Primary Industry Controls: Fifth Circuit Holds SBA May Reassign NAICS Codes and Apply Section 7(a) Size Rules to PPP Affiliation Waivers

Introduction

This commentary analyzes the Fifth Circuit’s unpublished per curiam decision in Shop Rite, Inc. v. United States Small Business Administration (No. 25-30028, Nov. 14, 2025), affirming summary judgment for the SBA. The dispute arises from the Paycheck Protection Program (PPP), created by the CARES Act in response to COVID-19, and centers on whether Shop Rite—an operator of gasoline stations with convenience stores and food-service operations—could invoke the PPP’s affiliation waiver for restaurant-and-hospitality businesses (i.e., NAICS codes beginning with “72”) to exclude affiliates from its employee count for PPP eligibility and loan forgiveness.

Shop Rite’s loan was approved and funded in April 2020. When Shop Rite later sought forgiveness, the SBA’s Office of Capital Access denied forgiveness and concluded Shop Rite was ineligible for the PPP loan, citing the 500-employee threshold when affiliates were included. Crucially, the SBA determined Shop Rite’s “primary industry” did not fall within NAICS “72,” thereby foreclosing the statutory affiliation waiver. The Office of Hearings and Appeals (OHA) affirmed, and the Western District of Louisiana granted summary judgment for the SBA. The Fifth Circuit now affirms.

Key issues on appeal included:

• Whether the SBA lawfully applied the Section 7(a) “primary industry” framework to the PPP affiliation waiver.
• Whether the SBA could reassign or verify a borrower’s NAICS code notwithstanding the borrower’s self-certification.
• Whether the SBA’s denial of the affiliation waiver was arbitrary and capricious.
• Whether reliance on the primary industry method was an impermissible post hoc rationale.

Summary of the Opinion

The Fifth Circuit (Higginbotham, Ho, and Douglas, JJ., per curiam) affirmed, holding:

• The CARES Act authorizes the SBA to administer PPP loans under Section 7(a)’s “terms, conditions, and processes,” absent an express exception. Because the Act is silent about how to assign NAICS codes for the affiliation waiver, the SBA could use the Section 7(a) “primary industry” method (13 C.F.R. § 121.107) to determine eligibility for the waiver in 15 U.S.C. § 636(a)(36)(D)(iv)(I).
• The SBA had authority—under its PPP loan-review program and general investigative powers—to review, verify, and where appropriate reassign the borrower’s NAICS code, notwithstanding self-certification.
• The SBA’s denial of the affiliation waiver was supported by substantial evidence: Shop Rite’s receipts and costs overwhelmingly reflected gasoline sales rather than food service; thus, its primary industry was not within NAICS “72.”
• The agency’s explanation was not a prohibited post hoc rationalization: the initial loan-review decision identified the determinative basis (size in excess of standards), and OHA permissibly elaborated by applying the primary industry framework within the administrative record.

The court also rejected Shop Rite’s arguments premised on SBA FAQs and “fair notice/good-faith reliance,” noting no prior agency position on which Shop Rite reasonably relied, and it observed that the Supreme Court had vacated the change-in-position holding in Wages & White Lion Investments.

Detailed Analysis

A. Precedents and Authorities Cited

• Statutory framework and SBA authority
  • Small Business Act and SBA’s broad powers: 15 U.S.C. §§ 631(a), 633(a), 634(b); SBA v. McClellan, 364 U.S. 446, 447 (1960).
  • Section 7(a) loans and size standards by NAICS: 15 U.S.C. § 636(a); 15 U.S.C. § 632(a)(2); 13 C.F.R. §§ 121.101(a), 120.100(d), 121.201.
  • Primary industry method: 13 C.F.R. § 121.107 (distribution of receipts, employees, and costs, plus other factors).
  • Size rules for applicants and affiliates: 13 C.F.R. § 121.301(a)(1)-(2), (b).
• CARES Act and PPP
  • PPP creation and scope: 15 U.S.C. § 636(a)(36).
  • Integration with Section 7(a): § 636(a)(36)(B) (SBA may guarantee PPP loans under Section 7(a) “terms, conditions, and processes” unless otherwise provided).
  • Alternate eligibility: “any business concern” ≤ 500 employees (with an alternative size standard not invoked here): § 636(a)(36)(D)(i).
  • Affiliation waiver for NAICS “72”: § 636(a)(36)(D)(iv)(I).
• SBA rules and guidance during PPP rollout
  • First Interim Final Rule (IFR): 85 Fed. Reg. 20811 (Apr. 15, 2020) (PPP is a “new Section 7(a) program”; ineligibility under 7(a) entails PPP ineligibility).
  • Second IFR (PPP loan-review program): 85 Fed. Reg. 33010 (June 1, 2020) (SBA may review borrower eligibility at any time, including certifications and representations).
• Review standards post-Loper Bright
  • Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024): Chevron deference overruled; courts independently interpret statutes but respect valid delegations; agency reasoning evaluated under the APA.
  • United Nat. Foods, Inc. v. NLRB, 138 F.4th 937, 946 (5th Cir. 2025) (applying Loper Bright).
  • Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944): agency views may carry persuasive weight proportional to their reasoning and expertise.
  • APA review: 5 U.S.C. § 706(2)(A), (C), (E) (arbitrary/capricious, in excess of statutory authority, and substantial-evidence standards).
  • Michigan v. EPA, 576 U.S. 743, 750 (2015); Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359 (1998): “reasoned decisionmaking.”
• Fifth Circuit PPP decisions and procedural guideposts
  • Seville Indus., L.L.C. v. U.S. SBA, 144 F.4th 740 (5th Cir. 2025): SBA’s PPP review authority and need to curb fraud.
  • Ramey & Schwaller, LLP v. Zions Bancorporation NA, 71 F.4th 257 (5th Cir. 2023), cert. denied, 144 S. Ct. 571 (2024): PPP context and aims.
  • Bruckner Truck Sales, Inc. v. Guzman, 148 F.4th 341 (5th Cir. 2025): ineligible for PPP loan means ineligible for forgiveness; also, agencies may elaborate on initial rationales if tethered to the record (citing DHS v. Regents of the Univ. of Cal., 591 U.S. 1 (2020)).
  • Dixon v. Toyota Motor Credit Corp., 794 F.3d 507, 508 (5th Cir. 2015): issues not raised in the opening brief are waived.
  • Wages & White Lion Invs., L.L.C. v. FDA, 90 F.4th 357 (5th Cir. 2024) (en banc), vacated, 604 U.S. 542 (2025): change-in-position doctrine; vacatur undermines reliance on that decision here.

B. The Court’s Legal Reasoning

1) Applying the Section 7(a) “primary industry” framework to the PPP affiliation waiver

The CARES Act’s affiliation waiver applies to entities “assigned a [NAICS] code beginning with 72” and employing not more than 500 employees. 15 U.S.C. § 636(a)(36)(D)(iv)(I). The statute does not specify how the relevant NAICS code is to be assigned for PPP purposes. The court held that Section 636(a)(36)(B) bridges that silence by authorizing the SBA to administer PPP under the “terms, conditions, and processes” of Section 7(a), unless otherwise provided. Under Section 7(a), size compliance tracks the borrower’s “primary industry,” as determined by the distribution of receipts, employees, and costs (13 C.F.R. § 121.107), and eligibility limits are keyed to the industry in which the applicant is primarily engaged (13 C.F.R. § 121.301(a)(1)-(2)).

Against that backdrop, the Fifth Circuit concluded the SBA properly used the primary industry method to determine whether Shop Rite qualified for the PPP’s affiliation waiver. Neither the PPP statute nor the cited FAQs foreclosed that approach, and the First IFR explicitly tied PPP eligibility to 7(a) ineligibility.

2) SBA authority to review and assign NAICS codes notwithstanding self-certification

The court emphasized the SBA’s broad investigative and compliance authority (15 U.S.C. § 634(b)(6), (7), (11)) and its Second IFR establishing a PPP loan-review program allowing SBA to reexamine borrower eligibility and certifications “at any time.” 85 Fed. Reg. 33010. In light of that authority, the SBA could “ensure Shop Rite was assigned the appropriate NAICS code.”

The court distinguished Shop Rite’s reliance on Horseshoe Bay Resort Holdings v. U.S. SBA, No. 1:24-CV-00040-DAE, 2025 WL 2697494 (W.D. Tex. Sept. 15, 2025), noting that the SBA did not take the position there that it lacked authority to revisit NAICS codes. Rather, in that case the SBA argued it was not required to disregard a borrower’s self-certification. Choosing not to change a given borrower’s code in one matter does not bar the SBA from reassigning another borrower’s code where the record supports doing so.

3) Arbitrary-and-capricious review and substantial evidence

Shop Rite argued that more than 70% of its locations and employees engaged in food service, warranting a NAICS “72” assignment. The court held that substantial evidence supported the SBA’s contrary determination because, under § 121.107, the SBA may weigh receipts, employees, and costs. The administrative record showed food service accounted for approximately 10% of revenues and around 2% of expenses; by contrast, gasoline sales dominated revenues and costs. The court underscored that the “highly deferential” substantial-evidence standard supported the SBA’s finding that Shop Rite’s primary industry was not food services.

4) No impermissible post hoc rationale

The SBA’s final loan-review decision concluded that Shop Rite and its affiliates exceeded the maximum employee and size standards. OHA later detailed that the primary industry determination foreclosed the NAICS “72” affiliation waiver. The court found no defect: an agency may elaborate on its initial rationale if tethered to the record and if the initial decision identified the determinative reason—here, size ineligibility. See Bruckner, 148 F.4th at 346 (quoting Regents, 591 U.S. at 21).

5) FAQs and “fair notice/good-faith reliance” arguments rejected

Shop Rite’s citation to SBA FAQs did not help because the FAQs did not prescribe a contrary method for assigning NAICS codes nor prohibit using the 7(a) primary industry rules. As to “fair notice,” the court found no prior agency position on which Shop Rite reasonably relied, and emphasized that the Fifth Circuit’s change-in-position analysis in Wages & White Lion had been vacated by the Supreme Court. In short, there was no agency volte-face or hidden policy shift misguiding Shop Rite.

C. Impact and Forward-Looking Considerations

• NAICS “72” affiliation waiver turns on the borrower’s primary industry, not its self-labeling. Borrowers cannot secure the PPP’s hospitality affiliation waiver merely by self-certifying a “72”-series NAICS code. The SBA may verify and reassign the NAICS code based on receipts, employees, costs, and other § 121.107 factors.
• Receipts and costs will often be dispositive in mixed-activity businesses. Where the record shows that revenues and expenses overwhelmingly arise from a non-restaurant line of business (e.g., fuel sales), the SBA can lawfully conclude that NAICS “72” does not apply, notwithstanding the number of locations or employees in food-service roles.
• PPP forgiveness hinges on initial eligibility. The court reiterates the Fifth Circuit’s rule in Bruckner: a borrower ineligible for the PPP loan is de facto ineligible for forgiveness.
• Post-Loper Bright administrative law frame. Even without Chevron deference, agencies prevail when they act within a valid delegation, reasonably fill statutory silences with existing regulatory frameworks, and support decisions with substantial evidence and record-based explanation.
• Limited utility of agency FAQs in litigation. FAQs, particularly those published after the agency’s decision, are unlikely to override codified regulations or IFRs or to demonstrate binding guidance contrary to the agency’s adjudication.
• Practical compliance advice.
  • Hybrid businesses should document the distribution of receipts, costs, and workforce across lines of business contemporaneously. If invoking NAICS “72,” ensure that the financial and operational distribution supports that classification.
  • Self-certification is reviewable. Treat the assigned NAICS code as a factual and legal conclusion subject to audit; anticipate the SBA’s use of § 121.107 factors.
  • Affiliates matter unless a valid waiver applies. If the affiliation waiver is not available, employee counts across affiliates will control PPP eligibility and forgiveness.

Complex Concepts Simplified

• PPP (Paycheck Protection Program): A CARES Act program offering government-guaranteed, forgivable loans to maintain payroll during COVID-19.
• Section 7(a) loans: The SBA’s longstanding program to guarantee small business loans, keyed to industry-specific size standards (by revenue or employees) tied to NAICS codes.
• NAICS code: A standardized industry classification identifying a business’s primary activity. For PPP’s affiliation waiver, the relevant question is whether the business is assigned a code beginning with “72” (accommodation and food services).
• Primary industry test (13 C.F.R. § 121.107): How the SBA determines an entity’s primary line of business by looking at the distribution of receipts (revenues), employees, and costs (and in some cases, other factors). It is not controlled by labels alone.
• Affiliation rules and the PPP’s “Affiliation Waiver”: Normally, a borrower’s affiliates are counted toward size thresholds. For businesses assigned NAICS codes beginning with “72,” the CARES Act waives affiliation for PPP eligibility up to 500 employees, but only if the borrower truly qualifies for a “72” code.
• Self-certification vs. SBA reassignment: Borrowers self-certified during the PPP’s rapid rollout, but the SBA retained authority to review, verify, and reassign NAICS codes based on actual operational and financial data.
• APA standards:
  • Arbitrary and capricious: The agency must act rationally, consider the relevant factors, and explain its decision.
  • Excess of statutory authority: The agency cannot act beyond its delegated powers.
  • Substantial evidence: The agency’s factual findings must be supported by evidence that a reasonable mind could accept.
  • Post hoc rationalization: On judicial review, agencies cannot justify a decision with new reasons outside the record; they may elaborate on the original rationale if grounded in the same record.

What the Court Did Not Decide

• The panel did not address OHA’s separate determination that Shop Rite, standing alone (without affiliates), exceeded 500 employees; the district court did not reach that issue, and neither did the Fifth Circuit.
• The panel assessed the FAQ-based argument “without commenting” on the FAQs’ binding effect or the relevance of FAQs issued after the final SBA loan review decision.

Case-Specific Notes and Procedural Posture

• Shop Rite’s PPP loan was funded on April 15, 2020; forgiveness was sought in June 2021.
• The SBA’s Office of Capital Access denied forgiveness, finding Shop Rite exceeded the 500-employee threshold when affiliates are included and that Shop Rite failed to provide documentation proving otherwise.
• OHA affirmed both the size finding and the conclusion that Shop Rite’s primary industry was not within NAICS “72,” foreclosing the affiliation waiver.
• On appeal, Shop Rite advanced four legal challenges (primary industry method; SBA authority to assign NAICS codes; arbitrariness; post hoc rationale). The Fifth Circuit rejected all four.
• Any challenge to the SBA’s underlying affiliation determinations was waived by not raising it in the opening brief (Dixon rule).

Practical Takeaways

• For PPP and similar programs, expect the SBA to cross-walk emergency programs to the Section 7(a) regulatory framework where statutes are silent.
• Businesses that combine hospitality with non-hospitality lines should not assume NAICS “72” status. Revenue and cost distributions carry significant weight in the primary industry analysis.
• Maintain auditable records showing line-of-business receipts, costs, and staffing. Where NAICS “72” is claimed, contemporaneous financials should corroborate that food services or accommodation are indeed primary.
• Do not rely on agency FAQs to override codified rules or IFRs, especially if the documents post-date the agency action at issue.
• After Loper Bright, agencies must justify their actions by statute and record. But well-reasoned applications of existing regulatory frameworks to fill statutory gaps will be sustained.

Conclusion

Shop Rite confirms a consequential PPP principle in the Fifth Circuit: eligibility for the PPP’s affiliation waiver turns on the SBA’s primary industry analysis under Section 7(a) rules, not on a borrower’s self-selected label. The SBA may revisit and reassign NAICS codes during compliance reviews and deny affiliation waivers where the borrower’s receipts and costs show that hospitality is not the primary line of business. The decision also aligns with Bruckner’s rule that PPP forgiveness stands or falls with initial eligibility and illustrates the post-Loper Bright regime: courts independently interpret governing statutes but will uphold agency actions that are authorized, reasoned, and supported by substantial evidence. For hybrid businesses, the message is unmistakable—document, don’t just designate, your primary industry.