In a district court hearing on Minnesota’s first-of-its-kind legislation banning prediction markets Thursday, it seemed the judge’s decision could depend heavily on one question – what should be done if the state has the power to ban some prediction market contracts but not others?
The case in the U.S. District Court for the District of Minnesota is the first one covering a state bill that specifically addresses prediction markets, making it distinct from past lawsuits about whether they are already covered by state sports betting laws. In addition, because the law covers almost all types of prediction market contracts, it goes beyond simply involving sports event contracts. The lawsuit was initially filed by the Commodity Futures Trading Commission (CFTC), but Kalshi and Polymarket also sued and the cases were combined.
Judge Katherine Menendez spent much of the hearing asking questions to get a better understanding of prediction markets. She called on Kalshi general counsel Rick Heaslip to answer questions about the type of markets Kalshi offers, including whether there was one on the outcome of the case itself.
Swaps are still central
Even though there are elements of the case that make it distinct from past prediction market lawsuits, many of the legal arguments involved were familiar.
Two questions remained central: What contracts meet the definition of a swap in the Commodity Exchange Act (CEA), and whether the CEA preempts state law.
States have argued that sports event contracts don’t meet the definition of a swap — a type of financial instrument traditionally used for hedging — because they say these contracts are not “associated with a potential financial, economic, or commercial consequence.” Prediction markets argue that the reference to potential consequences is deliberately broad.
What if only some contracts are swaps?
One question that Menendez repeatedly came back to was what the best course of action would be if she determined that some prediction market contracts met the definition of a swap, while other contracts did not. She asked both sides of the debate variants of that question repeatedly.
“Let’s imagine that of the thousand contracts listed for sale right now, that I could find one that I would have a very hard time believing that it has financial, economic, or commercial consequences,” she said to Kalshi’s lawyer Colleen Sinzdak. “Why should I not be able to find that preemption applies to that contract?”
Sinzdak’s answer was that the CFTC should be the one making that distinctions.
“Because it is being traded on a designated contract market which would make it under the exclusive jurisdiction of the CFTC,” she said. “What should happen in that case is that the CFTC should determine whether the contract is valid under the CEA.”
Menendez asked whether the CFTC had taken down any contracts in the last 18 months, and one of the regulator’s lawyers answered that they had not. Sinzdak argued that this was because exchanges like Kalshi were doing their job.
During his own time to speak, CFTC lawyer Henry Dickman was asked the question of what to do if some contracts are swaps and others are not. He said that under the law, states cannot enforce the Commodity Exchange Act’s own provisions against exchanges.
“When you look at the other CEA provisions, they give states authority to enforce the CEA, not state law, against persons, but not contract markets,” he said.
State asked similar question
Menendez later asked a flipped version of the same question to Minnesota’s counsel Lindsey Middlecamp.
“If I find that some of the things on Kalshi’s platform do meet the definition of swaps, how do I proceed?” she asked.
“I think that an election has financial, economic, or commercial consequences. I think how far the U.S. makes it at the World Cup has financial, economic, or commercial consequences. I’m not so sure that how long a press conference runs has financial, economic, or commercial consequences. It would be an uphill battle to convince me that how many rebounds a player gets has financial, economic, or commercial consequences.”
Middlecamp pointed out that the court would not actually need to draw a line between contracts that are swaps and those that are not swaps at all. If the court were to rule that state law is not preempted, it could apply to all contracts even if some of them meet the definition of a swap.
In addition, Middlecamp noted that if the court was figuring out which contracts were and were not swaps, it could let the law go into effect and require discovery to determine the potential economic, financial, or commercial consequences of the contract.
Menendez said a decision could come soon.
“We will get this order out as soon as we can, I will not specify the day, and I hope I will not be the subject of any prediction market contracts between now and then,” she said.
