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By: Kelly Zech, Volume 105 Staff Member

In March 2020, to combat the spread of the COVID-19 pandemic, government orders resulted in a sudden and unprecedented nationwide business shutdown. At the same time, Congress passed the historic Coronavirus Aid, Relief, and Economic Security (CARES) Act.[1] A provision of the CARES Act entitled “Keeping American Workers Paid and Employed Act” established a forgivable loan program, the Paycheck Protection Program (PPP), and designated the Small Business Association (SBA), via the Small Business Act, to oversee it.[2] Congress initially allocated $349 billion to the SBA for PPP loan guarantees. [3] Those funds were quickly disbursed.[4]  One month later, funding was increased to a total of $659 billion.[5] The PPP was intended to increase SBA loan eligibility for a greater range of small businesses and organizations.[6]  Specifically, Congress stated that during the loan eligibility period, “in addition to small business concerns, any business concern . . . shall be eligible to receive a covered loan . . . .”[7]

The SBA subsequently issued regulatory guidelines for PPP loan applicants that included a PPP Ineligibility Rule.[8] This resulted in a prohibition of loan disbursements to businesses that are foreign, pyramid sale structured, highly speculative, affiliated with an associate indicted for a  felony or crime of moral turpitude, political or lobbying, and, important here, offering live performances of a prurient sexual nature (the “prurient restriction”).[9] PPP loans were issued on a first come, first served basis until funding was exhausted.[10] The immediate effect was that lenders advised applicants who worked in legal sex industries, such as strip clubs, that they were ineligible for PPP loans. Those cash-strapped businesses then sought judicial remedy.[11]


Legal sex trade businesses, such as strip clubs, immediately filed lawsuits for injunctive relief across the United States.[12] Among these cases, the Second Circuit recently found that Pharaoh’s Gentlemen’s Club, an establishment that features nude dancing, was ineligible for a PPP loan because it features sexually arousing or appealing dancing.[13] The decision first analyzed the issue using statutory interpretation.  The court considered whether the CARES Act’s plain language providing eligibility to “any business concern” functioned as an expansion to businesses prohibited from receiving loans under the Small Business Act or merely served to expand loan eligibility to entities named in the statutory language itself.[14]  The Second Circuit favored a narrow interpretation and upheld the prurience restrictions for PPP loan eligibility.[15]  This created a circuit split.  In nearly identical cases the Sixth Circuit interpreted the statute more broadly, striking down the “prurience restrictions.”[16]

The Second Circuit’s opinion went further than the Sixth Circuit’s and addressed several constitutional claims, including the issue of whether the prurience restrictions violate the Free Speech Clause.[17]  The court held that the prurience restrictions do not impermissibly restrict constitutionally protected speech.[18]   To do so, the Second Circuit leaned on Rust v. Sullivan.[19]  In Rust, the Supreme Court examined how constitutionally protected speech interacts with the Spending Clause.[20]  The rule created by Rust is that when the government appropriates funding, it can set terms for receipt of that funding.”[21]  Further, the government can choose what activities it wants to subsidize so long as it is not regulating speech “outside the contours of the program itself.”[22] One of the primary justifications for the holding in Rust was that beneficiaries have a choice.[23] In other words, if a potential subsidy recipient does not want to voluntarily decrease their participation in constitutionally protected speech, they should not accept the funds. [24]

Rust formed the bedrock of the government speech doctrine, giving the government broad discretion in placing conditions attached to spending.[25]  As a result, the government is not restricted by the Free Speech Clause when it decides what it says and can engage in viewpoint discrimination. [26] The one caveat is that there must be a legitimate government interest in restricting that category of constitutionally protected speech.[27]


The CARES Act is explicitly meant to broaden aid to small businesses during the economic crisis created by the pandemic and government shut-down orders.[28]  The SBA’s Ineligibility Rule must be aligned with a legitimate government interest for every restriction.[29] However, the underlying rationale for the prurient restriction is that the SBA simply does not want to fund sexually explicit speech.  When the SBA first defended the rule in 1995, it stated that the agency has the right to prioritize limited resources and sharing funding with prurient businesses does not best serve the public.[30] In other words, the SBA decided that it did not want to fund sexually explicit expression.  It is difficult to align this justification against the backdrop of a very broadly defined CARES Act that funds a vast array of expression.[31]

In Pharaohs GC, Inc. v. United States Small Business Administration, the SBA reiterated that it does not want to prioritize funding for sex-related business, but this is not a legitimate government interest in deprioritizing funding.[32] Procedurally, Pharaoh’s had the burden to determine and negate the government’s legitimate interest.[33]  Pharaoh’s asserted that the legitimate government interest is exclusion of a disfavored message, but the court takes that one step further.[34]  The Second Circuit speculated as to what the government’s interest in excluding prurient speech might be without providing any evidentiary basis for that speculation.[35]  As a result, no legitimate government interest was firmly established.[36]

Applying Rust to the PPP loan criteria dangerously expanded government speech.  Without establishing a legitimate government interest, the SBA established a content-based restriction[37] on a narrow category of small businesses. As a result, the government speech doctrine now permits both attaching conditions to funding and barring receipt of funding to an entire category of constitutionally protected speech without a legitimate government interest. However, this expansion is no longer justified under the same rationale that justified Rust—choice. A gentleman’s club cannot simply cease being a gentleman’s club as a condition for the receipt of a subsidy because there is no longer a business to subsidize.

The adult entertainment venues who have sought injunctive relief for a PPP loan are small businesses that met legal operating requirements. These venues employ security, bartenders, servers, cooks, bookkeepers, and others in addition to performers. Protecting those jobs aligns with Congress’s intent in passing both the CARES Act and the Small Business Act—to expand aid and support for small businesses during a global pandemic. The precedent that the government can say it is in the public’s interest that a cook in a supper club deserves paycheck protection but that a cook in a gentleman’s club does not for doing the same job is an expansion of government speech doctrine that should not stand. The Second Circuit erred in interpreting Rust so broadly that it supports choosing which businesses and jobs are worth saving based on content restrictions without a justifying legitimate government interest—an interpretation that ultimately enables the government to widely restrict constitutionally protected rights with only the weakest of reasons.


[1] Coronavirus Aid, Relief, and Economic Security Act (CARES Act), 15 U.S.C. § 116 (2020).

[2] Id. The PPP was put into section 7(a) of the Small Business Act, 15 U.S.C. § 636(a).

[3] Id.

[4] Id.

[5] Pub. L. No. 116-147, 134 Stat. 660 (2020).

[6] 15 U.S.C. § 636(a)(36)(D).

[7] 15 U.S.C. § 636(a)(36(D)(i) (emphasis added) (“In addition to small business concerns, any business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern described in section 657a(b)(2)(C) of this title shall be eligible to receive a covered loan if the business concern, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern 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, nonprofit organization, housing cooperative, veterans organization, or Tribal business concern operates.”).

[8] E.g., 13 C.F.R. § 120.110(p)(2) (2020).

[9] Pharaohs GC, Inc. v. Small Bus. Admin., 990 F.3d 217, 224 (2d Cir. 2021) (quoting 13 C.F.R. § 120.110).  The basis for this restriction was pre-existing regulations under section 7(a) of the Small Business Act. 15 U.S.C. § 636(a)(36).

[10] 85 Fed. Reg. 20,811, 20,813.

[11] Alanna Vagianos, Legal Sex Workers and Others in Adult Industry Denied Coronavirus Aid, HuffPost (Apr. 2, 2020 at 3:45 PM) (updated Apr. 3, 2020), [].

[12] E.g., Camelot Banquet Rooms, Inc. v. Small Bus. Admin., 458 F. Supp. 3d 1044 (E.D. Wis. 2020), appeal dismissed, No. 20-1729, 2020 WL 6481792 (7th Cir. Aug. 5, 2020) (order granting preliminary injunction); DV Diamond Club of Flint, LLC v. Small Bus. Admin., 960 F.3d 743 (6th Cir. 2020) (order granting preliminary injunction); Pharaohs GC, Inc., 990 F.3d (order denying preliminary injunction).

[13] Pharaohs GC, Inc., 990 F.3d. at 223.

[14] Id. at 226–228.

[15] Id.

[16] DV Diamond Club of Flint, LLC, 960 F.3d at 745–47.

[17] U.S. Const. amend. I (“Congress shall make no law . . . abridging the freedom of          speech. . . .”).

[18] Pharaohs GC, Inc., 990 F.3d. at 217.

[19] Id. at 229.

[20] Rust v. Sullivan, 500 U.S. 173, 173–76 (1991); U.S. Const. art. I, § 8, cl. 1 (“[T]o pay the Debts and provide for the common Defence and general Welfare of the United States. . . .”).

[21] Id. (quoting Rust, 500 US. at 194).

[22] Rust, 500 U.S. at 197.

[23] Rust, 500 U.S. at 196–200 (distinguishing that subsidy recipients can choose to either not accept the subsidy or engage in the speech suppressed by the receipt of the subsidy through separate and independent programs).

[24] United States v. Am. Library Ass’n, Inc., 539 U.S. 194, 211–14 (2003) (holding that subsidies conditioning suppression of constitutionally protected speech is permissible because subsidy recipients have the choice in whether or not to accept those conditions).

[25] Amdt1. Government Speech Doctrine, Const. annotated, [].

[26] Id.

[27] Rust, 500 U.S. at 192–93; see also Ronald Steiner, Compelling State Interest, The First Amend. Encyclopedia (2009), [] (defining a legitimate government interest broadly so that it only requires scrutiny under rational basis review).

[28] See Camelot Banquet Rooms, Inc. v. Small Bus. Admin., 458 F.Supp.3d 1044, 1053–54 (E.D. Wis. 2020).

[29] Brian Soucek, Discriminatory Paycheck Protection, 11 Cal. L. Rev. Online 319, 332–33 (2020) (“[B]arring companies that have defaulted on federal loans (a financial safeguard), the bar on foreign businesses (advancing the SBA’s goal of fostering small American businesses), the bar on discriminatory clubs (meant to avoid government participation in such discrimination), or the bar on businesses devoted to religious indoctrination (. . . Establishment Clause concerns).”).

[30] Business Loan Programs, 60 Fed. Reg. 64,356, 64, 360 (Dec. 15, 1995).

[31] Soucek, supra note 29, at 333 (“And there is no evidence that promoting expression that is ‘wholesome’ rather than prurient is in any way related to the goals of the CARES Act, or even the Small Business Act.”).

[32] Pharaohs GC, Inc. v. Small Bus. Admin., 990 F.3d 217, 230 (2d Cir. 2021).

[33] Id.

[34] Id.

[35] Id. (speculating that the government might be concerned with the secondary effects of that speech in the surrounding community or that the government may consider legally operating sex-related business something that needs to be curbed due to the “debasing influence of commercial exploitation of sex.”).

[36] See also Souceck, supra note 29, at 335 (describing that the government must have an evidentiary basis for harmful secondary effects in order to place a restriction on sexually expressive activity).

[37] Compare Pharaohs, 990 F.3d at 231 (arguing that prurience is a content-based not viewpoint based restriction because “one could hot have a prurient view of American policy in the Middle East or antitrust regulation” but can have a prurient view of live performances) with, Souceck, supra note 25, at 333 (highlighting the absurdity of the prurient restriction enabling the government to choose which “products, services, performances, or depictions” of sexuality the government will fund for the “public interest.”).