An argument lurking just beneath the surface in a pending Fifth Circuit case could stem the bleeding from the Supreme Court’s decision in SEC v. Jarkesy.

Last summer, Jarkesy held that agencies seeking to impose monetary penalties on enforcement targets for securities fraud and other common law-ish claims must proceed in court, not their own administrative forums.

Now, Burgess v. Whang (5th Cir. 22-11172) presents a Jarkesy-based challenge to a $200,000 penalty assessed administratively against a Texas bank CEO by the Federal Deposit Insurance Corporation (FDIC).

The core issue on appeal is whether the FDIC adjudication involves “public” or “private” rights. It’s hard to predict how the Fifth Circuit will rule because, as Jarkesy acknowledged, the Court “has not definitively explained the distinction between public and private rights,” and the issue has been marked by “frequently arcane distinctions and confusing precedents.”

But there’s an alternative, more determinate course available. Section 1818(i)(2) of Title 12 of the U.S. Code authorizes the FDIC to administratively impose penalties only on “insured depository institutions” and affiliated parties. When banks choose to become and remain insured, they are therefore on notice that they are simultaneously opting in to the administrative enforcement regime and waiving Seventh Amendment rights.

The waiver reasonably extends to senior bank officials who (as the American Bankers Association recently acknowledged) are well aware of the prospect of being subjected to an administrative proceeding.

One of the FDIC’s amici presented a version of this consent argument in Burgess. The Constitutional Accountability Center wrote that “by electing to receive the benefits of federal insurance, federally insured banks receive a valuable Government benefit in exchange for participation on the government’s terms” – i.e., the adjudication system in § 1818(i)(2). The brief also notes that “Congress does not require state-chartered banks like Burgess’s to acquire deposit insurance” and so instead such banks “are willing participants in a scheme in which banks receive those critical federal benefits under strictly controlled circumstances.”

This licensing-as-consent argument creates a potential Jarkesy shield for any administrative enforcement proceedings against agency registrants, members, or others who voluntarily sought out and obtained an agency license while on notice of the administrative adjudication regime that operates as a condition of the license. FINRA has been using this argument to defend against Jarkesy attacks by members. The SEC could potentially use the argument to defeat Jarkesy challenges by registered entities; as several commentators have noted, the question was left open by Jarkesy because Jarkesy’s hedge fund was not registered. One scholar recently suggested the argument “could be extended across different federal agencies,” including OCC, FERC, and the Army Corps of Engineers.

Although one might question whether a state-chartered bank’s acquisition of deposit insurance is truly “voluntary” given that many states (seemingly including Texas) require such insurance, the Court has repeatedly validated consents to otherwise unconstitutional adjudications extracted under similar circumstances.

For instance, in Thomas v. Union Carbide, the Court upheld a mandatory arbitration provision of the federal pesticide regulatory scheme against an Article III challenge by characterizing participation in that scheme as “voluntary,” notwithstanding the fact that that anyone selling pesticides was required to participate and thus forgo access to an Article III court.

More recently, in Mallory v. Norfolk Southern, the Court rejected a Due Process challenge to a Pennsylvania court’s assertion of general personal jurisdiction over a foreign corporation registered to do business in that state even though such registration was required under state law. The plurality reasoned that the corporation made a bargain: it got “the right to do business in-state in return for agreeing to answer any suit against it.”

As in Union Carbide and Mallory, once the challenger in Burgess decided to go into banking, it may have been required to acquire FDIC insurance and, therefore, to consent to FDIC adjudication. But, under Union Carbide and Mallory, this legal mandate does not defeat the validity of the consent to an otherwise (potentially) unconstitutional adjudication.

Nor does the unconstitutional conditions doctrine likely bar the “insurance-as-consent” argument, given that this doctrine was raised by the challenger and rejected by the Court in both Mallory and another core Article III “consent” precedent, CFTC v. Schor. At least one esteemed constitutional scholar interprets Union Carbide as the demise of the “unconstitutional conditions” doctrine in this domain.

For more on this legal argument, see “Registration as Consent: Patching Jarkesy’s Hole in SEC Enforcement,” available here and forthcoming in Volume 100 of the Notre Dame Law Review Reflection.