By Hannah Albarazi

Law360, San Francisco (July 30, 2020, 9:53 PM EDT ) A group of 13 strip clubs urged a California federal magistrate judge at a video hearing Thursday to grant a preliminary injunction restraining the U.S. Small Business Administration from discriminating against workers in the adult live entertainment industry with a blanket denial of COVID-19 small business relief loans.

The strip clubs, which are located in cities across California, Oregon, Washington and Colorado, asked U.S. Magistrate Judge Laurel Beeler to preliminarily enjoin an SBA regulation that precludes businesses offering entertainment of a sexual nature from being eligible for Emergency Injury Disaster Loans under the Coronavirus Aid Relief and Economic Security Act.

Throughout Thursday's hearing, Judge Beeler appeared sympathetic to the strip clubs, saying that she understands these are businesses "where people are trying to make a living, in a time where they can't make a living."

Bradley J. Shafer of Shafer & Associates PC, attorney for the strip clubs, argued that the regulation exceeds congressional authority under the CARES Act and is not the result of reasoned decision-making.

But the SBA, represented by James Gilligan of the U.S. Department of Justice, said the agency isn't curbing anyone's freedom of speech but merely choosing not to fund those free speech activities.

"It's not a restriction on plaintiffs' speech at all," Gilligan told the judge, arguing that not providing funding is not an infringement on speech.

Judge Beeler said the case was "interesting" and acknowledged the validity of the arguments on both sides.

"As the government says, it is allowed to decide what it wants to fund. But I'm not unsympathetic to the [plaintiffs'] larger argument that 'we're a business too,'" Judge Beeler said.

The strip clubs say in their complaint that the CARES Act is supposed to provide broad relief to the economy through businesses and workers who have been impacted by the pandemic and say that the SBA can't "saddle those recovery efforts with the irrelevant ballast of decades-old regulations that impermissibly and unconscionably narrow the relief programs."

The government should not deny the emergency loans based on a companies' expressive viewpoint, the strip clubs say, arguing that doing so "threatens their very existence" and their fundamental First Amendment rights.

Since the coronavirus relief bill funding of the loans occurs on a first-come, first-serve basis until the fund is depleted, the strip clubs say the court must act now.

Shafer argued to Judge Beeler that in order for her to reach the conclusion that the strip clubs are wrong on the Administrative Procedures Act claim, she would have to disagree with two circuit courts.

Shafer pointed to the May decision by the Sixth Circuit, refusing to pause a Michigan federal judge's order blocking the SBA from withholding Paycheck Protection Program loans from strip clubs and other sexually oriented businesses.

Shafer, who also represented the plaintiffs in that case, told Law360 that all his clients in that case have since received PPP loans as a result of the favorable ruling.

The Seventh Circuit also refused the SBA's request to stay a preliminary injunction that a Wisconsin federal judge granted to sexually oriented businesses there challenging the SBA's ineligibility rule on First Amendment grounds.

Judge Beeler said the strip clubs could amend their complaint, which they filed in mid-June and which largely focused on alleged constitutional and CARES Act violations, to include additional allegations laid out in a supplemental brief filed the evening before the hearing, namely that the APA had been violated.

Shafer told Law360 that the APA issue is dispositive and should invalidate the agency's regulation.

The SBA declined to comment on the pending litigation Thursday.

The strip clubs are represented by Bradley J. Shafer of Shafer & Associates PC and Douglas J. Melton and Shane M. Cahill of Long & Levit LLP.

The U.S. Small Business Administration is represented by James Gilligan of the U.S. Department of Justice's Civil Division, Federal Programs Branch.

The case is Deja Vu - San Francisco LLC et al. v. the U.S. Small Business Administration et al, case number 3:20-cv-03982, in the U.S. District Court for the Northern District of California.

--Editing by Jay Jackson Jr.

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