In a new Fourth Circuit filing, Kalshi accuses authorities in Maryland and a district judge of ignoring the text of the Commodity Exchange Act (CEA) in order to create an argument for banning its sports event contracts.
The prediction market filed a reply brief in the U.S. Court of Appeals for the Fourth Circuit Monday, as part of its appeal of a decision made by the U.S. District Court for the District of Maryland last year to deny Kalshi an injunction that would have stopped the state from enforcing its sports wagering laws against the business. Although Kalshi was denied an injunction, Maryland agreed not to enforce its cease-and-desist against the business until the appeals court made its own decision, meaning that the prediction market remains available in the state for now.
gov.uscourts.ca4_.179613.59.0Central to the brief were discussions about preemption — the question of when federal law supersedes state law. Kalshi argues that the federal CEA gives the Commodity Futures Trading Commission (CFTC) the “exclusive jurisdiction” over contracts traded on CFTC-registered exchanges and that state gambling laws do not apply.
The District Court had determined that while the CEA might have been intended to overrule state laws that directly concerned commodity futures regulation, it was never intended to overrule state gambling laws. Because of this, the judge ruled that Maryland was allowed to enforce its cease-and-desist against the business.
Kalshi argues judge ignored statute
Kalshi’s lawyers claim that rather than looking at the text of the law, the district judge added his own gambling carve-out to the clauses of the law that allowed for preemption.
“The district court held that Defendants may ban Kalshi’s contracts even though Congress granted the CFTC ‘exclusive jurisdiction’ over these contracts,” the brief said. “The court reached this holding not by interpreting the statutory text, but by engrafting an extratextual ‘gambling’ exception onto the CEA based on policy-driven assumptions about congressional intent. But ‘assumptions are not laws.’”
Kalshi’s team goes on to argue that there is a “mountain of evidence” supporting the idea that the CEA preempts state gambling laws, which they claim Maryland and the district court ignored.
“Defendants contend with almost none of this,” the brief says. “Their principal argument — that the CFTC’s jurisdiction supersedes only securities regulators — ignores the CEA’s text and is plainly incorrect.”
Addressing Maryland’s newest argument
The brief also addressed an argument that the state had brought up in its most recent response brief: that Section 16 of the CEA specifically states that it preempts state law when it comes to certain types of contract, but swaps — the legal classification of Kalshi’s contracts — were not included in that list. The state argues that this is proof that Congress never intended for the CEA to preempt state law when it comes to swaps.
Kalshi’s lawyers argue that Section 16 only concerns off-exchange trading, and therefore specifies that state gaming laws cannot be applied to off-exchange trading of certain kinds of contracts, but can be applied to off-exchange trading of swaps. It points to the use of the phrase “excluded transactions” in the relevant part of the CEA, which generally refers to off-exchange trades.
“If Defendants were correct, states could freely apply state laws to comprehensively regulated on-DCM transactions, but not over-the-counter transactions outside the CFTC’s exclusive jurisdiction,” the brief says. “That is backwards.”
Kalshi’s interpretation of Section 16 would not only weaken Maryland’s argument with regard to preemption, but also poke a hole in the state’s claim that finding in Kalshi’s favor would mean that all bets accepted by sportsbooks would have to be classified as unregistered swaps trading and therefore be illegal under the CEA.
Kalshi again argues Special Rule helps case
Kalshi’s lawyers again repeated the argument that the CFTC’s “special rule” for contracts related to gaming, assassination, terrorism, or war — which members of Congress drafting the bill had intended to be used in part to “prevent” sports event contracts that exist “solely for gambling” — actually supports the argument that these contracts are legal.
The brief argues that the special rule puts the power to ban sports event contracts squarely in the hands of the CFTC, which has thus far allowed Kalshi’s sports event contracts to remain available, and not in the hands of the states.
“Defendants also invoke the Special Rule, but that provision dooms their argument,” Kalshi’s lawyers write. “It is textual proof that Congress knew contracts involving ‘gaming’ might be traded on DCMs and gave the CFTC — not 50 different states — authority to decide whether to permit them.”
Kalshi responds in Tennessee lawsuit
Elsewhere, Kalshi also filed a reply brief in its case against Tennessee. That case, in the U.S. District Court for the Middle District of Tennessee, has moved quickly since the state sent a cease-and–desist to Kalshi on Jan. 9.
Kalshi’s lawyers addressed Tennessee’s claim that Kalshi has no right to sue for an injunction because the CEA did not lay out a cause of action for it to do so. A cause of action is a specific rule that allows one party to bring a lawsuit. The brief argued that it was well-established that parties can bring claims against states if those states attempt to enforce laws that are preempted by federal law against the party in question.
Kalshi’s lawyers said that even though it was the party suing, it was still acting defensively in seeking an injunction to prevent enforcement against the business, and therefore a specific cause of action set out in the law was not a requirement.
