Wisconsin Court: Strip Clubs Eligible for PPP Loans

MILWAUKEE – A judge from the U.S. District Court Eastern District of Wisconsin issued a decision last Friday granting several Wisconsin gentlemen’s clubs a preliminary injunction which enjoins the government defendants in the case from continuing to use a Small Business Administration regulation to exclude the clubs from Paycheck Protection Program (PPP) loans authorized under the Coronavirus Aid, Relief, and Economic Security Act.

In the order issued Friday, U.S. District Judge Lynn Adelman seemed unimpressed by the government’s defense of its position.

“Although the purpose of the SBA regulation is highly relevant to this case, the government has made no serious effort to identify it,” Adelman wrote. “Instead, the government vaguely asserts that ‘[t]he SBA adopted this rule in furtherance of its statutory mandate to consider the public interest when directing its limited resources.’ But presumably everything the government does is in the public interest. Thus, a naked reference to the public interest says nothing about the regulation’s purpose.”

“To understand the regulation’s purpose, we must know why the SBA thinks that it serves the public interest,” Adelman added. “The government’s brief is silent on that point.”

Later in the decision, Adelman turned to the question of whether the SBA’s rule regarding businesses that offer entertainment of a “prurient sexual nature” apply to the plaintiffs in the first place – a question which has been asked by a number of prominent First Amendment attorneys around the country.

“The plaintiffs contend that the erotic dance entertainment they offer is not ‘prurient,’” Adelman noted in his decision. “More specifically, they allege that their entertainment is ‘non-obscene (and not prurient), appeals to healthy human interests and desires, and is in full compliance with the numerous licenses and permits’ that they must hold under local law. Thus, one of the central issues in this case is whether the plaintiffs’ entertainment is of a ‘prurient sexual nature.’ If it is not, then the plaintiffs are certain to succeed on the merits of their claims, for the regulation would not disqualify them from loan eligibility.”

What the government had to say on this question – which was, effectively, not much – clearly struck Adelman as a strange choice, given how central the point is to the merits of the plaintiffs’ case.

“Oddly, however, the government states in its brief that it ‘takes no position at this time regarding whether the performances offered by Plaintiffs is [sic] obscene, prurient—or, as Plaintiffs put it, ‘erotic but not obscene,’” Adelman wrote. “But if the government takes no position on whether the plaintiffs’ entertainment is ‘prurient,’ then it cannot take the position that the regulation disqualifies them from participation in the PPP. Unless their entertainment is prurient, the regulation does not apply.”

Adelman then speculated a bit on what the government might have meant in its noncommittal response on the question.

“Perhaps what the government meant to say was that it believes the plaintiffs’ entertainment is at least prurient, but it takes no position on whether the plaintiffs’ entertainment is also obscene,” Adelman wrote, adding in a parenthetical note that “obscenity receives no First Amendment protection.”

Either way, Adelman said the government “makes no attempt to show that the entertainment the plaintiffs offer is of a prurient sexual nature.”

“Not one sentence of the government’s brief is used to disagree with the plaintiffs’ assertion that the entertainment they offer is not prurient,” Adelman wrote. “The government does not, for example, contend that all forms of nude and semi-nude dancing are prurient or that the kinds of nude and semi-nude performances the plaintiffs offer are prurient. Nor does the government respond to the plaintiffs’ contention that, to be prurient, a work or performance must appeal to a shameful, morbid, and unhealthy interest in sex, as opposed to a normal, healthy sexual desire.”

Adelman concludes that essentially, the government merely “strenuously argues that the Constitution allows the SBA to choose not to subsidize the plaintiffs’ expression, but it does not pause to address the threshold issue of whether the SBA has actually made that choice through its regulation.”

This defect in the government’s defense seems to have been all Adelman needed to conclude the plaintiffs have shown a significant likelihood of success in the case.

“Because the government has not developed an argument showing that the plaintiffs present live performances of a prurient sexual nature (or otherwise fit within the language of 15 C.F.R. § 120.110(p)), I conclude that, for this reason alone, the plaintiffs are likely to succeed on the merits of their claims,” Adelman wrote in the decision.

Later in his order, Adelman addressed the question of whether the plaintiffs were being denied eligibility for the PPP loans based on the content of their expression – a claim the government denies, saying that it has “merely elected not to subsidize the plaintiffs’ expressive activities.”

“The government relies on the Supreme Court’s statement that ‘although government may not place obstacles in the path of a [person’s] exercise of… freedom of [speech], it need not remove those not of its own creation.,’” Adelman wrote, quoting from Regan v. Taxation With Representation, one of the main cases relied upon in the government’s brief.

Adelman observed that in the case before him, the government “notes that the obstacle preventing the plaintiffs from presenting the quantity of erotic dance entertainment they wish to present is the COVID-19 pandemic, not the federal government. Therefore, the government contends, the government has no obligation to remove the obstacle by allowing the plaintiffs to participate in the PPP.”

Unfortunately for the government, Adelman didn’t seem to buy that argument, either.

“The obvious flaw in the government’s reasoning is that it has chosen to remove the COVID-19 obstacle from the path of nearly every other small business in the United States,” Adelman wrote. “In leaving the obstacle in the plaintiffs’ path, the government has singled them out for unfavorable treatment based solely on the content of their speech.”

Adelman also reiterated that “the government has not articulated any legitimate governmental interest that might be served by excluding the plaintiffs from the PPP.”

“As explained below, in the cases on which the government relies, the Supreme Court allowed Congress to make content-based distinctions in its funding programs only when those distinctions were either related to the purpose of the funding program or were rationally related to another legitimate governmental interest,” Adelman observed. “Here, the purpose of the funding program is to make favorable loans to all small businesses to help them survive the economic crisis brought on by the COVID-19 pandemic. The funding program has no ‘message,’ and the government cannot point to any legitimate purpose that would be served by denying the plaintiffs access to the program. Thus, the Constitution does not permit the SBA to exclude the plaintiffs from the PPP based on the content of their speech.”

On Monday, the government filed a notice of appeal stating the intent of the defendants to seek an appeal of Adelman’s decision to the U.S. Court of Appeals for the Seventh Circuit. YNOT will continue to monitor and report on the case as it progresses.

Courthouse stock photo by Brett Sayles from Pexels