Camelot Banquet Rooms, Inc. v. U.S. Small Bus. Admin.

14 F.4th 624

CAMELOT BANQUET ROOMS, INC., et al., Plaintiffs-Appellees,

v.UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants-Appellants.

No. 21-2589

United States Court of Appeals, Seventh Circuit.

Decided September 15, 2021

Bradley J. Shafer, Zachary Youngsma, Matthew Joseph Hoffer, Attorneys, Shafer & Associates, Lansing, MI, Jeff Scott Olson, Attorney, Jeff Scott Olson Law Firm, S.C., Madison, WI, for Plaintiffs-Appellees Camelot Banquet Rooms, Inc., Downtown Juneau Investments, LLC, Midrad, LLC, PPH Properties I, LLC.

Bradley J. Shafer, Zachary Youngsma, Matthew Joseph Hoffer, Attorneys, Shafer & Associates, Lansing, MI, for Plaintiff-Appellee Heritage Management Services Inc.

Courtney Dixon, Attorney, Department of Justice, Civil Division, Appellate Staff, Washington, DC, for Defendants-Appellants.

Before Kanne, Rovner, and Hamilton, Circuit Judges.

ON MOTION FOR STAY PENDING APPEAL

Per Curiam.

Plaintiffs in this case are about fifty businesses all over the country that offer live adult entertainment in the form of nude or nearly nude dancing. They seek to obtain loans under the second round of the Paycheck Protection Program enacted by Congress to address economic disruption caused by the Covid-19 pandemic. By statute, Congress excluded plaintiffs and several other categories of businesses from the second round of the Program. See 15 U.S.C. § 636(a)(37)(A)(iv)(III)(aa), incorporating 13 C.F.R. § 120.110, with two exceptions.

Plaintiffs assert that their exclusion from the Program violates their constitutional rights, primarily under the Free Speech Clause of the First Amendment. The district court agreed. It issued a preliminary injunction that enjoins the United States Small Business Administration (SBA) from denying plaintiffs eligibility for the loan program based on the statutory exclusion that incorporates 13 C.F.R. § 120.110. Camelot Banquet Rooms, Inc. v. U.S. Small Business Admin ., ––– F. Supp. 3d ––––, 2021 WL 3680369 (E.D. Wis. Aug. 19, 2021). The SBA has appealed and seeks a stay of the injunction pending appeal. The district court denied a stay on August 31. Camelot Banquet Rooms, Inc. v. U.S. Small Business Admin ., ––– F. Supp. 3d ––––, 2021 WL 3878977 (E.D. Wis. Aug. 31, 2021). Later that day we issued a temporary stay pending expedited briefing on the stay issue, which was completed on September 9.

We now grant the government's stay of the preliminary injunction and expedite briefing on the merits of this appeal. The government's merits brief shall be filed no later than September 29, 2021; plaintiffs shall file their brief no later than October 13, 2021; and the government shall file any reply brief no later than seven days after plaintiffs file their brief. The court will contact counsel to schedule oral argument promptly.

I. Applicable Legal Standards

Plaintiffs who seek a preliminary injunction must show that (1) they will suffer irreparable harm in the absence of an injunction, (2) traditional legal remedies are inadequate to remedy the harm, and (3) they have some likelihood of success on the merits. If those elements are shown, the court must then balance the harm the moving parties would suffer without an injunction against the harm the opposing parties would suffer if one is granted, and the court must consider the public interest, which takes into account the effects of a decision on non-parties. E.g., Courthouse News Service v. Brown , 908 F.3d 1063, 1068 (7th Cir. 2018).

On the merits, the district court concluded that plaintiffs are likely to succeed on their free speech claim. The court viewed the exclusion of plaintiffs from the Program as an "attempt to suppress a dangerous idea" and a classification that was not rationally related to a legitimate government purpose. The court found that the other factors also supported an injunction. Receiving funds under the Program only at the end of the lawsuit would likely come too late for plaintiffs’ businesses to survive, and they would have no viable damages remedy against the government or any official. The court saw little harm to the government from an injunction, which it thought would also serve the public interest by aiding struggling businesses, consistent with the aims of the broader Covid relief legislation.

On appeal, we review the district court's issuance of a preliminary injunction for an abuse of discretion, though an error of law can often produce an abuse of discretion. E.g., Cooter & Gell v. Hartmarx Corp ., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990) ; Ty, Inc. v. Jones Group, Inc. , 237 F.3d 891, 896 (7th Cir. 2001) ; Abbott Labs. v. Mead Johnson & Co. , 971 F.2d 6, 13 (7th Cir. 1992).

In deciding whether to stay an injunction pending appeal, we apply a standard that parallels the preliminary injunction standard but also keeps in mind the district court's exercise of equitable discretion. A party seeking a stay must show a likelihood of success on the merits and a threat of irreparable harm absent a stay. If those criteria are satisfied, we must consider the balance of harms, primarily in terms of the balance of risks of irreparable harm in case of a judicial error, and we must consider the public interest, which refers primarily to the interests of those who are not parties to the suit. See generally Nken v. Holder , 556 U.S. 418, 426, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009) ; Whole Woman's Health Alliance v. Rokita , 13 F.4th 595 (7th Cir. 2021) (granting stay pending appeal); Illinois Republican Party v. Pritzker , 973 F.3d 760, 762–63 (7th Cir. 2020) (noting earlier denial of injunction pending appeal).

We conclude that the SBA has satisfied the demanding standard for a stay of an injunction pending appeal. As we explain below, at this preliminary stage, the SBA has shown a strong likelihood of success on the merits. The other factors are essentially a wash, so the final result is driven by the likelihood of success on the merits.

II. The Paycheck Protection Program

No American who has lived through the Covid-19 pandemic will forget its devastating consequences for lives and health or the massive economic disruption it has caused. Congress responded with several rounds of massive economic assistance, including the Paycheck Protection Program. Under the Program, many small businesses became eligible for low-interest loans that would be guaranteed by the federal government and even eligible for forgiveness if the businesses used them, in essence, to keep employees on the payroll during the economic downturn.

The first round of legislation gave the SBA considerable discretion to decide eligibility for the Program. In doing so, the SBA borrowed from a regulation that identifies categories of businesses that are not eligible for all or nearly all SBA loan programs. 13 C.F.R. § 120.110. The list includes non-profit enterprises, banks and other financial companies, life insurance companies, businesses located in foreign countries, pyramid sale distribution plans, casinos and other gambling businesses, loan packagers, political or lobbying businesses, and speculative businesses.

Subsection (p) of that regulation excludes plaintiffs. It bars:

Businesses which:

(1) Present live performances of a prurient sexual nature; or

(2) Derive 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....

§ 120.110(p).

In the first round of Paycheck Protection Program loans, the SBA made an exception for non-profits, which the statute expressly deemed eligible. See 85 Fed. Reg. 20811, 20812 (Apr. 15, 2020). In an earlier related case brought by plaintiff Camelot Banquet Rooms in the Eastern District of Wisconsin, the district court issued a preliminary injunction barring denial of eligibility for the Program based on the regulation. That decision relied on statutory, administrative law, and constitutional grounds. Camelot Banquet Rooms, Inc. v. U.S. Small Business Admin ., 458 F. Supp. 3d 1044 (E.D. Wis. 2020). We denied a stay of that injunction in a conclusory order, and the government soon dismissed the appeal. But see Pharaohs GC, Inc. v. U.S. Small Business Admin. , 990 F.3d 217 (2d Cir. 2021) (affirming denial of injunction in similar first-round case brought by adult-entertainment club); American Ass'n of Political Consultants v. U.S. Small Business Admin ., 810 F. App'x 8, 9–10 (D.C. Cir. 2020) (affirming denial of injunctive relief in similar First Amendment challenge to first-round exclusion of lobbying and political consulting businesses).

The second round of the Paycheck Protection Program took a different approach to eligibility. Congress adopted statutory language to exclude several categories of businesses, including plaintiffs’ adult-entertainment venues. It did so by incorporating into the statute the terms of 13 C.F.R. § 120.110, the regulation that the SBA had used on its own initiative for the first round. 15 U.S.C. § 636(a)(37)(A)(iv)(III)(aa).¹

Accordingly, in this second round, the earlier issues of statutory interpretation and administrative law have fallen away.

Plaintiffs can prevail only if denying them a subsidized loan under the Program violates the Constitution. Plaintiffs seem unlikely to be able to make that showing.

III. Plaintiffs’ First Amendment Theory

Plaintiffs’ core claim is under the Free Speech Clause of the First Amendment. They contend that excluding them from the Program penalizes them for engaging in expressive activity protected by the First Amendment. See generally Barnes v. Glen Theatre, Inc ., 501 U.S. 560, 565–66, 111 S.Ct. 2456, 115 L.Ed.2d 504 (1991) (plurality opinion) (treating nude dancing as "marginally" within outer perimeters of First Amendment protection; affirming local ban on completely nude dancing).

The problem with plaintiffs’ First Amendment claim and the preliminary injunction here is that Congress is not trying to regulate or suppress...