The Rotunda at the U.S. Capitol in Washington, D.C. (Photo: Diego M. Radzinschi/ALM)

A federal appeals court on Wednesday cleared a path for adult nightclubs to seek government-backed coronavirus relief loans, dealing a setback to the Trump administration in its bid to block those businesses from receiving assistance.

The U.S. Justice Department had asked the U.S. Court of Appeals for the Seventh Circuit to block a trial judge's decision requiring the U.S. Small Business Administration to deem adult nightclubs eligible for coronavirus relief loans. After agreeing to stay the lower court's decision earlier this month, a three-judge panel on Wednesday denied the Justice Department's request to stave off the ruling.

The panel—including Judges Michael Kanne, Ilana Rovner and David Hamilton—did not elaborate on their reasoning to deny the government's request to stay the underlying preliminary injunction.

A group of Wisconsin strip clubs challenged Small Business Administration regulations that excluded them from a federal loan program designed to prop up small businesses struggling amid the coronavirus outbreak. The clubs argued that their exclusion from the Payroll Protection Program, created as part of the roughly $2 trillion coronavirus relief package, amounted to a violation of their free-speech rights under the First Amendment.

The suit from the strip clubs was part of a wave of litigation in courts across the country seeking access to federal coronavirus relief loans. In another lawsuit, a group representing political consultants and lobbyists challenged the exclusion of the influence industry from the loan program. In that case, a federal judge in Washington declined to order the Trump administration to make coronavirus relief loans available to lobbyists. The U.S. Court of Appeals for the D.C. Circuit said Tuesday the court would rule on the court papers and not hold oral arguments.

The Seventh Circuit's order Wednesday was the second in less than a week in which a federal appeals court ruled against the Small Business Administration in a dispute over federal coronavirus loans. A Sixth Circuit panel on Friday, ruling in a Michigan case in which strip clubs sued the agency, refused to pause a trial judge's order favoring the businesses.

The Seventh Circuit's ruling came weeks after a federal judge in Milwaukee ordered the Trump administration to allow the businesses to tap into the government-backed coronavirus loans. U.S. District Judge Lynn Adelman, in a 33-page opinion, said the nightclubs had "shown that their inability to obtain a loan through the PPP will prevent them from exercising their First Amendment right to present erotic dance entertainment."

Within days, the Justice Department called on the appeals court to prevent Adelman's ruling from taking effect. The Justice Department defended the exclusion of adult nightclubs from the loan program, saying that restriction on the loans funds represented not a restriction on their free-speech rights but rather a refusal to fund it with public dollars.

"That decision was rational, and reflects the policy judgment of Congress and the SBA that limited public funds are best spent subsidizing other types of businesses at this time," Justice Department lawyers said.

Justice Department lawyers argued that "absent a stay, the government will be forced to obligate limited taxpayer funds to underwrite loans to businesses that Congress and the SBA have determined are not entitled to such funds, to the detriment of otherwise eligible borrowers who would receive the funds but for the district court's erroneous injunction."

In a brief earlier this month, the Justice Department said that the businesses "remain free to conduct their First Amendment activities as they see fit using any other funds."

Jeff Olson, a Madison-based lawyer representing the adult nightclubs, did not immediately respond to a request for comment on the appeals court's ruling. A Justice Department spokesperson declined to comment Wednesday.

The Justice Department could ask the full Seventh Circuit to take up the panel's order or head to the U.S. Supreme Court and ask the justices to take up the case. The court has not had an opportunity to review disputes over federal coronavirus relief loans.

Adelman, the Wisconsin judge, made waves earlier this year for a piece of writing in which he criticized rulings under the leadership of Chief Judge John Roberts Jr. Adelman described a court that he said was benefitting more powerful interests over democratic values.

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