A federal court has ruled that Connecticut can enforce its sports betting laws against Kalshi, rejecting the prediction market’s arguments on almost every possible question in one of the most comprehensive rulings against the prediction market to date.
The U.S. District Court for the District of Connecticut on Monday denied Kalshi an injunction that would have protected it from state enforcement.
5991b773-cd31-4eea-a2b7-47044c076a36The two main questions in the case, like other state-vs.-prediction market lawsuits, are whether the Commodity Exchange Act (CEA) preempts state gambling laws, and if it does, whether sports event contracts can be classed as “swaps” in order to be covered by the preemption.
Kalshi has argued yes to both, and it needs to win on both to win an injunction shielding it from enforcement. If a court ruled against Kalshi on one argument, it wouldn’t need to find a decision on the other.
Yet the judge, Vernon D. Oliver, ruled against Kalshi on both arguments, even while noting that he did not need to make a decision on both questions in order to issue an opinion.
Even within each question, Judge Oliver found multiple reasons to side with the state over Kalshi.
Judge: Game winners aren’t occurrences …
Starting with the swaps argument, Oliver wrote that there were two different ways in which Kalshi’s sports contracts did not meet the definition of a swap, as well as a further argument against sports contracts being swaps based on how the word is used in other parts of the CEA.
According to the CEA, a swap “is 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.”
Echoing and quoting from a past ruling banning Crypto.com’s sports event contracts in Nevada, Oliver wrote that Kalshi’s sports event contracts are not about the “occurence” of an event, but instead are about the outcome of an event.
“For example, a boxing match would constitute the relevant ‘event’ and it ‘could either take place (occurrence), not take place (nonoccurrence), or go only three rounds (extent of the occurrence),’” he wrote. “The term ‘event’ does not encompass the result of the event, meaning who wins the boxing match is not a separate event in and of itself.
“Kalshi’s sports-event contracts fail to satisfy this portion of the statutory definition of a swap because they do not depend on whether an underlying sporting event occurs, fails to occur, or occurs to a particular extent.”
… And do not have economic consequences
Oliver then went on to argue that sports event contracts also do not qualify as “associated with a potential financial, economic, or commercial consequence.”
Kalshi has argued that this language is deliberately broad and is intended to capture consequences that may be indirect or fairly small. However, Oliver wrote that Kalshi’s interpretation “knows no limiting principle.”
He added that any attempts by Kalshi to draw a line between contracts that do or do not have financial, economic, or commercial consequences fails as the lines it draws are too subjective. Oliver wrote that Kalshi’s lawyers said the company does not offer contracts on the exact scores of sporting contests because these would be “divorced from” financial or economic consequences (Kalshi has offered exact score contracts for soccer, but not for other sports).
“But it is not clear to the Court why the identity of the winning team, as opposed to the game’s final score, is meaningfully different for purposes of the statutory requirement that the event have a potential financial, economic, or commercial consequence,” the judge wrote. “There are many sporting events in which the winner has little or no practical consequence beyond the contest itself, while the precise score may carry significant financial and commercial implications.”
Oliver instead interpreted “associated with a potential financial, economic, or commercial consequence” to mean that the consequences must be “embedded within” the event, which would exclude “externalities such as downstream financial effects created by third parties’ independent decisions to bet on the event.”
Further evidence on swaps elsewhere in CEA
Oliver then offered a third reason why Kalshi’s sports contracts cannot be swaps, which is that the CEA “requires swaps to be listed on DCMs [designated contract markets].” This, he wrote, would mean that “state-regulated sportsbooks, casinos, or licensed online gaming providers would be violating federal law by offering them outside of a CEA exchange.”
Kalshi argues that only transactions on DCMs qualify as swaps, but the judge wrote that this “would create an anomalous regulatory gap.”
“If companies could offer swaps in this regulatory ‘Wild West,’ there would be no principled reason why other types of swaps — including credit default swaps — could not similarly be traded outside the CEA framework,” he wrote.
Oliver also pointed to a “statement of purpose” at the start of the CEA, which says that transactions under the Act “provid[e] a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.” Oliver wrote that “it is not apparent to the Court what risk-management or hedging function contracts premised on the outcomes of or within sporting contests actually serve.”
Preemption arguments fail too
The judge then turned to preemption. He acknowledged that by finding Kalshi’s sports event contracts were not swaps, he could rule in the state’s favor regardless of the preemption question. However, he still chose to explain why state law is not preempted even for legitimate swaps.
“The Court’s conclusion that Kalshi’s contracts are not swaps is sufficient to resolve the Motion,” Oliver wrote. “Nevertheless, even if the contracts were properly characterized as swaps, Kalshi’s preemption arguments would still fail.”
One kind of preemption that Kalshi argues applies is field preemption. This is where Congress wrote a federal law to be comprehensive enough to preempt all state laws about that same field.
Oliver wrote that the main line in the CEA that Kalshi points to as evidence of preemption is preceded by the line, “nothing contained in th[e] section shall … supersede or limit the jurisdiction at any time conferred on … other regulatory authorities under the laws of the United States or of any State,” suggesting that states still had room to regulate too.
In addition, he wrote that the CEA contains instances where Congress did specifically write that state law was preempted, including explicitly saying that state gaming laws are preempted for certain types of contracts (which would not include event contracts). As a result, Oliver wrote, it is hard to believe that Congress also intended to preempt state gambling laws for sports event contracts without saying so explicitly.
Oliver also wrote that it was “unlikely that, through Dodd-Frank, Congress intended to displace the States’ historic police powers over sports betting and instead vest exclusive regulatory authority over such activity in the CFTC — a relatively small financial regulator with no historical role or particular expertise in regulating sports betting.”
Judge says Kalshi could get license
Kalshi has also argued that conflict preemption applies, meaning that it would be impossible to comply with the CEA and state sports betting laws.
Oliver wrote that Kalshi could be able to obtain a license to offer sports betting in accordance with Connecticut laws. In Connecticut, the Mohegan and Mashantucket Pequot tribes, together with the state lottery, have co-exclusive rights to offer sports betting. The tribes and the lottery then sublicense their sports betting rights, allowing DraftKings, FanDuel, and Fanatics to operate in the state. As a result, it would be more challenging for Kalshi to offer state-regulated sports betting than in most other states, though obtaining one of the sublicenses could be possible in theory at least.
Recent court decisions not going Kalshi’s way
Though Kalshi has had its share of wins, recent court decisions have mostly gone the way of states. Last week, Utah became the eighth state to have at least some success in keeping Kalshi from operating within their borders. Connecticut would now be the ninth.
Kalshi is likely to appeal, as it has done in the case of other district court rulings that have not gone its way. While it appeals, it may seek a stay of enforcement or emergency injunction. If those are not granted, then Connecticut authorities could sue Kalshi in state court, seeking an order to ban the platform from offering sports contracts.
