Tag: Sixth Circuit

Sixth Circuit Explicitly Sidesteps the NLRB’s McLaren Macomb Decision

The Sixth Circuit Court of Appeals recently declined to comment on the National Labor Relations Board’s (the “Board”) McLaren Macomb decision which took aim at overbroad non-disparagement and non-disclosure agreements.

We first reported in February 2023, on the significant decision by the Board in McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), which concluded, among other things, that proffering a severance agreement with broad confidentiality and non-disparagement provisions could violate Section 7 of the National Labor Relations Act (“NLRA”) – a decision and rationale we wrote about in depth here. The decision drove employers to reevaluate existing severance agreements with such provisions.

On appeal, the Sixth Circuit sidestepped the most salient aspects of the Board’s McLaren Macomb decision, namely those portions addressing the lawfulness of confidentiality and non-disparagement provisions in severance agreements, writing, “we do not address [the Board’s] decision to reverse Baylor [Univ. Med. Ctr., 369 NLRB No. 43 (2020)] and IGT[, 370 NLRB No. 50 (Nov. 4, 2020)], or whether it correctly interpreted the NLRA in doing so.” In other words, the Sixth Circuit did not offer any insight or pass judgment one way or another on the Board’s ruling that broad-based non-disparagement and confidentiality provisions are unlawful under NLRA. Indeed, while the Sixth Circuit did find the specific severance agreements at issue unlawful, it did so under previous Board precedent (not for the reasons articulated in McLaren Macomb), further reinforcing the Court’s unwillingness to address this critical issue directly.

What does this mean for employers? While there is lingering uncertainty for employers, it reinforces, at least for now, that the Board may continue to find severance agreements offered to non-supervisory employees that include broad-based confidentiality and non-disparagement provisions as unlawful. Consequently, employers should continue to review their existing severance agreements with the assistance of employment counsel to determine whether, when, and to what extent they may include appropriately crafted non-disparagement and confidentiality clauses.

©1994-2024 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
 For more news on the Sixth Circuit NLRB Ruling, visit the NLR Labor & Employment section.

In Rare Summer Opinion, Supreme Court Follows Sixth Circuit’s Lead

In Department of Education v. Louisiana, the Supreme Court issued a rare August opinion to maintain two preliminary injunctions that block the Department of Education’s new rule.  That rule expands Title IX to prevent sexual-orientation and gender-identity discrimination.  State coalitions brought challenges; district courts in Louisiana and Kentucky enjoined the rule during the litigation; the Fifth and Sixth Circuits denied the government’s requests to stay the injunctions, nor would the Supreme Court intercede for the government.

All the Justices agreed that aspects of the rule warranted interim relief, most centrally the “provision that newly defines sex discrimination” to include sexual-orientation and gender-identity discrimination.  But because the district courts enjoined the entirety of the rule, the scope of relief proved divisive.  A narrow majority agreed to leave the broad injunctions in place, while four Justices in dissent argued to sever the suspect aspects of the rule and allow the remainder of the rule to take effect.  With emphasis on the “emergency posture,” the majority explained that the government had not carried its burden “on its severability argument.”

Justice Sotomayor’s dissent proposed limiting the injunctions to just the three challenged aspects of the rule.  The dissent focused on the “traditional” limits on courts’ power to fashion “equitable remedies.”  That Justice Gorsuch joined Justices Sotomayor, Kagan, and Jackson should come as no surprise.  Justice Gorsuch has harped on limiting equitable remedies to party-specific relief (e.g. Labrador v. Poe); cast doubt on severability doctrine (Barr v. AAPC (opinion concurring in part and dissenting in part)); and, of course, authored the landmark Bostock v. Clayton County decision that interpreted Title VII to protect against sex discrimination in much the same way the Department wishes to interpret Title IX.

This decision is an unreliable forecast of the Court’s view of what Title IX sex discrimination encompasses.  The Court unanimously agreed to table the debate over the Department’s new definition of sex discrimination while the lower courts proceed “with appropriate dispatch.”  The case concerned the status of the rest of the rule as that litigation continues.

A truer tell on the merits is the Sixth Circuit panel’s order denying the government’s stay request.  The panel found it “likely” “that the Rule’s definition of sex discrimination exceeds the Department’s authority.”  Preliminarily at least, the court thought it unlikely that Title IX—last amended in 1972—addresses sexual-orientation and gender-identity discrimination.  The Sixth Circuit has been reluctant “to export Title VII’s expansive meaning of sex discrimination to other settings”—and so it was here.

If “past is not always prologue,” still sometimes it is.  The Sixth Circuit panel divided on the injunction’s scope just like the Supreme Court.  Chief Judge Sutton and Judge Batchelder formed the majority, finding that the three “central provisions of the Rule . . . appear to touch every substantive provision.”  Saddling school administrators with new regulatory requirements on the eve of the new schoolyear tipped the equities toward enjoining the full rule.  Judge Mathis dissented because the injunction disturbed provisions of the rule “that Plaintiffs have not challenged.”

For now, the Department’s new rule yields to the old one.  That rule, too, is being litigated in the Sixth Circuit because guidance documents say the Department will interpret Title IX the same way Bostock interpreted Title VII.  See Tennessee v. Dep’t of Educ. and this coverage at the Notice & Comment blog.  To close out with some Supreme Court trivia—this marks its first mid-summer opinion since Alabama Association of Realtors v. DHHS in 2021, where the Court ended the Biden Administration’s Covid-era moratorium on evictions.  Before that may be the Court’s September 2012 decision Tennant v. Jefferson County Commission involving a challenge to West Virginia’s congressional districts.

© Copyright 2024 Squire Patton Boggs (US) LLP
For more news on SCOTUS Decision in Department of Education v. Louisiana, visit the NLR Public Education Services section.

OSHA’s Next Steps with the Vaccine or Test Rule

On Tuesday, January 25, the U.S. Occupational Safety and Health Administration (OSHA) announced the withdrawal of the “Emergency Temporary Standard” (ETS) that would have required large private employers of 100 or more employees to implement a vaccine or test policy. This announcement came after the U.S. Supreme Court stayed enforcement of the ETS on January 13, 2022 pending a decision from the Sixth Circuit on the underlying proceedings challenging the ETS. The withdrawal of the ETS is effective as of January 26, 2022.

The announcement from OSHA made it clear that the withdrawal is not complete, stating:

“Although OSHA is withdrawing the Vaccination and Testing ETS as an enforceable emergency temporary standard, OSHA is not withdrawing the ETS to the extent that it serves as a proposed rule under section 6(c)(3) of the Act, and this action does not affect the ETS’s status as a proposal under section 6(b) of the Act or otherwise affect the status of the notice-and-comment rulemaking commenced by the Vaccination and Testing ETS.” OSHA’s complete withdrawal can be found here.

OSHA intends to keep the ETS as a proposed rule under OSHA’s rulemaking authority. This means that OSHA may choose to modify the previously published ETS and may rely on the Supreme Court’s opinion in doing so. OSHA may choose to implement ideas from the Supreme Court justices such as an industry or workplace-specific analysis.  Additionally, OSHA is also likely to review the comments submitted during the notice and comment period for direction with respect to a potential final ETS.

While Tuesday’s announcement does not necessitate action by employers, it does leave the door open for future directives.

© 2022 Varnum LLP
For more on OSHA, visit the NLR Labor & Employment section.

Sixth Circuit Clarifies When Statute of Limitations Commences in False Claims Act Whistleblower Retaliation Cases

On January 10, 2022, the Sixth Circuit held in El-Khalil v. Oakwood Healthcare, Inc., 2022 WL 92565 (6th Cir. Jan 10, 2022) that the statute of limitations period for a False Claims Act whistleblower retaliation case commences when the whistleblower is first informed of the retaliatory adverse employment action.

El-Khalil’s False Claims Act Whistleblower Retaliation Claim

While working as a podiatrist at Oakwood Healthcare, El-Khalil saw  employees submit fraudulent Medicare claims, which he reported to the federal government. In 2015, Oakwood’s Medical Executive Committee (MEC) rejected El-Khalil’s application to renew his staff privileges.  After commencing a series of administrative appeals, El-Khalil found himself before Oakwood’s Joint Conference Committee (JCC) on September 22, 2016. The JCC, which had the authority to issue a final, non-appealable decision, voted to affirm the denial of El-Khalil’s staff privileges.  On September 27, 2016, the JCC sent El-Khalil written notice of its decision.

Three years later, on September 27, 2019, El-Khalil sued Oakwood for retaliation under the False Claims Act whistleblower retaliation law.  Oakwood moved for summary dismissal on the basis that the claim was not timely filed in that the JCC’s decision became final when it voted on September 22, 2016 and therefore the filing on September 27, 2019 was outside of the 3-year statute of limitations. The district court granted Oakwood’s motion and El-Khalil appealed.

Sixth Circuit Denies Relief

In affirming the district court, the Sixth Circuit held that the text of the FCA anti-retaliation provision (providing that an action “may not be brought more than 3 years after the date when the retaliation occurred”) is unequivocal that the limitations period commences when the retaliation actually happened. It adopts “the standard rule” that the limitations period begins when the plaintiff “can file suit and obtain relief,” not when the plaintiff discovers the retaliation. The retaliation occurred on September 22 when the JCC voted to affirm the denial of El-Khalil’s staff privileges, and the JCC’s September 27 letter merely memorialized an already final decision.

In addition, the Sixth Circuit held that the False Claims Act’s whistleblower protection provision does not contain a notice provision. As soon as Oakwood “discriminated against” El-Khalil “because of” his FCA-protected conduct, he had a ripe “cause of action triggering the limitations period.” The court noted that if an FCA retaliation plaintiff could show that the employer concealed from the whistleblower the decision to take an adverse action, the whistleblower might be able to avail themself of equitable tolling to halt the ticking of the limitations clock.

Implications for Whistleblowers

Some whistleblower retaliation claims have a short statute of limitations and therefore it is critical to promptly determine when the statute of limitations starts to run.  For most whistleblower retaliation claims that are adjudicated at the U.S. Department of Labor, the clock for filing a complaint begins to tick when the complainant receives unequivocal notice of the adverse action.  Udofot v. NASA/Goddard Space Center, ARB No. 10-027, ALJ No. 2009-CAA-7 (ARB Dec. 20, 2011).  If a notice of termination is ambiguous, the statute of limitations may start to run upon the effective date of the termination as opposed to the notice date.  Certain circumstances may justify equitable modification, such as where:

  1. the employer actively misleads or conceals information such that the employee is prevented from making out a prima facie case;
  2. some extraordinary event prevents the employee from filing on time;
  3. the employee timely files the complaint, but with the wrong agency or forum; or
  4. the employer’s own acts or omissions induce the employee to reasonably forego filing within the limitations period.

See Turin v. AmTrust Financial Svcs., Inc., ARB No. 11-062, ALJ No. 2010-SOX-018 (ARB March 29, 2013).

When assessing the statute of limitations for whistleblower retaliation claims, it is also critical to calculate the deadline to timely file a claim for each discrete adverse action or each act of retaliation.  However, in an action alleging a hostile work environment, retaliatory acts outside the statute of limitations period are actionable where there is an ongoing hostile work environment and at least one of the acts occurred within the statute of limitations period.  And when filing a retaliation claim, the whistleblower should consider pleading untimely acts of retaliation because such facts are relevant background evidence in support of a timely claim.

Article By Jason Zuckerman of Zuckerman Law

For more whistleblower and business crimes legal news, click here to visit the National Law Review.

© 2022 Zuckerman Law

Stay of OSHA Emergency Temporary Standard Lifted By Sixth Circuit – “All Systems Go,” For Now…

A divided panel of the United States Court of Appeals for the Sixth Circuit lifted the stay on the Occupational Safety and Health Association’s Emergency Temporary Standard (“OSHA ETS”) late Friday night (December 17, 2021). The Sixth Circuit had previously been selected at random to hear the consolidated OSHA ETS litigation.

As a result of the Sixth Circuit’s ruling, OSHA announced that it would exercise enforcement discretion with respect to the compliance dates of the OSHA ETS.  To provide employers with sufficient time to come into compliance:

  • OSHA will not issue citations for noncompliance with any requirements of the OSHA ETS before January 10, 2022; and

  • OSHA will not issue citations for noncompliance with testing requirements before February 9, 2022.

These “extensions” are conditioned on an employer exercising reasonable, good faith efforts to come into compliance with the OSHA ETS.

Ultimately, the Sixth Circuit found that the petitioners (Republican-led states, businesses, religious groups, and individuals) were unable to establish a likelihood of success on the merits. In doing so, the Sixth Circuit considered and analyzed a myriad of statutory and constitutional arguments. Two out of the three judges on the panel determined that the petitioners would be unlikely to be successful on their constitutional arguments that OSHA violated the commerce clause or the non-delegation doctrine.

Under the Occupational Safety and Health Act, OSHA is required to show that health effects may constitute a “grave danger” in order to warrant an emergency temporary standard. The Sixth Circuit held that the determination as to what constitutes “grave danger” should be left, in the first instance, to the agency. The Sixth Circuit expressly disagreed with, and in effect overruled, the United States Court of Appeals for the Fifth Circuit by holding that OSHA was not required to make findings of exposure in all covered workplaces. The Sixth Circuit held that to require so would mean that no hazard could ever rise to the level of “grave danger.” Ultimately, the Sixth Circuit found that OSHA had shown that COVID-19 is a danger and relied on proper science in issuing the ETS. The Sixth Circuit further held that simply because OSHA did not issue the ETS at the beginning of the pandemic did not mean the agency did not consider COVID-19 an emergency worth addressing.

The Sixth Circuit’s decision was appealed this morning to the Supreme Court; however, this appeal does not alter the decision unless and until the Supreme Court rules.  In the meantime, employers should resume (or continue) preparations to comply with the ETS requirements. For a summary of the OSHA ETS and its requirements, visit here.

Article By Lilian Doan Davis and Isaac T. Caverly of Polsinelli PC

For more coronavirus legal news, click here to visit the National Law Review.

© Polsinelli PC, Polsinelli LLP in California

Sixth Circuit Deals Blow to OSHA’s Proposed Expedited Briefing Schedule, Says it Will Keep ETS Case

In what is getting to be habit in the OSHA ETS litigation with courts issuing orders late Friday afternoons, the Sixth Circuit on December 3, 2021 tersely denied a petition to transfer the case back to the Fifth Circuit.  In the same order, the Sixth Circuit also denied, without explanation, the union petitioners’ bid to transfer the case to the D.C. Circuit where there is pending litigation of the OSHA Healthcare ETS issued in June 2020.

The order perfunctorily addressed several pending motions on the docket, including OSHA’s motion for an expedited briefing schedule, which would have set the close of briefing on the merits for December 29, 2021 with oral argument held as soon as practicable thereafter.  In denying the motion, the Sixth Circuit stated little more than it was reserving judgment on setting a merits briefing schedule.  Obviously, there are a tremendous number of parties with varied interests and a multitude of legal arguments both statutory and Constitutional, which the court clearly recognizes are at play and likely require a schedule that is not rushed.

The next big issue for the court to tackle will be OSHA’s motion to dissolve the stay with the close of briefing just a week away on December 10, 2021.  Whether the court will dole out more good news for employers, states, and other challengers to the ETS for the holiday season is anybody’s guess, but a decision before the holidays seems imminent.

Article By Melanie L. Paul of Jackson Lewis P.C.

For more coronavirus legal news, click here to visit the National Law Review.
Jackson Lewis P.C. © 2021

SBA Rulemaking and Guidance Challenged in Federal Lawsuits in Connection with PPP Loan Guidance

The Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law by the President on March 27, 2020. Title I of the CARES Act, named “Keeping American Workers Employed and Paid” by Congress, appropriated $659 billion for loans guaranteed by the Small Business Administration (“SBA”) under the Paycheck Protection Program (“PPP”).

Section 1114 of the CARES Act instructs the SBA to issue regulations “to carry out this title and the amendments made by this title” within fifteen days and without regard to the usual notice requirements, which the SBA did in the form of Frequently Asked Questions (the “FAQs”). 15 U.S.C. §§ 9001(1), 9012.

While ostensibly intended to clarify uncertainty in the CARES Act, two recent federal lawsuits challenge certain rulemaking and guidance promulgated by the SBA. The question before the courts is whether such rulemaking and guidance is a lawful interpretation of the CARES Act or, as the plaintiffs argue, amounts to illegal rulemaking.

Agencies are prohibited by the Administrative Procedures Act from taking action “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(C). The validity of an agency’s interpretation of a statute is reviewed by a court using the two-step framework outlined in the landmark case, Chevron, U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984). The first question reviewed in the Chevron analysis is, “whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43.

The plaintiffs argue that certain elements of the SBA guidance did not give effect to the unambiguously expressed intent of Congress and, as a result, are unlawful and unenforceable.

DV Diamond Club of Flint v. SBA

DV Diamond Club of Flint LLC (“DV Diamond”) is a strip club in Flint, Michigan, which feared that it would be denied a PPP loan by lenders as a result of guidance from the SBA that is not consistent with the CARES Act. DV Diamond’s initial complaint, dated April 8, 2020, was amended on April 17, 2020 to add forty-one new co-plaintiffs (collectively with DV Diamond, the “Plaintiffs”), each of which claims to operate a legal sexual oriented business which meets the eligibility requirements under the CARES Act. The Plaintiffs argue that the CARES Act is unambiguous as to what businesses are eligible for PPP loans and the SBA, therefore, has no right to assert additional eligibility requirements or disqualifiers. See DV Diamond Club of Flint, LLC v. U.S. SBA, 20-cv-10899, 2020 U.S. Dist. LEXIS 82213, at *27 (E.D. Mich. May 11, 2020).

The U.S. District Court for the Eastern District of Michigan (the “District Court”) issued an injunction in favor of the Plaintiffs, noting that Congress unambiguously stated that the SBA may not exclude from eligibility for a PPP loan guarantee a business that met the CARES Act’s size standard for eligibility. Id. at *27.

The District Court agreed with the Plaintiffs that, “under step one of Chevron that the PPP Ineligibility Rule conflicts with the PPP and is therefore invalid.” Id. at *42.

“Congress provided temporary paycheck support to all Americans employed by all small businesses that satisfied the two eligibility requirements—even businesses that may have been disfavored during normal times.” Id. at *4-5.

The Sixth Circuit Court of Appeals denied the SBA’s motion for a stay of the injunction, holding that the relevant factors, including the Plaintiff’s likelihood success, weighed in favor of the Plaintiff. DV Diamond Club of Flint, LLC v. SBA, No. 20-1437, 2020 U.S. App. LEXIS 15822, at *8 (6th Cir. May 15, 2020).

Zumasys, Inc. v. SBA

Zumasys and two affiliated companies (collectively, “Zumasys”) received PPP loans but are concerned that they may subsequently be deemed ineligible as a result of “improper, and legally impermissible, underground regulation” promulgated by the SBA. (Zumasys, Inc. v. U.S. SBA et al., Dkt. No. 20-cv-008511, Dkt. 1 (the Zumasys Complaint) ¶ 58.)

Zumasys claims to have acted in reliance on the CARES Act by obtaining—and spending—what they expected to be forgivable PPP funds under the terms of the CARES Act rather than furloughing or terminating their employees. Subsequently, guidance set forth in questions 31 and 37 of the SBA’s Frequently Asked Questions, according to Zumasys, might require their loans to be repaid. Zumasys claims that being forced to repay their loans will place them in a worse financial position than had it never sought the PPP funds.

The SBA’s “credit elsewhere” test, which requires a borrower to demonstrate that the needed financing is not otherwise available on reasonable terms from non-governmental sources, was expressly excluded as an eligibility requirement to obtain a PPP loan by Congress. Zumasys alleges, however, that the FAQs “purport to re-impose the “credit elsewhere” requirement in contravention of” the CARES Act. (Id. ¶ 66.)

As a result, in an argument similar to that made by DV Diamond and its co-plaintiffs, Zumasys asserts that the FAQs “are not in accordance with the law and exceed Defendants’ authority under the CARES Act,” and asks that the SBA should be enjoined from enforcing them by the court. (Id.)

Subsequent to the filing of the Zumasys lawsuit, on May 13, 2020, the SBA issued guidance in question 46 in the FAQs that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

While this development, on its face, would seem to alleviate the concerns of Zumasys, a great deal of uncertainty remains for borrowers in connection with the guidance that has been released by the SBA since the passing of the CARES Act into law. Furthermore, there is no guarantee that subsequent guidance from the SBA will not contradict the guidance currently being relied upon, and in FAQ 39 the SBA noted that it will review all loans in excess of $2 million and in subsequent rulemaking it noted that with respect to a PPP Loan of any size, the “SBA may undertake a review at any time in [the] SBA’s discretion.”

Conclusion

The challenges by DV Diamond, Zumasys and other plaintiffs will hinge on whether or not the applicable courts determine that the guidance issued by the SBA is inconsistent with the unambiguously expressed intent of Congress.

To the extent that borrowers and applicants continue to believe that problematic discrepancies exist between the law and guidance being delivered by the SBA, and the SBA subsequently determines that a borrower is ineligible for a PPP loan or forgiveness of such loan, the courts may in the future be called upon again to apply the Chevron analysis to the SBA’s actions in connection with the PPP.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Sills Cummis & Gross P.C.

© Copyright 2020 Sills Cummis & Gross P.C.
For more on SBA’s PPP loans, see the National Law Review Coronavirus News section.

Federal Courts Side With Strip Clubs in Opposing the SBA’s Ineligibility Rules for the Paycheck Protection Program, Possibly Signaling a Broader Trend

Recent rulings from federal courts enjoined the US Small Business Administration (SBA) from applying its April 2, 2020 Interim Final Rule (April 2 IFR) to limit the types of businesses that can participate in the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Some of these rulings are expressly limited to the named plaintiffs that had been denied PPP loans and do not directly impact any other businesses that have or might apply for a PPP loan. Irrespective of any limitations in these cases, such decisions may signal a broader trend. In increasing numbers, federal courts are agreeing with arguments made by small businesses facing COVID-19-related challenges that the SBA’s PPP business eligibility limitations are inconsistent with Congress’ intention to help “any business concern” during this unprecedented time.

Financial services businesses that are deemed ineligible under the April 2 IFR need to pay close attention to cases that challenge the SBA’s incorporation of its existing list of “prohibited businesses” into eligibility requirements for a PPP loan. Even without court rulings, it also is possible (although not likely) that Congress or the SBA could suspend or revise the April 2 IFR to broaden PPP eligibility to include some or all of the currently designated “prohibited businesses.”

This advisory will explore:

  • the SBA’s April 2 IFR restricted eligibility in the PPP to certain financial services businesses that were ineligible for SBA-guaranteed loans under existing federal programs;

  • a recent Sixth Circuit ruling challenging the April 2 IFR as well as other federal court cases may signal a trend by federal courts to adhere to the text of the CARES Act; and

  • whether other federal courts will follow the Sixth Circuit’s view, or whether Congress or the SBA will suspend or revise the April 2 IFR to broaden PPP eligibility.

The April 2 IFR and Subsequent SBA Rules and Guidance

The PPP was one of several measures enacted by Congress under the CARES Act to provide small businesses with support to cover payroll and certain other expenses for an eight-week period due to the economic effects of the COVID-19 pandemic. As noted in a prior Katten Financial Markets and Funds advisory, the SBA published the April 2 IFR on the evening before lenders could accept PPP applications, determining that various businesses, including some financial services business, were ineligible to apply for PPP loans under the CARES Act.1

The April 2 IFR limited the types of businesses eligible for the PPP by specifically incorporating an existing SBA regulation and guidance document that lists the types of businesses that are ineligible from applying for Section 7(a) SBA loans. In particular, the April 2 IFR provides, in part, that: “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2.”2

Some of the ineligible financial services businesses listed in the SBA’s Standard Operating Procedure 50 10 (SOP) include, without limitation:

  • banks;
  • life insurance companies (but not independent agents);
  • finance companies;
  • investment companies;
  • certain passive businesses owned by developers and landlords, which do not actively use or occupy the assets acquired or improved with the loan proceeds, and/or which are primarily engaged in owning or purchasing real estate and leasing it for any purpose; and
  • speculative businesses that primarily “purchas[e] and hold[ ] an item until the market price increases” or “engag[e] in a risky business for the chance of an unusually large profit.”

With respect to last category in this list, the SBA provided further clarity regarding certain investment businesses and speculative businesses that were applying for PPP loans. In an April 24, 2020 Interim Final Rule (April 24 IFR), the SBA expressly clarified that hedge funds and private equity firms are investment and speculative businesses and, therefore, are ineligible to receive PPP loans.3 However, the April 24 IFR created an exception for portfolio companies of private equity firms, which were deemed eligible for PPP loans if the entities met the requirements for affiliated borrowers under the April 2 IFR.4

Recent Sixth Circuit Case

As noted above, the SBA’s SOP did not only deem financial services businesses ineligible to receive PPP loans. Other types of businesses, including without limitation, legal gambling businesses, lobbying firms, businesses promoting religion and businesses providing “prurient sexual material” also were deemed ineligible. Believing that these limitations were inconsistent with a plain reading of the text of the CARES Act, some of these businesses have challenged the SBA’s restrictions imposed pursuant to the April 2 IFR.

On May 11, 2020, the US District Court for the Eastern District of Michigan preliminarily enjoined the SBA from enforcing the April 2 IFR to preclude sexually oriented businesses from PPP loans under the CARES Act.5 Plaintiffs were primarily businesses that provided lawful “clothed, semi-nude, and/or nude performance entertainment,” which were considered ineligible businesses for the PPP under the April 2 IFR due to their “prurient” nature.6 The district court found that the CARES Act specifically broadened the class of businesses that are PPP eligible,7 determining that it was clear from the text of the statute that Congress provided “support to all Americans employed by all small businesses.”8 The district court, however, limited the injunction to the plaintiffs and intervenors in the case, noting that it was “not a ‘nationwide injunction’ and did not restrict any future action the SBA may take in connection with applications for PPP loans.”9 The SBA appealed to the US Court of Appeals for the Sixth Circuit and requested a stay of the injunction.10

The Sixth Circuit ultimately denied the SBA’s stay, and agreed with the district court’s interpretation of the CARES Act’s eligibility requirements.11 Specifically, the Sixth Circuit held on May 15 that the CARES Act conferred eligibility to “any business concern,” which aligned with Congress’s intent to provide support to as many displaced American workers as possible. The SBA pointed out that the CARES Act explicitly listed “nonprofit organizations” as eligible for PPP loans, even though “they are ineligible for ordinary SBA loans.”12 The SBA argued that if Congress wanted to include previously ineligible businesses for PPP loans, like sexually oriented businesses, the CARES Act would have listed such entities.13 The Sixth Circuit stated that it was “necessary to specify non-profits because they are not businesses,” which further supported the district court’s expansive interpretation of the CARES Act.14

The Sixth Circuit’s opinion only requires the SBA to issue loans to the businesses that were a party to the underlying lawsuit. The ruling does not require the SBA to make PPP loans to any other businesses that are defined as ineligible in its April 2 IFR. However, as a practical matter, this opinion could be used to support a small business located in Ohio, Pennsylvania or Michigan (i.e., the states within the jurisdictional reach of the Sixth Circuit) in a federal court proceeding initiated prior to the submission of a PPP application requiring the SBA to defend its eligibility criteria in connection with such small business’s specific facts. (Note that an application should not be made without first obtaining a similar legal result as the small business applicant would not otherwise be able to make the certifications necessary to apply for a PPP loan.)

Cases in Other Circuits

In addition to the Sixth Circuit, several other federal courts have struck down the SBA’s imposition of its ineligibility criteria on PPP applicants engaged in sexually oriented businesses. For example, the US District Court for the Eastern District of Wisconsin on May 1 preliminarily enjoined the SBA from enforcing the April 2 IFR to preclude “erotic dance entertainment” companies from obtaining a PPP loan.15 The SBA argued that because Congress removed some conditions that would ordinarily apply to Section 7(a) SBA loans (such as the PPP eligibility for non-profits), “it must have intended for the SBA to enforce all other conditions.”16 Similar to the Sixth Circuit, the district court found the SBA’s interpretation “highly unlikely” given “Congress’s clear intent to extend PPP loans to all small businesses affected by the pandemic.”17 Additionally, the SBA failed to identify any purpose of either the CARES Act or Section 7(a) that is furthered by the SBA’s exclusion of sexually oriented businesses.18 The SBA appealed to the US Court of Appeals for the Seventh Circuit and requested a stay of the injunction pending appeal. The Seventh Circuit denied the request for a stay on May 20, 2020, but has yet to rule on the merits of the appeal.19

Implications

As of May 21, 2020, roughly $100 billion PPP funds are still available.20 In its recent statutory amendments to the PPP, Congress decided not to address PPP eligibility issues.21 Notwithstanding Congress’s decision not to take action on these issues more recently, financial services businesses deemed ineligible under SBA regulations for PPP loans under the CARES Act should still pay close attention to these cases and whether federal court rulings influence Congress or the SBA to revisit the April 2 IFR.22

1 See US Small Business Administration, Interim Final Rule: Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, (Apr. 15, 2020).

2 See Interim Final Rule at 8, citing 13 C.F.R. § 120.110 and Small Business Administration Standard Operating Procedure 50 10 Subpart B, Chapter 2.

3 See US Small Business Administration, Interim Final Rule: Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility, __ Fed. Reg.___, available.

4 According to the April 24 interim final rule, the affiliation requirements are waived if “the borrower receives financial assistance from an SBA-licensed Small Business Investment Company (SBIC) in any amount. This includes any type of financing listed in 13 CFR 107.50, such as loans, debt with equity features, equity, and guarantees. Affiliation is waived even if the borrower has investment from other non-SBIC investors.” Id.

5 DV Diamond Club of Flint, LLC, et al. v. SBA, et al., No. 20-1437 (6th Cir. Apr. 15, 2020).

6 Id. at 2.

7 DV Diamond Club of Flint LLC v. SBA, No. 20-cv-10899 (E.D. Mich. May 11, 2020), at 2. The district court stated that 15 U.S.C. § 636(a)(36)(D) of the CARES Act specifically “broadened the class of businesses that are eligible to receive SBA financial assistance.” Id. at 9. This section provides, in relevant part, that “‘[d]uring the covered period, in addition to small business concerns, any business concern . . . shall be eligible to receive a covered [i.e., SBA-guaranteed] loan’ if the business employs less than 500 employees or if the business employs less than the size standard in number of employees for the industry,” which is established by the SBA. Id. See also 15 U.S.C. §§ 636(a)(36)(D)(i)(I)-(II).

8 DV Diamond Club, No. 20-cv-10899 (E.D. Mich. May 11, 2020), at 2.

9 Id. at 45.

10 DV Diamond Club, No. 20-1437 (6th Cir. Apr. 15, 2020), at 1.

11 Id. at 4. The Sixth Circuit interpreted the CARES Act under the Supreme Court’s ruling in Chevron, U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984). Id. In Chevron, the Supreme Court stated that if a federal statute can be facially interpreted, “the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43.

12 DV Diamond Club, No. 20-1437 (6th Cir. Apr. 15, 2020), at 5.

13 Id.

14 Id. US Circuit Judge Eugene E. Siler Jr. dissented, stating that the CARES Act was ambiguous and the district court’s injunction should be stayed to give time to decide on the merits. Id. at 6. He noted that the CARES Act requires “PPP loans to be administered ‘under the same terms, conditions and processes’” as the SBA’s section 7(a) loans, which would exclude sexually oriented businesses from PPP eligibility. Id. See also 15 U.S.C. § 636(a)(36)(B).

15 Camelot Banquet Rooms, Inc., et al. v. SBA, et al., No. 20-C-061 (E.D. Wis. May 1, 2020), at 27-28. A similar case, filed early May 2020, is currently pending in the US District Court for the Northern District of Illinois. See Admiral Theatre Inc. v. SBA et al., No. 1:20-cv-02807 (N.D. Ill May 8, 2020).

16 Camelot Banquet Rooms, No. 20-C-061 (E.D. Wis. May 1, 2010), at 15.

17 Id. at 16. In contrast to the Eastern District of Michigan, the Wisconsin federal court did not explicitly limit its injunction to the parties. In light of the potentially serious penalties for ineligible applicants, businesses that are ineligible for the PPP under the April 2 IFR should be cautious about applying for a PPP loan without exploring all options and consequences with counsel.

18 Id.

19Camelot Banquet Rooms, Inc., et al. v. SBA, et al., No. 20-1729 (7th Cir. May 20, 2020). In contrast to the Sixth and Seventh Circuit rulings, the US District Court for the District of Columbia denied an injunction to enjoin the SBA from making an eligibility determination for the PPP under the CARES Act. Am. Ass’n of Political Consultants v. SBA, No. 20-970 (D.D.C. April 21, 2020). Plaintiffs, a trade association of political consultants and lobbyists, argued that the denial of PPP loans under the SBA’s April 2 IFR due to the political nature of their businesses violated plaintiffs’ First Amendment rights. Id. at 1-2. The district court ruled that it was constitutionally valid for the SBA to decide “what industries to stimulate” with PPP loans. Id. at 11. The plaintiffs filed a notice of appeal on April 22, 2020. Am. Ass’n of Political Consultants, Notice of Appeal, ECF No. 22 (D.D.C. April 22, 2020).

20 Kate Rogers, More than half of small businesses are looking to have PPP funds forgiven, survey says, CNBC News (May 21, 2020), available at https://www.cnbc.com/2020/05/21/more-than-half-of-small-businesses-are-looking-for-ppp-forgiveness.html.

21 On June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”), which modified certain provisions of the PPP. H.R. 7010, 116th Cong. (2020), available at https://www.congress.gov/bill/116th-congress/house-bill/7010/text?r=12&s=1. At a high level, the PPP Flexibility Act: 1) extends the PPP to December 31, 2020; 2) extends the covered period for purposes of loan forgiveness from 8 weeks to the earlier of 24 weeks or December 31, 2020; 3) extends the covered period for purposes of loan forgiveness from 8 weeks to the earlier of 24 weeks or December 31, 2020; 4) increases the current limit on non-payroll expenses from 25% to 40%; 5) extends the maturity date on the portion of a PPP loan that is not forgiven from 2 years to 5 years; and 6) defers payroll taxes for businesses that take PPP loans.

22 IFRs are subject to public comment under the Administrative Procedures Act. The particular comment period of the April 2 IFR expired on May 15, 2020.

©2020 Katten Muchin Rosenman LLP

For more on business’ PPP loan eligibility, see the National Law Review Coronavirus News section.

Sixth Circuit Erases Chalking of Parked Cars

It’s not often that a dispute over parking tickets ends up in federal court. But that’s exactly what happened this week in Taylor v. City of Saginaw – a case that has already drawn the attention of the national media.

Taylor involved a challenge to “a common parking enforcement practice known as ‘chalking,’ whereby City parking enforcement officers use chalk to mark the tires of parked vehicles to track how long they have been parked.” This practice can be surprisingly effective (as certain blog authors unfortunately can attest). But it is apparently very effective in Saginaw – according to Judge Donald’s decision, one particular parking enforcement officer managed to chalk (and then ticket) Ms. Taylor fifteen separate times between 2014 and 2017.

Armed with a slew of parking tickets, Ms. Taylor filed suit in federal court, alleging that the City violated the Fourth Amendment by chalking her tires without her consent or a valid warrant. The Sixth Circuit agreed, relying upon the Supreme Court’s recent decision in United States v. Jones, 565 U.S. 400 (2012), to hold that chalking constitutes an unreasonable trespass upon a constitutionally-protected area (your car).

At first blush, chalking a car’s tires may not seem like the type of “search” typically raising Fourth Amendment concerns. But as Judge Donald explained, Jones signaled a rebirth of “the seldom used ‘property-based’ approach to the Fourth Amendment search inquiry,” which focuses on physical intrusion to one’s property:

Under Jones, when governmental intrusions are accompanied by physical intrusions, a search occurs when the government: (1) trespasses upon a constitutionally protected area, (2) to obtain information.

In the Court’s view, chalking satisfied both of these requirements: the officer came into contact with Ms. Taylor’s car, in an attempt to obtain information about her (whether she remained in her parking spot too long).

The Court proceeded to hold that the search was unreasonable because the car was parked legally when chalked, and the officer lacked any reasonable suspicion (let alone probable cause) that a crime had been committed. The Court also specifically rejected the City’s assertion of the “community caretaker” exception, explaining that “the purpose of chalking is to raise revenue, and not to mitigate [a] public hazard.”

Taylor is the latest in a series of interesting Fourth Amendment cases playing out on our public roadways. The Sixth Circuit’s decision relied heavily on the Supreme Court’s decision in Jones, which addressed the constitutionality of electronically monitoring an individual’s location by affixing a GPS device to his car.

And the Supreme Court heard argument yesterday in Mitchell v. Wisconsin, which asks whether a statute authorizing a blood draw from an unconscious motorist suspected of driving under the influence provides an exception to the Fourth Amendment warrant requirement.

 

© Copyright 2019 Squire Patton Boggs (US) LLP
Read more news from the Sixth Circuit from the National Law Review on our Litigation Page.

Kentucky Supreme Court Justice Hughes Nominated For Sixth Circuit Seat

Earlier this year, President Obama announced the nomination of Kentucky Supreme Court Justice Lisabeth T. Hughes for the Sixth Circuit vacancy created by Judge Martin’s retirement.  sixth circuitJustice Hughes served as a judge in various Kentucky courts for nearly a decade before her appointment to the Supreme Court of Kentucky in 2007.  If confirmed, she will join several former state court judges on the Sixth Circuit, including Judge Cook (Ohio), Judge Griffin (Michigan), Judge Donald (Tennessee), and Judge White (Michigan). Two years ago Justice Hughes was being considered for the Court. While all eyes are currently on the appointment of Judge Garland to the Supreme Court, it is questionable whether any circuit-level appointments will clear the Senate at this time.  If she were confirmed, Justice Hughes would join seven other active female judges on the Sixth Circuit, meaning that half of the active judges would be female. We’ll continue to monitor any progress on the confirmation of Justice Hughes.

Article By Larisa Vaysman of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP