The effects of the coronavirus pandemic continue to play out in unexpected ways, as this blog has covered on several occasions. Now the Sixth Circuit has ruled on loan guarantees under the Paycheck Protection Program for sexually-oriented businesses.  Can the Small Business Administration, consistent with long-standing agency policy, prohibit sexually-oriented small businesses from eligibility for paycheck loans guaranteed by the federal government under the PPP?  The Sixth Circuit and Eastern District of Michigan have both said “no.”


The SBA Deems Sexually-Oriented Businesses “Ineligible” for PPP Participation

The PPP—part of Congress’s effort under the March 2020 CARES Act “to mitigate the economic devastation caused by the COVID-19 pandemic”—authorizes the SBA to guarantee billions in private loans to small businesses.  Loans made by SBA-participating banks to small businesses to satisfy payroll obligations (among other things) are eligible for forgiveness.  The SBA, rather than the small business, pays the lender the amount of the loan, plus interest.

The SBA has “extraordinarily broad powers” to aid, counsel, assist, and protect the interests of small business, including guaranteeing loans made by private lenders to small businesses.  As part of those broad powers, since at least January 1996 the SBA has deemed “ineligible” certain sexually-oriented businesses from participating in SBA lending programs.  That prohibition continues today.

Shortly after enactment of the CARES Act, the SBA adopted a set of rules to implement the PPP loan guarantees.  Those rules incorporated SBA’s prohibition of sexually-oriented businesses from participating in SBA lending programs.  A consortium of adult entertainment and novelty stores filed an emergency motion for preliminary injunction, imploring the district court to prohibit the SBA from denying PPP loans based on the “sexual nature” of their businesses.

District Court Enjoins the SBA PPP Implementing Rules

Applying the Chevron doctrine, the district court ruled the CARES Act unambiguously prohibits the SBA from excluding sexually-oriented businesses from the PPP.  Under the familiar Chevron “two-step,” the court first asks whether “Congress has directly spoken to the precise question at issue.”  If the statute is unambiguous, that is the end of the matter; the court applies the statute as written.  “However, if the statute is ambiguous, then (and only then)” does the court proceed to step two of the Chevron analysis—deference to the agency’s reasonable statutory interpretation.

Emphasizing that Chevron step one is no toothless formality, the court explained that Congress has identified “only two criteria” for a business to be eligible for PPP loans: (1) the business must have fewer than 500 employees (2) during the “covered period” of the PPP.  So long as a business has less than 500 employees during the covered period, Congress provided that “any business . . . shall be eligible to receive” a SBA-guaranteed loan.  Congress’s use of “any” and “shall” in the PPP, according to the court, “requires the SBA to deem eligible for a PPP loan guarantee every business” that employed less than 500 people during the covered period.  Thus, under the clear terms of the statute, the SBA could not exclude the sexually-oriented businesses from the PPP.

Sixth Circuit Denies SBA Emergency Stay Motion

Last Friday, a Sixth Circuit panel (Stranch, J., Donald, J.) agreed.  The Court explained the term “any” carries an expansive meaning, makes no distinction or limitation, and thus implies “every member of the class or group.”  That “broad interpretation” was also appropriate given “Congress’s intent to provide support to as many displaced American workers as possible.”  Or as the district court put it, “Congress did not pick winners and losers in the PPP.  Instead, through the PPP, Congress provided temporary paycheck support to all Americans employed by all small businesses that satisfied the two eligibility requirements—even businesses that may have been disfavored during normal times.”  Because the district court’s ruling was reasonable, the Sixth Circuit denied the SBA’s emergency motion to stay the injunction order.

Judge Siler dissented, contending the PPP is indeed ambiguous.  Picking up on an argument raised by SBA, the dissent contends the PPP says it is “to be administered ‘under the same terms, conditions, and processes’ as other [SBA] loans, which exclude private clubs and adult entertainment businesses from eligibility.”  That additional language, the dissent and the SBA argue, creates ambiguity as to whether SBA’s longstanding policy to exclude sexually-oriented businesses from loan eligibility is permissible under the PPP.

On one key point, the Siler dissent—a concise effort drafted under unusual time pressure—says aloud what we’ve all thought at one time or another:

It is also a weekend and time is running short.