is presenting is that the government regulations make an availability distinction between prurient businesses and those that are not, and the lawsuit is predicated on the concern that the government will interpret 'prurient' more broadly than it was interpreted in the First Amendment cases," observed First Amendment attorney Reed Lee. "Those cases define 'prurient' as 'shameful or morbid interest in sex, nudity or excretion,' and that is a very, very narrow term. So that's the issue that the case presents."
Regarding the Fifth Amendment violations, the complaint charges that both the SBA regulations and SOP "treat establishments presenting certain forms of performance dance entertainment, such as Plaintiff, differently from establishments presenting other forms of entertainment or no entertainment, for no compelling, important, or rational reason"; "treat workers at establishments presenting certain forms of performance dance entertainment, such as Plaintiff, differently from workers at establishments presenting other forms of entertainment or no entertainment, for no compelling, important, or rational reason"; "violate DV’s, its employees, and the entertainers’ who perform on its premises rights under the occupational liberty component of the Fifth Amendment"; and are "impermissibly vague."
The complaint also charges, in Count III, that the eligibility for PPP loans under the CARES Act makes it clear that adult businesses are not barred from seeking such loans, and therefore, "the SBA lacked authority to promulgate regulations with restricted or otherwise ‘clarified’ what businesses were eligible for PPP Loans."
"Everyone would like this to be a simple, straightforward case about how broad 'prurient' is, and if that's the way this case comes down, if that's the way the government wants to litigate it, it's a very strong case," Lee assessed, "because none of us who've been involved in the one area of the First Amendment that's used that term, none of us think that any of these businesses are 'prurient.' It's such a strong term."
Jason Mohney, who oversees the cabaret chain that includes Little Darlings, Déjà vu and Hustler Clubs, but has fewer than 500 employees at all of the locations combined, expressed his concerns to the Detroit News.
"This is a nightmare," he said. "People we work with are part of our team, our family. So you start off by telling your family members that they’re out of a job and you’re not sure when they will get their jobs back. You work all your life to build something up and in the blink of an eye, you’re starting all over again."
Mohney administers clubs in Michigan, Nevada, Louisiana, Illinois, Florida, Oklahoma and California.
It has been rumored that the SBA loan situation is of great concern to the First Amendment Lawyers Association, and it is believed that Shafer's is only the first of several more, similar lawsuits to come.
