Tex. Entm't Ass'n, Inc. v. Hegar

• Decision Date: 19 August 2021
• Docket Number: No. 20-50262,20-50262
• Citation: 10 F.4th 495
• Parties: TEXAS ENTERTAINMENT ASSOCIATION, INCORPORATED, Plaintiff—Appellee, v. Glenn HEGAR, Comptroller of Public Accounts of the State of Texas, in his official capacity, Defendant—Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

10 F.4th 495

TEXAS ENTERTAINMENT ASSOCIATION, INCORPORATED, Plaintiff—Appellee,

v.Glenn HEGAR, Comptroller of Public Accounts of the State of Texas, in his official capacity, Defendant—Appellant.

No. 20-50262

United States Court of Appeals, Fifth Circuit.

FILED August 19, 2021

Benjamin Allen, William King, Casey T. Wallace, Wallace & Allen, L.L.P., Houston, TX, for Plaintiff—Appellee.

Ari Cuenin, Office of the Attorney General, Office of the Solicitor General, Melissa Lee Hargis, Austin, TX, for Defendant—Appellant.

Before Stewart, Higginson, and Wilson, Circuit Judges.

Cory T. Wilson, Circuit Judge:

The Texas legislature enacted a "sexually oriented business" fee (SOBF) in 2007, imposing a $5-per-customer charge on businesses that serve alcohol in the presence of "nude" entertainment. The SOBF went into effect on January 1, 2008. To avoid this fee, many establishments that featured traditional nude dancing modified their practices to require that dancers wear shorts and opaque latex over their breasts. These establishments became known colloquially as "latex clubs."

Eight years later, the Texas Comptroller promulgated a rule that clarified the definition of "nude" under the SOBF statute to apply to dancers who wear opaque latex over their breasts (the Clothing Rule). As a result, the latex clubs became subject to the SOBF. On their behalf, the Texas Entertainment Association (TEA) brought suit against Glenn Hegar in his official capacity as Comptroller of Public Accounts of the State of Texas, challenging the Clothing Rule on First Amendment, due process, and equal protection grounds.

The district court granted partial summary judgment to TEA on its First Amendment freedom of expression claim and its claim that the Clothing Rule violated due process. After a two-day bench trial, the court held that the Clothing Rule was not overbroad in violation of the First Amendment, but that it violated the Equal Protection Clause of the Fourteenth Amendment. The Comptroller appeals.

I.

In 2007, the Texas legislature enacted a statute authorizing the SOBF, and the law became effective on January 1, 2008. Under the statute, "sexually oriented businesses" are required to pay a fee of $5 per customer admitted to the business. A "sexually oriented business" is defined as "a nightclub, bar, restaurant, or similar commercial enterprise that: (A) provides for an audience of two or more individuals live nude entertainment or live nude performances; and (B) authorizes on-premises consumption of alcoholic beverages ...." TEX. BUS. & COM. CODE § 102.051(2). The statute itself defines "nude" as "entirely unclothed" or "clothed in a manner that leaves uncovered or visible through less than fully opaque clothing any portion of the breasts below the top of the areola of the breasts, if the person is female, or any portion of the genitals or buttocks." Id. § 102.051(1). "Clothed" and "clothing" are not defined in the statute.

After its passage, TEA challenged the SOBF statute in Texas state court. In 2011, the Texas Supreme Court held that the statute was constitutional. That court concluded that there was evidence to support that the SOBF statute was enacted to combat the harmful secondary effects of nude dancing in the presence of alcohol, and thus was not content based, and proceeded to explain that the statute passed intermediate scrutiny under the First Amendment. Combs v. Tex. Ent. Ass'n, Inc. , 347 S.W.3d 277, 287–88 (Tex. 2011).

In response to the SOBF's enactment, several nude dancing establishments changed their practices to require their dancers to wear opaque latex breast coverings and shorts, in order legally to avoid the new SOBF. And these establishments, dubbed "latex clubs," avoided the SOBF for over eight years, until October 2016, when the Texas Comptroller proposed to amend the Texas Administrative Code to "include a definition of clothing that conforms to the commonly understood meaning of the term" in order "to memorialize the [C]omptroller's existing interpretation of what constitutes clothing." In January 2017, the Texas Comptroller promulgated the Clothing Rule, amending the Texas Administrative Code to limit "clothing" to exclude "[p]aint, latex, wax, gel, foam, film, coatings, and other substances applied to the body in a liquid or semi-liquid state[.]" 34 Tex. Admin. Code § 3.722(a)(1). This new definition subjected latex clubs to the SOBF, and the Comptroller instituted proceedings to collect the fee both prospectively, and retroactively to 2008.

TEA challenged the Clothing Rule in federal district court, asserting constitutional violations of the First Amendment, due process, and equal protection. In response, the Comptroller filed a motion to dismiss asserting that: (1) TEA's claims were barred by the Tax Injunction Act (TIA), (2) the court should dismiss TEA's lawsuit based on principles of comity, (3) the Comptroller was immune from suit under the Eleventh Amendment, and (4) TEA lacked standing to sue.

The magistrate judge issued a report and recommendation in response to the motion to dismiss, recommending that that the district court deny the Comptroller's jurisdictional challenges but dismiss TEA's claims for damages. The magistrate judge determined that the TIA did not divest the court of jurisdiction, because the SOBF is a fee and not a tax, and further rejected the Comptroller's argument that the district court lacked jurisdiction based on comity principles. The magistrate judge further concluded that, under Ex Parte Young , the Eleventh Amendment did not bar suit against the Comptroller in his official capacity for prospective injunctive relief, but it did bar TEA's claims for damages. Finally, the magistrate judge concluded that TEA "sufficiently pled associational standing" because TEA pled that "several of its members are subject to the fee," "TEA's goal is to protect the financial interests of its members, which is germane to the purposes of the organization," and that "the nature of the case does not require the affected members to participate as plaintiffs."

The district court accepted the magistrate judge's report and recommendation in full. In doing so, the district court overruled the Comptroller's objections, denied the Comptroller's motion to dismiss except with respect to TEA's claims for damages, and dismissed TEA's claims for damages without prejudice.

On April 16, 2018, TEA moved for summary judgment on its First Amendment challenges to the Clothing Rule. The Comptroller filed his own motion for summary judgment, invoking Younger to argue that the federal court should abstain from hearing TEA's claims and arguing that the Clothing Rule does not violate the Constitution.¹ The district court granted partial summary judgment to TEA on its First Amendment freedom of expression claim and, sua sponte, on its Fourteenth Amendment due process claim.

In its First Amendment analysis, the district court held that the Clothing Rule was not "content neutral" because the rule was not motivated by the substantial government interest of reducing "the deleterious secondary effects of the establishment[s] to be regulated." The district court explained that the Comptroller "did not conduct or review any studies or make any factual findings about the deleterious secondary effects of entertainment from latex-clad dancers in the presence of alcohol." The Comptroller contended that he was not required to conduct a new study or rely on new evidence to justify adoption of the Clothing Rule because the Comptroller was "adopting an interpretive rule that simply defined an undefined statutory term." The district court disagreed, concluding that the Clothing Rule was substantive rather than interpretive because it "affects individual rights and obligations" by expanding the number of businesses subject to the SOBF and then retroactively assessing the fee.

As for TEA's due process claim, the district court held that enforcement of the Clothing Rule against latex clubs "before they were put on notice that the definition of nudity would be changed or clarified to cover their conduct is harsh and oppressive, and thus violates due process." However, the district court concluded that "when exactly the latex clubs were put on notice" was a fact question to be determined at trial.

Subsequent to the district court's partial summary judgment, the court conducted a two-day bench trial to resolve: (1) when the latex clubs received notice of the Clothing Rule, and (2) the merits of TEA's overbreadth and equal protection claims. Following trial, the district court issued Findings of Fact and Conclusions of Law that determined that while the Clothing Rule was not overbroad in violation of the First Amendment,² its retroactive application prior to October 28, 2016 (when the Comptroller first proposed the Clothing Rule in the Texas Register) violated due process. The district court further found prospective enforcement of the Clothing Rule "violate[d] equal protection and [was] therefore unconstitutional as currently applied."

The Comptroller now appeals the district court's rulings on standing and the TIA and further contends that the district court should have declined to exercise jurisdiction under principles of comity and abstention. The Comptroller additionally appeals the district court's partial summary judgment as to TEA's free expression and due process claims and the ruling in TEA's favor on its equal protection claim following trial.

II.

"We review a grant of summary judgment de novo , applying the same legal standards as the district court." Certain Underwriters at Lloyd's, London v. Axon Pressure Prods. Inc ., 951 F.3d 248, 255 (5th Cir. 2020) (citation omitted). Following a bench trial, "findings of fact are reviewed for clear error and legal issues are reviewed de novo ." One Beacon Ins. Co. v. Crowley Marine Servs., Inc. , 648 F.3d 258, 262 (5th Cir. 2011) (internal quotation marks omitted) (quoting Water Craft Mgmt. LLC v....