PHARAOHS GC, INC., Plaintiff-Appellant, v. UNITED STATES SMALL BUSINESS ADMINISTRATION, TAMI PERRIELLO, in her Official Capacity as Acting Administrator of the Small Business Administration, UNITED STATES OF AMERICA, JANET YELLEN, in her Official Capacity as United States Secretary of Treasury, Defendants-Appellees.
Docket No. 20-2170-cv
United States Court of Appeals for the Second Circuit
March 4, 2021
August Term, 2020 (Argued: November 3, 2020)
Before: LOHIER and PARK, Circuit Judges, and RAKOFF,
In March 2020, Congress created the Paycheck Protection Program (“PPP” or “Program”), which authorized the Small Business Administration (“SBA”) to guarantee favorable loans to certain businesses affected by the COVID-19 pandemic. The SBA promulgated regulations imposing several longstanding eligibility requirements on PPP loan applicants, including that no SBA guarantee would be given to businesses presenting “live performances of a prurient sexual nature.” Pharaohs GC, Inc. (“Pharaohs”), a business featuring nude dancing, sought a preliminary injunction directing the SBA to give it a PPP loan guarantee. The United States District Court for the Western District of New York (Vilardo, J.) denied the motion. On appeal, Pharaohs argues that the regulation violates the Administrative Procedure Act and the First and Fifth Amendments to the U.S. Constitution. We hold that the district court did not abuse its discretion in finding that Pharaohs has failed to show that it is substantially likely to succeed on its claims that (1) the SBA exceeded its statutory authority to promulgate eligibility restrictions, and (2) the exclusion of nude-dancing establishments from the Program violates the First or Fifth Amendments. We thus AFFIRM.
STEVEN M. COHEN (William A. Lorenz, Jr., on the brief), Hogan Willig, PLLC, Amherst, New York for Plaintiff-Appellant.
COURTNEY L. DIXON (James P. Kennedy, Jr., Michael S. Raab, on the brief), for Jeffrey Bossert Clark, Acting Assistant Attorney General for Defendants-Appellees.*
PARK, Circuit Judge:
In March 2020, Congress created the Paycheck Protection Program (“PPP” or “Program”), which authorized the Small Business Administration (“SBA”) to guarantee favorable loans to certain businesses affected by the COVID-19 pandemic. The SBA Administrator promulgated regulations imposing several longstanding eligibility requirements on PPP loan applicants, including that no SBA guarantee would be given to businesses presenting “live performances of a prurient sexual nature.” Pharaohs GC, Inc. (“Pharaohs”), a business featuring nude dancing, sought a preliminary injunction directing the SBA to give it a PPP loan guarantee. The United States District Court for the Western District of New York (Vilardo, J.) denied the motion. On appeal, Pharaohs argues that the regulation violates the Administrative Procedure Act and the First and Fifth Amendments to the U.S. Constitution. We hold that the district court did not abuse its discretion in finding that Pharaohs has failed to show that it is substantially likely to succeed on its claims that (1) the SBA exceeded its statutory authority to promulgate eligibility restrictions, and (2) the exclusion of nude-dancing establishments from the Program violates the First or Fifth Amendments. We thus affirm.
I. BACKGROUND
A. The CARES Act
In response to the COVID-19 pandemic, Governor Andrew Cuomo ordered the closure of most “non-essential” businesses in the State of New York. N.Y.
Congress placed the Program under section 7(a) of the Small Business Act,
The rules governing eligibility for PPP loans incorporated longstanding restrictions on eligibility for 7(a) loans. A section of the first interim final rule entitled “How do I determine if I am ineligible?” provides that the types of businesses categorically ineligible for 7(a) loans also are ineligible for PPP loans.
Pharaohs is a “gentlemen’s club” outside Buffalo, New York, that features nude dancing. It closed to customers on March 15, 2020, and has stayed closed in compliance with Governor Cuomo’s orders. Pharaohs applied for a PPP loan of $345,067.50 through Live Oak Bank to pay wages to its 76 employees, among other expenses. An underwriter at Live Oak Bank informed Pharaohs that its loan application would be rejected because Pharaohs, as a business providing live entertainment of a prurient sexual nature, is not eligible to participate in the Program.
Pharaohs filed this action in the U.S. District Court for the Western District of New York, alleging that the eligibility restriction is inconsistent with the CARES Act and violates its constitutional rights and seeking injunctive, declaratory, and monetary relief. Pharaohs also moved for a temporary restraining order and preliminary injunction. The SBA agreed to reserve $345,067.50 in PPP funds pending resolution of the motion for a preliminary injunction, so Pharaohs withdrew the motion for a temporary restraining order. Live Oak Bank has placed Pharaohs’s application on hold pending the outcome of this case.
Pharaohs contended that (1) the prurience restriction is unlawful under the Administrative Procedure Act (“APA”),
The district court denied the motion, concluding that “Pharaohs has not shown—let alone clearly shown—that it is likely to succeed on the merits of its claim.” Pharaohs GC, Inc. v. U.S. Small Bus. Admin., No. 20-cv-655, 2020 WL 3489404, at *3 (W.D.N.Y. June 26, 2020). Pharaohs now appeals that decision. We have jurisdiction under
II. DISCUSSION
A. Standard of Review
To demonstrate that a preliminary injunction should be entered in its favor, Pharaohs “must establish [1] that [it] is likely to succeed on the merits, [2] that [it] is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of the equities tips in [its] favor, and [4] that an injunction is in the public interest.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). Furthermore, because Pharaohs “seeks a preliminary injunction that will alter the status quo,” it must “demonstrate a ‘substantial’ likelihood of success on the merits.” N.Y. Progress & Prot. PAC v. Walsh, 733 F.3d 483, 486 (2d Cir. 2013) (citation omitted). We review the denial of a preliminary injunction for abuse of discretion. Id. “Such an abuse occurs when the district court bases its ruling on an incorrect legal standard or on a clearly erroneous assessment of the facts.” Bronx Household of Faith v. Bd. of Educ., 331 F.3d 342, 348 (2d Cir. 2003).
Pharaohs first argues that the SBA’s exclusion of adult-entertainment venues from the Program is inconsistent with the CARES Act. This argument is unlikely to succeed because Congress gave the SBA Administrator discretion to exclude certain types of businesses from the Program.
The CARES Act states that “the Administrator may guarantee [PPP] loans under the same terms, conditions, and processes” as a 7(a) loan “except as otherwise provided.”
[I]n addition to small business concerns, any business concern [or] nonprofit organization . . . shall be eligible to receive a [PPP] loan if the business concern [or] nonprofit organization . . . employs not more than the greater of--
(I) 500 employees; or
(II) if applicable, the size standard in number of employees established by the Administration for the industry in which the business concern [or] nonprofit organization . . . operates.
Pharaohs argues that “any business concern . . . shall be eligible” means that every “business concern” with no more than 500 employees is eligible for PPP loans. Based on this broad wording, Pharaohs charges that the Administrator overstepped her authority under the CARES Act by excluding nude-dancing establishments from the Program. Thus, Pharaohs concludes that we must “hold unlawful and set aside” the Administrator’s action because it was “in excess of statutory jurisdiction, authority, or limitations.”
To review whether an interim final rule exceeds the authority conferred by statute, we apply the two-step framework set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). See United States v. Mead Corp., 533 U.S. 218, 227, 230–31 (2001) (advising that “rules carrying the force of law” are subject to the Chevron framework even when, as with interim final rules, such rules were promulgated without the aid of notice and comment). Deference under Chevron “is not due unless a ‘court, employing traditional tools of statutory construction,’ is left with an unresolved ambiguity.” Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1630 (2018) (quoting Chevron, 467 U.S. at 843 n.9). And as the Supreme Court has explained in a related context, “a court must exhaust all the ‘traditional tools’” before concluding that there is a genuine ambiguity. Kisor v. Wilkie, 139 S. Ct. 2400, 2415 (2019).
We reject Pharaohs’s argument because the CARES Act unambiguously gives the Administrator discretion to adopt the longstanding “terms, conditions, and processes” of the 7(a) program. Subparagraph D’s statement that “any business concern . . . shall be eligible” is not to the contrary when read in its statutory context—specifically, its foundation in the Small Business Act’s 7(a) loan program. “It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989). “A provision that may
“[T]he PPP was not created as a standalone program but was added into the existing § 7(a) program, which subjects it to existing conditions and regulations, as well as existing SBA authority.” In re Gateway Radiology Consultants, P.A., 983 F.3d 1239, 1256 (11th Cir. 2020). Reading subparagraph D in the context of the SBA’s 7(a) loan program, it is clear that Pharaohs’s interpretation—i.e., “any business concern” means “every business concern”—is not tenable.
First, under Pharaohs’s reading, the Administrator would be unable to exclude certain businesses from the Program, which would render several provisions of the CARES Act superfluous. For example, if the Administrator could not base eligibility on a small business’s collateral or the businessowner’s personal guarantee, there would be no reason for the CARES Act to lift SBA regulations requiring collateral and a personal guarantee. See
Second, Congress enacted the Program on the foundation of the SBA’s 7(a) loan program, excluding some eligibility limits but not the prurience restriction. We presume that Congress legislates against the backdrop of existing law. See Garcia v. Teitler, 443 F.3d 202, 207 (2d Cir. 2006). Here, the context in which Congress created the Program included longstanding regulatory limits on SBA loan eligibility, such as the prurience restriction. For example, the CARES Act expressly includes nonprofit organizations—the very first type of business excluded under the existing 7(a) program rules. See
Subparagraph D must be understood as simply raising the employee threshold defining eligibility for small business
Finally, even if subparagraph D were ambiguous, the Administrator would still prevail because the SBA’s interpretation is reasonable. “The question for the reviewing court at Chevron Step Two is whether the agency’s answer to the interpretive question is based on a permissible construction of the statute.” Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 520 (2d Cir. 2017) (cleaned up). It is a permissible construction of subparagraph D to situate its use of the phrase “any business concern” within the limits imposed by its statutory and regulatory context. See Util. Air Regulatory Grp. v. EPA, 573 U.S. 302, 321 (2014) (acknowledging the importance of statutory context at Chevron Step Two).
C. Likelihood of Success on the Merits: Constitutional Claims
Pharaohs also contends that the SBA’s exclusion of businesses from the Program based on the prurience restriction violates its equal protection and First Amendment rights. Pharaohs appears to offer three different theories as to why it believes the prurience restriction is unconstitutional. First, Pharaohs says that the restriction impermissibly regulates protected speech. Second, Pharaohs suggests that the restriction would fail rational-basis review because its impermissible purpose is to exclude businesses expressing a disfavored message from a program that was created to assist all small businesses. Finally, Pharaohs contends that the prurience restriction is unconstitutional viewpoint discrimination. We are not persuaded by these arguments and conclude that Pharaohs is unlikely to succeed on the merits of its constitutional claims.
1. Regulation of Expression
First, the Program’s prurience restriction is not subject to strict scrutiny because, with exceptions not satisfied here, restrictions on government subsidies are subject to less demanding review. Although nude dancing “is expressive conduct protected by the First Amendment,” Barnes v. Glen Theatre, Inc., 501 U.S. 560, 565 (1991) (plurality opinion), it “falls only within the outer ambit of the
Pharaohs contends that the Administrator “seeks to regulate speech of private businesses” in violation of the Constitution. Appellant’s Br. at 30. Pharaohs’s argument appears to turn on the distinction between permissible funding conditions that set the scope of a government subsidy and funding conditions that amount to backdoor regulation of speech.
The general rule is that “when the Government appropriates public funds to establish a program it is entitled to define the limits of that program.” Rust v. Sullivan, 500 U.S. 173, 194 (1991). But “the government may not deny a benefit to a person on a basis that infringes his constitutionally protected freedom of speech.” Agency for Int’l Dev. v. All. For Open Soc’y Int’l, Inc., 570 U.S. 205, 214 (2013) (cleaned up). In other words, the government may set funding terms and conditions that “specify the activities Congress wants to subsidize” unless those terms and conditions “seek to leverage funding to regulate speech outside the contours of the program itself.” Id. at 214–15; see Rust, 500 U.S. at 197 (rejecting challenge to subsidy program that did not “effectively prohibit[] the recipient[s] from engaging in the protected conduct outside the scope of the federally funded program”).
The prurience restriction at issue here excludes certain types of businesses from eligibility for PPP loans—it does not directly regulate speech. The prurience restriction is thus part of a selective subsidy program. In Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983), the Supreme Court held that the exclusion of lobbying organizations from the tax exemption for nonprofits did not violate the First Amendment. Id. at 549 (explaining that the “decision not to subsidize the exercise of a fundamental right does not infringe the right, and thus is not subject to strict scrutiny”). The Court concluded that the tax exemption was a subsidy because it had “much the same effect as a cash grant.” Id. at 544. And the “selection of particular entities or persons for entitlement to this sort of largesse ‘is obviously a matter of policy and discretion not open to judicial review unless in circumstances which here we are not able to find.’” Id. at 549 (citations omitted).
In its motion for mandatory injunctive relief, Pharaohs has not made the necessary “clear showing” that the restriction at issue here improperly leverages the subsidy to regulate speech. Tom Doherty Assocs., Inc. v. Saban Entm’t, Inc., 60 F.3d 27, 34 (2d Cir. 1995) (quoting Abdul Wali v. Coughlin, 754 F.2d 1015, 1025 (2d Cir. 1985)). As with the subsidy in Regan, PPP loans are broadly available, but the government has decided not to subsidize certain types of businesses, even if they engage in constitutionally protected activities. The government does not violate a plaintiff’s rights “by declining to subsidize its First Amendment activities.” Regan, 461 U.S. at 548. “The Court has never held that Congress must grant a benefit . . . to a person who wishes to exercise a constitutional right.” Id. at 545. Likewise, there is no indication that the restriction here “was intended to suppress” protected conduct. Id. at 548; see id. (“The
We thus hold that the district court did not abuse its discretion by declining to apply strict scrutiny to the government’s decision to exclude certain entities from receiving subsidies under the Program.
2. Legitimate Government Interest
The government’s decision not to subsidize certain activities need only “bear a rational relation to a legitimate government purpose.” Regan, 461 U.S. at 547 (applying rational-basis review to, as here, a challenge to a selective subsidy under both the Free Speech and Equal Protection Clauses); accord Boy Scouts of Am. v. Wyman, 335 F.3d 80, 91–92, 97 (2d Cir. 2003). We thus apply rational-basis review to the Administrator’s exclusion of nude-dancing establishments from the Program. Although the rational-basis standard is “not meant to be toothless,” it provides no “license for courts to judge the wisdom, fairness, or logic of legislative choices.” Winston v. City of Syracuse, 887 F.3d 553, 560 (2d Cir. 2018) (internal quotation marks omitted).
The Administrator asserts that the exclusion of businesses presenting live performances of a prurient sexual nature is rationally related to the government’s legitimate interest in prioritizing its finite resources. This account mirrors the rationale the SBA gave when it first proposed the exclusion of such businesses from 7(a) loans. In its 1995 notice of proposed rulemaking, the SBA justified the exclusion of lawful but prurient businesses as consistent with its “obligation to direct its limited resources and financial assistance to small businesses in ways which will best accomplish SBA’s mission, serve its constituency, and serve the public interest.” Business Loan Programs, 60 Fed. Reg. 64,356, 64,360 (Dec. 15, 1995). Although the prioritized distribution of finite resources is a legitimate government interest, this rationale does not explain why there is an interest in deprioritizing businesses featuring nude dancing.
It is the movant’s burden, however, to negate the bases that “might support” the regulation. Sensational Smiles, LLC v. Mullen, 793 F.3d 281, 284 (2d Cir. 2015) (quoting Heller v. Doe, 509 U.S. 312, 320 (1993)). Pharaohs asserts that “the only apparent purpose for this regulation is to exclude small businesses that express a disfavored message from programs that were created to assist all small businesses.” Appellant’s Br. at 23 (quoting Camelot Banquet Rooms, Inc. v. U.S. Small Bus. Admin., 458 F. Supp. 3d 1044, 1061 (E.D. Wis. 2020)). But Pharaohs fails to acknowledge that legitimate interests may be served by the government’s decision not to subsidize adult-entertainment venues. See, e.g., City of Renton v. Playtime Theaters, Inc., 475 U.S. 41, 47–49 (1986) (holding that local governments may enact zoning ordinances against adult movie theaters to curb negative “secondary effects”); Paris Adult Theater I v. Slaton, 413 U.S. 49, 63 (1973) (recognizing the government’s legitimate interest in curbing the “debas[ing]” influence of “commercial exploitation of sex”).
3. Viewpoint-Based Discrimination
Pharaohs also contends that the exclusion of businesses hosting “live performances of a prurient sexual nature” is unconstitutional viewpoint-based discrimination.5 It argues that nude dancing illustrates the viewpoint “that lust or sexual desire is good” and that the SBA’s refusal to fund nude-dancing establishments is a viewpoint-based classification instead of a content-based one. Appellant’s Br. at 33. We disagree: “prurient” describes a type of content, not a viewpoint.
In General Media Communications, Inc. v. Cohen, 131 F.3d 273 (2d Cir. 1997), we upheld a prohibition against the sale on military bases of material, “the dominant theme of which depicts or describes nudity . . . in a lascivious way.” Id. at 282. This is because “lasciviousness” is a content-based distinction describing the subject of the prohibition. Id. at 281–82, 287–88 (quoting
The same considerations govern a classification based on “prurience.” The word “prurient” operates in the SBA’s regulation to describe the subject matter—or content—of businesses excluded from SBA loans. Businesses that present live performances are excluded if the nature of those performances is prurient. See
D. Remaining Injunction Factors
In the absence of the necessary “clear or substantial” showing of Pharaohs’s likelihood of success on the merits, the district court properly exercised its discretion to deny preliminary relief. Tom Doherty Assocs., 60 F.3d at 33. The court did not—and did not need to—address the remaining preliminary injunction factors. A district court may grant a
III. CONCLUSION
For the reasons set forth above, the district court’s judgment is affirmed.