Kalshi-Arizona Battle Shifts To New Legal Question

Arizona and Kalshi are clashing over a new legal argument which could have major consequences in prediction market lawsuits around the country: Can a federal court block a state lawsuit if the federal case came first?

The U.S. District Court for the District of Arizona is currently considering a request by Kalshi for an injunction that would stop authorities in Arizona from taking action against the business. State Attorney General Kris Mayes on March 17 filed criminal charges against the prediction market, making Arizona the first state to do so.

But the case took a new twist when the court issued an order last Saturday that said “the Anti-Injunction Act may bar this Court from providing the injunctive relief Plaintiff requests.”

The Anti-Injunction Act says that a federal court cannot issue an injunction against ongoing state court proceedings unless one of three exceptions applies: the court is “expressly authorized” to do so by Congress, it is issuing the injunction because it is “necessary in aid of its jurisdiction,” or it must do so “to protect or effectuate its judgments.”

Kalshi and the state filed supplemental briefs on the topic Tuesday, followed by responses to the other parties’ briefs Thursday.

While Arizona is the first state in which this act has come up, it may not be the last.

Arizona stands out as the only state to file criminal charges against Kalshi, but the Anti-Injunction Act can also apply to civil court proceedings. States pursuing action, whether criminal or civil, in state court against Kalshi appear to be more likely to get favorable rulings, and face less delay from appeals, making it likely that more states that oppose prediction markets will follow the state-court route.

Arizona argues that Kalshi does not qualify for any of the three listed exceptions. The prediction market may rely on federal law to argue that it is authorized to offer sports contracts, it said, but this is not the same as having specific authorization to block state court orders.

“Kalshi’s only claim is that the CEA preempts State gambling law,” it said. “But the CEA does not ‘create a specific and uniquely federal right or remedy enforceable in a federal court of equity.’

“There is no judgment or jurisdiction unique to this Court that requires it to block the state proceedings. Kalshi can just as easily make its preemption arguments in state court.”

The CEA, or Commodities Exchange Act, is the law that governs predictions markets.

Kalshi says act cannot apply

Kalshi — as Arizona’s lawyers noted in their response brief — does not seriously lay out a case that the business qualifies for one of the exemptions.

But a question with a less clear answer may be how this law applies if one party — in this case, Kalshi — sues preemptively to prevent an anticipated lawsuit in state court. If the state lawsuit didn’t yet exist when the injunction was requested, is it a pending lawsuit?

Kalshi argues that the act cannot apply, because when it sued Arizona, there was no state lawsuit to interfere with.

“Kalshi has not sought an ‘injunction to stay proceedings’ in a state court,” its brief reads. “Indeed, Kalshi could not have sought that relief, because there was no state-court proceeding to enjoin when Kalshi filed this lawsuit and sought a preliminary injunction.

“Instead, Kalshi seeks to restrain ‘state executive officials from enforcing state laws that are contrary to federal law’” as well as a “declaration” that state law is preempted—both quintessentially proper forms of relief.”

Arizona says timing is ‘No obstacle’

Arizona sees things differently. 

“Kalshi may argue that it moved for the injunction before the state court proceeding began,” the state’s brief said. “But that is no obstacle to the Act’s application.”

It said there was nothing in the law that said the Anti-Injunction Act applies only if the state lawsuit comes first.

“First, the text states that federal courts may not grant an injunction to stay proceedings in a State court,” it said. 

It then quoted a portion of a Central California District Court opinion – which would not be binding in the Arizona court – regarding Monster Energy Drinks, which said: “Nothing in the plain language suggests that the Act applies only when the federal plaintiff requests injunctive relief after the state court suit had been filed.”

Kalshi: Not asking to block specific case

Kalshi’s legal team adds that it is not really asking for the federal court to block a specific state court proceeding.

Instead, the legal team says that they are asking for an order saying that any attempts by Arizona to enforce its gambling laws against the business are preempted by federal law, and that this would just happen to have the effect of blocking Arizona’s criminal charges.

“If this Court grants Kalshi the relief it seeks, the result would not be to stay or block the state-court proceedings. Instead, the result would be that principles of preclusion would require the state court to adhere to this Court’s judgment on the federal questions this Court resolves.”

‘A stunning concession?’

In the state’s view, Kalshi’s decision to make this argument is an admission of defeat. It claims that by arguing that it is not directly asking to block state court proceedings, it is arguing that its entire lawsuit is pointless.

“Kalshi has made a stunning concession,” the state’s lawyers wrote. “After initially urging the Court to reach a decision on the Motion for a Preliminary Injunction before its arraignment, Kalshi now cries uncle and repeatedly concedes that it does not seek ‘to stay or block the state-court proceedings.’”

Kalshi’s legal team calls that representation of its arguments “incorrect.”

“Kalshi clarified that although it had not sought an order against the state court itself, the effect of Kalshi’s requested relief would nonetheless bring those state proceedings to a close because of preclusion,” they wrote.

The state looked to the NFL as it claimed courts have already decided that what matters is whether the spirit of the federal ruling is to block pending state court action. It cited a case involving the Oakland Raiders’ 1982 move to Los Angeles to argue that a state-court defendant can’t escape the Anti-Injunction Act by “cleverly crafting relief.”

Tribes file amicus brief

The dispute over the Anti-Injunction Act was just one event in a busy week of proceedings in the Arizona lawsuits. 

On Wednesday, 28 tribes and 10 tribal associations submitted an amicus brief supporting the state.

The tribes argue that Kalshi is violating the Indian Gaming Regulatory Act (IGRA) by offering sports betting on tribal lands. It says that if the court was to accept that the Commodity Exchange Act permits sports betting, it would “impliedly repeal” IGRA and Arizona’s tribal compacts.

“America’s history is replete with prospectors taking resources from Indian lands without permission from Tribes,” the brief reads. “But Congress put a stop to that practice long ago. Yet Kalshi would have this Court believe that, without so much as a whisper of legislative intent, Congress gave it permission to enter Indian lands and siphon gaming revenues away from tribes over such tribes’ objections. Congress did no such thing.”

On Thursday, the federal government sued Arizona — as well as Connecticut and Illinois — over its attempts to regulate prediction markets. The court is planning to merge the federal government’s lawsuit against the state with Kalshi’s.