The CARES Act Doesn’t Seem to Care About Adult Industry Businesses

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It made headlines recently that adult industry businesses and workers may be ineligible to access the Small Business Administration (SBA) loans meant to save businesses during the Covid-19 crisis.  At least one potentially-affected company has brought suit against the government on what I believe are reasonable grounds.  Let’s take a look at the situation.

On March 27, 2020, in response to the economic hardship caused by the ordered closing of businesses due to coronavirus, the U.S. government passed a two trillion-dollar stimulus called the CARES Act, an acronym for Coronavirus Aid, Relief, and Economic Security Act.  The Act included almost $350 billion for a Paycheck Protection Program (“PPP”) to help businesses continue to pay their employees while shut down. 

The application for PPP loans includes exclusion language mirroring that of a United States federal regulation, 37 CFR § 120.110 (called herein “the Regulation”), which states:

The following types of businesses are ineligible:

(p) 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;

A provision in the SBA Standard Operating Procedure (herein “SOP”) provides, in pertinent part, very similar language:

a. A business is not eligible for SBA assistance if: 

 i. It presents live or recorded performances of a prurient sexual nature; or 

ii. It derives more than 5% of its gross revenue, directly or indirectly, through the sale of products, services or the presentation of any depictions or displays of a prurient sexual nature. 

According to the SOP, it is the lender and the SBA that determine whether a business is considered “prurient” in its offerings. 

On April 8, 2020, DV Diamond Club of Flint, LLC (d/b/a Little Darlings) filed a lawsuit in a federal district court in Michigan against the SBA, the United States, Jovita Carranza (Administrator of the SBA), and Steven Mnuchin (Secretary of the U.S. Treasury).  The plaintiff is a strip club that sells alcohol in accordance with its liquor license.  The club applied for a PPP loan, and is concerned that its application will be denied or delayed due to the “prurience” exclusion. 

The complaint in the lawsuit challenges the exclusion on First Amendment “free speech” grounds.  The complaint asserts that the exclusion is an impermissible content-based restriction on speech (i.e. the government is restricting speech based on its (sexual) content, rather than in a neutral way applicable across the board regardless of type of content). 

The complaint further challenges the exclusion on Fifth Amendment grounds. The club argues that the exclusion treats establishments and their workers presenting certain forms of performance dance entertainment (such as strip clubs including the plaintiff) differently from establishments and workers presenting other forms of entertainment or no entertainment, for no compelling, important, or rational reason. It further argues that the exclusion violates rights of the plaintiff and its workers under the occupational liberty (right to “life, liberty and the pursuit of happiness”) language of the Fifth Amendment.

A key here to what the outcome of this case may be is how the word, “prurient,” is defined. Is the exotic dance provided at a strip club, such as Little Darlings, “prurient?”  In the larger scheme of things, are sex toys prurient items?  How about the content made by porn studios?  What about content of erotic magazine publishers? 

“Prurience” is a component of “obscenity,” but the two terms are not one and the same. The complaint challenges that the exclusion has conformed to constitutional standards of obscenity. Three cases in the U.S. have defined a test for determining what is obscene.  These cases include: Miller v. California, 413 U.S. 15, 24-25 (1973); Smith v. United States, 431 U.S. 291, 300-02, 309 (1977); and Pope v. Illinois, 481 U.S. 497, 500-01 (1987).  The resulting analysis is:

  • — Whether the average person, applying contemporary adult community standards, finds that the matter, taken as a whole, appeals to prurient interests (i.e., an erotic, lascivious, abnormal, unhealthy, degrading, shameful, or morbid interest in nudity, sex, or excretion);
  • — Whether the average person, applying contemporary adult community standards, finds that the matter depicts or describes sexual conduct in a patently offensive way (i.e., ultimate sexual acts, normal or perverted, actual or simulated, masturbation, excretory functions, lewd exhibition of the genitals, or sado-masochistic sexual abuse); and
  • — Whether a reasonable person finds that the matter, taken as a whole, lacks serious literary, artistic, political, or scientific value.

I think that the vast majority of companies and workers in the adult industry would not consider themselves to be making or peddling obscene or prurient material as defined by the above test.  The club, in its complaint, spoke to the non-obscene nature of its entertainment. 

However, it is what the lenders and the SBA think that matters to the adult industry’s future right now, which leaves things uncertain.  The club, in its lawsuit, has asked the court for a temporary restraining order, and preliminary and permanent injunctions enjoining the government and SBA from enforcing or utilizing the Regulation and the SOP provision in regard to loan applications made pursuant to the PPP of the Cares Act.

It’s my opinion that the Regulation and the SOP provision are unnecessary, as the SBA wouldn’t be expected to give loans to businesses that offer obscene content or products, since such businesses would be illegal anyway – Making and distributing obscenity is a crime under federal law. The language in the PPP application just creates possibilities for discrimination against law-abiding and legal adult businesses.

Let’s hope that Little Darlings brings BIG change with its legal action. Covid-19 has wrecked havoc across the world, and it is clear that nothing will be the same in its wake. I hope that there will be some silver linings though.  Maybe one of them could be the removal of at least one point of potential marginalization of adult industry. 

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