Déjà Vu Judge: SBA Has Broad Authority Over PPP Loans

SAN FRANCISCO — A federal magistrate judge on Friday shot down a bid by more than a dozen Déjà Vu-affiliated adult entertainment clubs to gain eligibility for pandemic relief loans. The ruling by U.S. Magistrate Judge Laurel Beeler denies a motion for preliminary injunction over a Small Business Administration rule that makes businesses that offer “live performances of a prurient sexual nature” ineligible for federally backed PPP loans through the CARES Act, passed in March. Beeler, in her ruling, said the SBA has broad authority to create lending rules. Since the SBA’s pandemic loan program launched, adult entertainment businesses applying for the PPP have seen mixed outcomes. Several gentlemen’s clubs have received federal aid while others have been shut out. To offer a glimpse of the unevenness, federal judges in Wisconsin and Michigan temporarily blocked the SBA from enforcing the regulation against adult entertainment clubs several months back. But courts in Maryland and New York have ruled in favor of the SBA in other similar lawsuits. In the case involving Déjà Vu-affiliated clubs, Beeler found the SBA rule is based on content — not viewpoints — and content-based restrictions are allowed when the government is providing financial assistance. Déjà Vu contended that the SBA’s regulation excluding prurient businesses from the pandemic loan program violates 15 U.S.C. § 633(e)’s prohibition of financial assistance only to obscene businesses, as determined by a court. Déjà Vu-affiliated clubs involved in the suit — 15 venues located in California (seven), Colorado (one), Oregon (one) and Washington (six) — claimed the government’s reliance on that rule violates their free speech and freedom of association rights under the First Amendment and equal protection and occupational liberty rights under the Fifth Amendment. But Beeler ruled the SBA’s decision to exclude businesses that offer “live performances of a prurient sexual nature” firmly in line with the agency’s policies for stricter lending rules. Beeler, citing the 2007 U.S. Supreme Court ruling in Davenport v. Washington Education Association, concluded that a federal agency “can make content-based distinctions when it subsidizes speech.” She noted that the government proffered the secondary effects of adult entertainment establishments in the case. “The plaintiffs’ main argument — raised in their supplemental brief — is that in 15 U.S.C. § 633(e), Congress spoke to the only type of sexual expression that the SBA can exclude from its programs: ‘business concern[s] or other person[s] engaged in the production or distribution of any product or service that has been judged obscene by a court of jurisdiction,’” Beeler wrote. “The statute does not unambiguously support the plaintiffs’ interpretation of it.” Beeler, in her ruling, said that the statute is plain, and there is no textual ambiguity. “[E]ven if the statute were ambiguous, the legislative history supports only the conclusion that Congress intended to prohibit assistance to obscene businesses,” Beeler wrote. “Nothing suggests that it intended to reach further to restrict the statutory delegation of authority to the SBA to exercise its discretion to promulgate lending rules that it deems in the public interest.” In her ruling, Beeler also addressed the constitutional standards of obscenity in relation to SBA regulations and determinations, despite that plaintiffs did not specifically challenge the SBA’s argument in a reply brief. “The plaintiffs contend that [the SBA loan program] fails to conform to the constitutional standards of obscenity set forth in Miller v. California,” Beeler wrote. “The SBA responds that the Constitution does not require it to adopt the Miller test in its determination about whether to finance prurient businesses.   “They in any event are not likely to succeed on the merits of the argument,” Beeler wrote. “The Miller test is a three-prong test for identifying obscene material that the government may regulate without infringing on the First Amendment. It does not apply here. “[The SBA] does not restrict or prohibit speech and instead permissibly refuses to subsidize it.” At post time, it was uncertain whether Déjà Vu would appeal the ruling. AVN reached out to its attorney, Douglas Melton, and is awaiting a response.