Update June 24, 2020: The Small Business Administration amended their rules to expand eligibility for Paycheck Protection Program loans to many small business owners with criminal records. Under the new rule, small business owners with pending misdemeanor charges and those on probation or parole for older crimes may now apply. Our case continues as we seek to extend the deadline for businesses to apply for aid.
Update June 29, 2020: The Court ruled that the Small Business Administration’s previous restrictions on business owners with criminal records were unlawful, prior to their June 24 rule change spurred by our lawsuit and months of advocacy. The application deadline was extended for our clients, who were made eligible by the June 24 changes. Read more about the ruling here.
June 16, 2020 — Today, the Public Interest Law Center, American Civil Liberties Union (ACLU), and Washington Lawyers’ Committee for Civil Rights and Urban Affairs filed a lawsuit in federal court to stop the Small Business Administration (SBA) from denying federal Paycheck Protection Program (PPP) loans to small business owners with criminal records. Congress has made billions of dollars in PPP loans available to small businesses to keep them and their employees financially afloat in the wake of COVID-19’s massive economic impact. However, the SBA’s exclusionary rules shut-out many tax-paying small business owners with past criminal records, a group that is disproportionately Black and Latinx.
The lawsuit was filed on behalf of plaintiffs: Defy Ventures, a nonprofit organization that works with formerly incarcerated people to provide them entrepreneurial training and support; John Garland, a Black majority owner of graphic design business FastsignsBethpage, Inc. and advocate for the formerly incarcerated; and Sekwan Merritt, a Black small business owner who owns and operates a small electrical contracting business, Lightning Electric. Mr. Garland was unable to apply for a PPP loan due to a pending misdemeanor charge for which he has not been convicted and that he denies. Mr. Merritt was denied a PPP loan because he is still on parole for a 2012 drug conviction. Law firms Jenner & Block and Weil, Gotshal & Manges also represent the plaintiffs.
“The SBA’s discrimination against formerly incarcerated individuals hurts not just those of us who have worked hard to create our own businesses after returning home, but also impacts our families, the people who work for us, and our communities,” said plaintiff Sekwan Merritt. “Through my electrical contracting business, Lightning Electric, I want to provide hope and opportunity for folks who were formerly incarcerated. However, as it stands, the SBA blocks the path to economic equality and progress for people who come from underserved communities and who are disproportionately affected by mass incarceration.”
“Even in the best of times, the millions of Americans with arrest and conviction records face widespread bias and discrimination in the job market. By arbitrarily denying emergency aid to small businesses owned by Americans with records—businesses like Lightning Electric, which often hires returning citizens—the SBA is dragging down the recovery of entire communities.”
The lawsuit challenges the Small Business Administration’s interim final rule and application form barring individuals with certain criminal histories— such as those with pending charges, those serving parole, probation, or those who have been convicted of a felony within the last year — from applying for PPP loans. The civil rights organizations argue that the rule violates the Administrative Procedure Act by adding exclusions to the PPP that were not authorized by the CARES Act and are arbitrary and capricious under the Administrative Procedures Act.
Given that PPP loan applications are due by June 30, the lawsuit seeks a preliminary injunction to immediately halt the rule requiring the criminal background screen, and an extension of the PPP application deadline for those applicants unlawfully excluded under the challenged criminal-record exclusions.
“Formerly incarcerated individuals who have paid their debt to society deserve a fair chance to succeed,” said plaintiff Andrew Glazier, CEO of Defy Ventures. The criminal justice system already disproportionately impacts people of color, and destructive policies that create unnecessary barriers to much-needed resources—such as the PPP—serve only to amplify the structural racism in our justice system. The SBA’s role is to support the success of small businesses, not to impose rules based on uninformed and discriminatory value judgements on their worthiness to receive support. It is long past time to eliminate rules like these.”
The SBA’s rules have a disparate impact on people of color, who are more likely to have a criminal record due to the systemic overcriminalization of Black and Brown communities. In addition, due to widespread barriers to employment, people with past criminal records often turn to entrepreneurship as a way to support their families and contribute to their communities. The SBA’s exclusion has the potential to impact both small business owners with past criminal records, a population that is already disadvantaged in the workplace, and the economies of the communities they serve.
“I am the owner of a growing small business, which not only provides a livelihood for myself and our employees, but provides necessary services to the community and other businesses,” said plaintiff John Garland. “There is no reason that our business should be denied the chance to survive this crisis and continue to grow into the future or that my employees should not be able to be paid because I have pending misdemeanor charges for which I strenuously maintain my innocence.”
Individuals involved in the case commented:
ReNika Moore, Director of the ACLU’s Racial Justice Program: “The SBA’s misguided rule excluding small business owners from federal aid based on their contact with the criminal legal system ignores the job opportunities, products and services they provide to their communities. The excluded small business owners are more likely to be Black and Latinx because of bias in our criminal legal system, and their communities are hardest hit by COVID-19. We won’t stop fighting until this economic lifeline is afforded to all.”
Claudia De Palma, Staff Attorney at the Public Interest Law Center: “Even in the best of times, the millions of Americans with arrest and conviction records face widespread bias and discrimination in the job market. By arbitrarily denying emergency aid to small businesses owned by Americans with records—businesses like Lightning Electric, which often hires returning citizens—the SBA is dragging down the recovery of entire communities and exacerbating the outsized impact the pandemic has had on communities of color, which are also disproportionately affected by the criminal legal system. An economic crisis is not the time to create additional barriers to desperately needed support, particularly to small businesses that are part of the fabric of neighborhoods across America.”
Joanna Wasik, Counsel at Washington Lawyers’ Committee for Civil Rights and Urban Affairs: “Formerly incarcerated business owners deserve the right to apply for SBA’s forgivable loans.We should celebrate the accomplishments of formerly incarcerated individuals who are contributing to their communities, not shut them out from aid at a time of acute financial crisis. The SBA’s exclusion compounds the already devastating impacts that communities of color are facing from the COVID-19 pandemic Congress did not provide any exclusions when it passed the CARES Act, and the SBA has provided no good reason for them.”
Kali N. Bracey, Partner, Jenner & Block: “Small businesses provide an important opportunity for people of color, who are disproportionately criminalized and incarcerated, to rebuild their lives following contact with the criminal justice system. The SBA’s implementation of the CARES Act unlawfully prevents small business owners who have had felony convictions from receiving funds. These restrictions undermine the entire purpose of the CARES Act and PPP loan program — which Congress designed to get loans to those who need it most. This lawsuit seeks to make good on Congress’s promise: That PPP funds reach all eligible small businesses to help their employees and to end the discrimination against small business owners of color.”
Zachary D. Tripp, Partner, Weil, Gotshal & Manges: “Congress created the PPP program to provide emergency relief to all small businesses and the millions of Americans who work for them. But the SBA’s categorical disqualification of small businesses based on their owners’ past interactions with the criminal-justice system unlawfully denies that aid to American entrepreneurs who, despite barriers and stigma associated with their criminal history, have started businesses that contribute to the economic vitality of their communities. The SBA’s actions particularly hurt communities of color, which are already disproportionately harmed by the pandemic. Our lawsuit seeks to prevent the SBA from denying promised relief to many of those who need it the most.”
This case was filed in the United States District Court, District of Maryland.