Kalshi’s brief in its Third Circuit Court of Appeals case against New Jersey authorities emphasizes that a whole lot of the question of the legality of sports event contracts comes down to a question of “preemption,” the formal way of determining whether or not federal or state law takes precedence.
Specifically, does the federal Commodity Exchange Act supersede state laws, such as New Jersey’s gaming statutes?
There are other factors that form Kalshi’s argument. Do sports event contracts have an economic consequence? Does the CEA’s “special rule” give the CFTC the freedom to allow a gaming-related event contracts if it chooses to do so? Kalshi says yes in both cases; New Jersey says no.
But the word “preempt” — or related words like “preempted” — appears 121 times in Kalshi’s filing, which landed with the court on Thursday.
Much of the case, it seems, hinges on exactly where and when federal law preempts state law.
The framers of the constitution realized it would be an issue, and so they drafted the Supremacy Clause.
“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any thing in the Constitution or Laws of any State to the Contrary notwithstanding,” the clause says.
So that makes it easy, right? Federal laws are the supreme law of the land and take priority over state laws, it would appear.
In many cases, definitely. But how do we know when the clause can actually be invoked? Here, it gets a bit trickier. The text of the constitution provides less of a guide, but legal rulings have offered some kind of clarity.
A phrase coined by former Supreme Court Justice Antonin Scalia has been popular in clarifying the limits of the supremacy clause. In a 2001 opinion, he wrote that “Congress does not usually hide elephants in mouseholes.” In other words, federal legislation generally doesn’t repeal existing laws — whether state or federal — by accident or only through careful reading.
Instead, the consensus has been that Congressional intent matters.
“The purpose of Congress is the ultimate touchstone in every preemption case,” former Supreme Court Justice John Paul Stevens wrote in 2009.
Typically, there are two main examples of cases where federal law preempts state law: conflict and field preemption. In conflict preemption, a state and federal law are directly in conflict with one another. In field preemption, certain laws are understood by the courts as being intended to cover an entire field, preempting any laws on the same subject.
Threading the needle
It seems clear that the CEA would preempt any state law that would attempt to create a state-level commodity trading regime. In fact, former Senator Carl Curtis explicitly noted that the CEA would “preempt the field,” meaning it would take precedence over any state laws related to the field of commodity trading.
But does it also preempt state gambling laws?
New Jersey — and the various states and tribal entities that have filed amicus briefs to side with the state — say no. If it did, they argue, all state gaming laws would be rendered irrelevant, something that congress surely didn’t intend. A sportsbook like DraftKings, the argument goes, could be accused of running an unlicensed commodity exchange.
Kalshi accuses New Jersey of resorting to a “parade of horribles” — arguing a number of outlandish negative consequences that could result from preemption.
For evidence of a lack of intent, New Jersey, other state attorneys general, and tribal entities often point to Sen. Blanche Lincoln’s comment on the senate floor during discussions of the 2010 Dodd-Frank reforms that included the “special rule” covering event contracts related to gaming.
She said, “It would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These types of contracts would not serve any real commercial purpose. Rather, they would be used solely for gambling.”
Lincoln, for her part, has since become a lobbyist for Kalshi, and argued points that appear to contradict her 2010 comments.
As to whether the CEA preempts state gaming laws, Kalshi’s argument threads a needle.
“Finding preemption will not produce Defendants’ sky-is-falling consequences,” Kalshi says. “It will not mean that the CEA supersedes all state gambling laws.
“Instead, the CEA preempts state gambling laws only as narrowly applied to trading on DCMs [designated contract markets], leaving state law unaffected in every other application, including as to sportsbooks and casinos.”
Is that a common-sense interpretation of the law, or an attempt to interpret it in a way that’s just wide enough to allow for Kalshi’s sports event contracts, but just narrow enough to prevent other unforeseen consequences?
Whether a court accepts the idea of a narrowly defined preemption could be key in determining whether a state — or tribe — has the power to block Kalshi’s sports event contracts. It’s not a completely new idea. In Aetna Health Inc. v. Davila, the Supreme Court held that preemption could apply to some types of insurance providers but not others. But whether a similar party-dependent preemption would apply in Kalshi’s case is a matter of legal debate.
Patchwork of regulation
Kalshi argues that if states are allowed to enforce laws against its operations as a DCM, it could be left in an unworkable environment.
“If New Jersey could enforce its laws against Kalshi, so could 49 other states, subjecting Kalshi to a patchwork of contradictory regulation, interfering with the CFTC’s uniform oversight, and conflicting with Kalshi’s federally imposed obligation to provide impartial access to its exchange,” the prediction market says.
That argument may seem quaint to sportsbook operators, who have simply had to get used to a patchwork of contradictory regulation.
But Kalshi notes that when Congress drafted the CEA, it didn’t seem to want that patchwork to exist for trading exchanges. Former Sen. Dick Clark said doing so would “lead to total chaos.”
It also probably did not foresee that commodity exchanges would one day be used for trading on sports event outcomes. So did Congress intend to preempt state gaming laws as far as the actions of a designated contract market are concerned?
That’ll be a question for the Third Circuit, if not eventually the Supreme Court.
