New York can ban Kalshi’s sports event contracts, a federal judge determined Tuesday, marking the second big win for states over the prediction market in a little over a week.
Judge Analisa Torres of the U.S. District Court for the Southern District of New York ruled in the state’s favor, denying Kalshi a preliminary injunction. That means the state could be allowed to enforce its sports betting laws against Kalshi, though the prediction market will likely seek a stay of enforcement while it appeals the decision.
The decision follows a state court in Michigan last week ordering Kalshi to block Michigan users from accessing its sports contracts, becoming only the second state to do so. It remains to be seen whether New York will be able to enforce an actual ban.
Similar reasoning to Maryland
The court’s reasoning was similar to the August opinion in the U.S. District Court for the District of Maryland, which went the state’s way. Like the Maryland court, Torres entirely sidestepped the question of whether Kalshi’s contracts met the definition of a swap, because it said that even if they did, the Commodity Exchange Act (CEA) did not preempt state gambling laws.
The New York opinion said that it was clear that Congress intended to preempt state law when it passed the CEA, but that the state laws it intended to preempt were only those that were actually about commodity or futures trading, not gambling laws.
“Although it is clear from the CEA’s text that Congress intended for the CFTC to have exclusive jurisdiction over swap transactions on DCMs, the Court must also determine the scope of that preemption — that is, ‘at what point the state regulation sufficiently interferes with federal regulation that it should be deemed [preempted],’” the judge wrote.
Field preemption
Kalshi argued that there were multiple different ways in which state law was preempted by the CEA. The first of those is field preemption, which applies when a law is comprehensive enough that courts assume it preempts all state laws that attempt to regulate that same field.
The judge quoted extensively from the Maryland opinion in explaining her decision. Torres wrote that the CEA’s “special rule,” which allows the Commodity Futures Trading Commission (CFTC) to ban contracts involving terrorism, war, assassination, gaming, or activities contrary to federal or state law, proves that the CEA was meant to exist alongside state law, not overrule it. In addition, section 16a of the law specifically states that state gaming laws are preempted for certain types of commodity transaction, but did not include any category that sports event contracts could fall into, suggesting that state gaming laws are otherwise not preempted.
The section in question refers to transactions between banks, foreign currency, government securities, contracts with actual delivery of a commodity, plus “hybrid instruments,” which include both commodities and securities and are generally regulated by the Securities and Exchange Commission (SEC).
Conflict preemption
A further form of preemption that Kalshi argued applies is conflict preemption. This is when a state law and federal law come into conflict, so that it would be impossible to abide by both. In that case, the federal law generally preempts the state law.
However, Torres wrote that, “Kalshi has not shown that it is impossible to comply with both New York gambling laws and the CEA.
“Kalshi contends that if it were required to comply with New York law, it would violate the CFTC’s requirement that a DCM provide ‘impartial access to its markets and services’ because Kalshi would be required to limit access to its exchange to persons living only in New York, which would be impossible for a nationwide platform such as Kalshi.
“Not so. The purpose of the impartial access requirement is to prevent DCMs from having certain discriminatory access requirements for their platform; it does not require DCMs to offer contracts nationwide.”
Torres added that there was “nothing preventing” Kalshi from simply getting a sports betting license.
“Although complying with New York gambling laws imposes an additional regulatory requirement on Kalshi, that requirement is not squarely contrary to federal law,” Torres wrote.
Conflict preemption can also apply if following a state law would directly contradict the purpose of a federal law. Kalshi said this was the case because the purpose of the CEA was to create a unified regulatory system for exchanges.
Torres argued this was not the case because Congress never intended sports event contracts to be listed. She cited a colloquy in which then-Sen. Blanche Lincoln said that the Special Rule existed in order to prevent exchanges from listing event contracts on sports, which “would not serve any real commercial purpose” but “rather … would be used solely for gambling.” Lincoln is currently a Kalshi lobbyist, and she — and Kalshi’s legal team — argue that the colloquy is actually evidence that sports contracts are allowed.
Irreparable harm?
Torres added that Kalshi would not suffer irreparable harm without an injunction. The prediction market had argued that the CFTC could revoke its designated contract market (DCM) status if it was forced to block certain states, but the court said there was no evidence of this.
Kalshi already blocks customers located in Nevada and residents of Michigan from accessing its sports contracts, with seemingly no consequences for its license.
Kalshi announced almost immediately that it would appeal the decision to the U.S. Court of Appeals for the Second Circuit. That would be the fourth appellate court to hear a case about the legality of sports event contracts. The Third Circuit — in Kalshi’s case against New Jersey — ruled that states could not ban them.
The Fourth, Sixth, and Ninth Circuits are all considering appeals. The case appears all but certain to reach the Supreme Court eventually. A disagreement between two circuit courts is the most likely trigger for the Supreme Court to hear a case.
There are a number of other lawsuits involving the legality of sports event contracts in New York. The CFTC had also sued the state over its attempt to regulate sports contracts as gambling. Meanwhile, the state had sued Coinbase and Gemini in state court over their sports contract offerings — and in response, Coinbase and Gemini sued to have those cases heard in federal court.
Tuesday’s ruling likely increases the chances that these other cases also go the state’s way.
