Kalshi’s lawyers took a new approach to one of the most important questions in sports event contract litigation Monday, arguing that the prediction market’s contracts “don’t have to be swaps” to be immune from state law. The new argument relies on an alternative reading of a potentially ambiguous section of the Commodity Exchange Act (CEA).
The prediction market, alongside Polymarket and the Commodity Futures Trading Commission (CFTC), was arguing against the state of Rhode Island Monday in a hearing in the U.S. District Court for the District of Rhode Island. The hearing came after the state sued Kalshi and Kalshi sued the state on the exact same day in May.
Different way to read CEA
Generally, court cases about sports event contracts have come down to two questions. The first is whether the CEA preempts state gambling laws. The second is whether sports event contracts meet the definition of a “swap.” The text of the CEA says a swap should be “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” Generally, Kalshi has argued that this definition is deliberately very broad, while states have argued that if it was as broad as Kalshi claims, it would essentially serve no purpose.
The CEA also says that the CFTC has “exclusive jurisdiction … with respect to accounts, agreements, and transactions involving swaps … traded or executed on a contract market designated” under the CEA. Prediction markets argue that the words “exclusive jurisdiction” are proof of preemption.
That passage could arguably be read in two different ways. Generally, courts — whether they side with Kalshi or the states — appear to have assumed that it said the CFTC has exclusive jurisdiction over accounts involving swaps, agreements involving swaps, or transactions involving swaps, provided all three are on a designated contract market. If that’s the case, prediction markets have to prove that their sports contracts qualify as swaps, and then go on to prove that “exclusive jurisdiction” is meant to indicate that state gambling laws are preempted.
However, Kalshi lawyer Colleen Sinzdak put forward an argument that appears to be based on the idea that “involving swaps” was only meant to modify the word “transactions.” That would mean that the passage would refer to all accounts on a designated contract market, all agreements on a designated contract market, and transactions involving swaps on a designated contract market. CFTC-registered event contracts would clearly be agreements traded on a designed contract market, so if this interpretation was correct, all Kalshi would have to prove is that “exclusive jurisdiction” is proof of preemption of gambling laws.
Many courts have been skeptical of the idea that Kalshi’s contracts meet the definition of a swap, so this argument would potentially give the prediction market another potential path to victory.
Sinzdak began her argument by discussing preemption and repeating arguments that Kalshi has made in almost every state. For example, she argued that Congress had state gambling laws in mind when they gave the CFTC “exclusive jurisdiction” in 1974, because some states had tried to ban traditional commodities trading under their gambling laws. She also argued that the “special rule” in the Commodity Exchange Act, which addresses contracts involving gaming, is proof that the CFTC was meant to have jurisdiction over these contracts.
However, when the discussion moved to whether Kalshi’s sports event contracts were swaps, Sinzdak deemphasized the importance of that question. She said that while the contracts “100% are” swaps, the law does not actually require them to be swaps for preemption to apply.
“The question doesn’t force you to go through that, because it also mentions, ‘Agreements traded on designated contract markets,’” she said. “And there is just no argument that an event contract is not an agreement. And Congress had good reason to write it that way because they wanted the CFTC to have power over what happens on a CFTC-designated market.”
Later in the hearing, she said, “They don’t have to be swaps to fall under the CFTC’s jurisdiction.”
Judge Mary S. McElroy asked, “Are you saying that as long as it’s traded on a DCM, it falls under the CFTC’s jurisdiction even if it’s not a swap?” To which Sinzdak replied, “I am saying that.”
Judge brings hearing back to swap question
McElroy did not seem totally convinced by the idea that Kalshi could win without its contracts being swaps. She said that the definition that counts “agreements” was “circular,” while Sinzdak argued the point was to establish the CFTC’s jurisdiction over its own markets.
McElroy seemed set on diverting the conversation back to the swaps question. She asked whether there was a “limiting principle” on Kalshi’s broad interpretation of the definition, and asked what would keep a high school football game from counting.
Sinzdak said that some high school games likely do meet the definition of a swap, but would be prohibited under the CEA because they‘re against the public interest. She gave the example of the color of the Gatorade shower for the Super Bowl-winning coach as something that would fail to meet the definition.
“The statutory text says what it says,” she said. “If you say the color of a Gatorade shower has potential financial consequences, I could try to spin out an argument, but at that point it’s plainly too attenuated.”
McElroy continued to press the question of a limiting principle further when hearing arguments from the CFTC and Polymarket, asking them about a sixth-grade team whose coach buys the team ice cream if they win. Polymarket lawyer Tom Dupree said that this would likely violate the CFTC’s statutory core principle that contracts must not be readily susceptible to manipulation.
The state’s attorney, Patrick Dolan, faced skeptical questioning too. McElroy asked whether, given that betting at sportsbooks was usually restricted to a single state, exchange-style products should be thought of as their own distinct product class and not subject to state-by-state gambling regulations.
The hearing came after what was on the whole a difficult week in the courts for Kalshi. Although the prediction market escaped a ban on all of its contracts in Minnesota last week, it was sued by the state of New York for $36 billion in damages after failing to win an emergency injunction, lost its bid for an injunction in Wisconsin, and faced a Sixth Circuit panel that appeared to be skeptical of the argument that Kalshi couldn’t abide by state law and the CEA at the same time.
