SBA Discriminates Against Franchises Seeking PPP Loans, Lawsuit Says
A Jani-King franchisee in Cleveland was rejected for a PPP loan, but a lawsuit claims the SBA is "unlawfully restricting eligibility" for franchises in general and commercial cleaning franchises in particular.
The Small Business Administration has discriminated against "franchised businesses in general and commercial cleaning franchises in particular" by "unlawfully restricting eligibility for loans" under the temporary Paycheck Protection Program, says a lawsuit filed in federal court in Washington, D.C.
In an amendment filed Monday, the lawsuit adds a challenge to the SBA's permanent 7(a) loan program as well, often used for real estate and equipment, on the same grounds.
Plaintiffs are a Jani-King franchisee in the Cleveland area with 18 employees, who applied for a PPP loan but was denied, along with Jani-King Franchising and Jani-King International Inc. They challenge the SBA's practice of denying access to PPP loans to any franchise unless its agreement has been approved for listing in the SBA Franchise Directory.
To get on that approved list, the SBA relies on the definition of a 'franchise' by the Federal Trade Commission in its Franchise Disclosure Rule. However, "unlike the FTC, the SBA has no enforcement authority for the Franchise Disclosure Rule," says the lawsuit, according to Michael Lockerby and Peter Loh, partners at Foley & Lardner who are pressing the case.
Such requirements "are not set forth in any statute or regulation—including the CARES Act and its implementing regulations." In effect, they create an extra hurdle that only franchised businesses must meet, putting those businesses at a disadvantage.
The CARES Act, offering aid to businesses hurt by COVID-19 shutdowns, included Paycheck Protection Program loans that will be forgiven if borrowers meet certain requirements, including spending 75 percent of the loan on hiring back workers. The SBA is administering the program.
The SBA filed an opposition to the original motion seeking a temporary restraining order. On April 23, the judge on the case declined to enter a TRO but said he was going to resolve the whole case in three weeks, according to Lockerby.
Summary judgment motions are due May 4; oppositions are due May 11; reply briefs are due May 13. "And there will be a hearing on 2 p.m. Eastern time on Friday May 15. He will after that resolve it pretty quickly," Lockerby said.
But will there be any PPP money left by then? The first $350 billion in the Paycheck Protection Program was gone in a week; the second tranche, for $310 billion, became available April 20 and was said to be already mostly spoken for.
"Who knows if there will be a third round of funding? We're challenging the requirements not only for the PPP program but the 7A program as well," he said. "Assuming all these companies are still in business when the dust settles, in the future they'll be able to get a 7(a) loan."