Second Circuit judges denied Kalshi an injunction that would have protected it from New York and Connecticut’s attempts to enforce their gambling laws on the business, potentially opening the doors to sports contract bans in those states.
During a Tuesday hearing a three-judge panel doubted that sports event contracts could qualify as swaps, but also seemed to look for ways to avoid letting New York and Connecticut ban the products for now.
The U.S. Court of Appeals for the Second Circuit heard arguments from lawyers for Kalshi, Coinbase, and the CFTC calling for an injunction to block state enforcement against sports event contracts, and from New York and Connecticut arguing against an injunction.
Judges John M. Walker Jr., Joseph F. Bianco, and Dennis Jacobs heard the arguments and ruled shortly after.
The case is a combined appeal of district court rulings from New York and Connecticut, both of which denied injunctions for Kalshi. Coinbase was also part of the New York case.
After winning their district court cases, both New York and Connecticut sued Kalshi in state court, with New York seeking billions in damages. Those cases are on hold while the appellate court considers Kalshi and Coinbase’s appeals.
Questions for Kalshi, Coinbase, and the CFTC mostly concerned the merits of the case, while questions for the state seemed to deal more with potential harms caused by allowing the states to take enforcement action.
Court denies injunction
The court published its decision on the motion just hours after the hearing ended. The order from the court did not go into detail on the reasoning for why it was denied.
bba7a8f8-c434-4b1b-a5d0-8711cc0247cb“Appellants in these three appeals, which are being considered in tandem, move for an injunction
pending appeal,” it said. “Upon due consideration, it is hereby ORDERED that the motions are DENIED
because Appellants have failed to make the required showing that an injunction pending appeal is
warranted.”
However during the hearing, it seemed that the judges doubted Kalshi’s likelihood of success on the merits because they did not believe sports contracts could be swaps.
With no injunction in place, Kalshi continues to be at risk of enforcement from state-court lawsuits in New York and Connecticut. If the state courts rule against the business, its contracts could be banned in those states.
The New York lawsuit in particular could be consequential because Kalshi is based in New York, and the state’s requested order appears to cover all types of contract rather than just sports contracts. The CFTC ordered Kalshi to disobey the New York order if it ever comes into effect.
Kalshi is attempting to have both the state-court lawsuits moved to federal court. However, its attempts to do so for other cases have all been unsuccessful, as this is typically a higher bar than winning an injunction.
Judges ‘don’t see’ how sports bets are swaps
Kalshi lawyer Will Havemann was first to speak and began by arguing the prediction market would suffer irreparable harm if an injunction was not granted. He noted that the order requested by New York when it sued Kalshi in a state court appeared to go beyond shutting down sports contracts within the state.
“New York has taken the extraordinary step of filing a state court lawsuit that would shut down a federally regulated exchange — not just sports contracts, but all event contracts, and not just in New York, but nationwide,” he said.
However, Judge Walker turned the conversation toward whether the prediction market was likely to win the case on the merits. There, he appeared to be skeptical of Kalshi’s arguments. He said that in his view, the definition of a swap in the text of the Commodity Exchange Act (CEA) did not appear to encompass sports bets.
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.”
“I don’t see how sports betting in its entirety is a swap,” Walker said. “Because there has to be an underlying event, and the underlying event has to be associated with potential financial economic or commercial consequences.”
Bianco felt similarly. He said that a swap appeared to refer to contracts about inherently financial topics, not sports.
“It feels like we’re trying to fit a square peg into a round hole here,” he said. “The definition was conceived of with regard to financial markets. Now it’s being applied to a different situation.”
However, Havemann argued that Congress specifically intended to write a broad definition of the word swap. He said that the Dodd-Frank amendments to the CEA were meant to stop off-exchange trading of swaps, which would have limited oversight, and so swaps were supposed to encompass a wide range of possible products. He added that Congress then wrote the CEA’s “special rule” in order to address swaps that involved gaming, rather than saying that contracts involving gaming were not swaps.
“It’s true that it’s broad,” he said. “Everything about the swap definition was intended to be broad. Because Congress was worried about trading happening off exchange.
“And then — this is important — Congress gave the CFTC additional power over contracts involving gaming.”
Coinbase steers focus to game winners
Coinbase lawyer Yaira Dubin followed and faced more skeptical questioning about whether sports contracts really meet the definition of a swap.
After Walker had referenced mention markets and player props while questioning Havemann, Dubin said it was important that the judges understood that the case wasn’t just about these types of markets, but also game winners, where economic consequences may be clearer.
“This is not about the edge cases. It’s about the core category of sports event contracts, which is ‘who wins X game?’
“And the core argument from Connecticut and New York is that that contract doesn’t meet the definition of swap because it pertains to sports. But there is no sports carve-out in the CEA.”
However, Bianco said that he couldn’t see a definition of potential economic, commercial, or financial consequences that would allow a sports event contract to be a swap without making sportsbook trades off-exchange swaps, which would be banned under the CEA.
“If we interpret potentially associated with an economic consequence to be downstream, that would bring in Caesars Sportsbook,” he said. “The CFTC can say there’s a distinction, but I don’t see it.”
Dubin said, “The Commodity Exchange Act is concerned with tradable instruments that trade on its markets.”
CFTC alleges harms of state jurisdiction
CFTC lawyer Henry Dickman said the agency was already taking serious steps to regulate event contracts.
“The commission is actively engaged right now in building a framework around event contracts,” he said. “We’re instructing exchanges to take down contracts that are not within the public interest.
“And perhaps most importantly, we’re bringing enforcement actions against those who insider trade or manipulate markets.”
A ruling allowing for state jurisdiction over prediction market contracts, he claimed, could harm those enforcement cases.
So far, enforcement of insider trading or market manipulation cases on prediction markets has not concerned sports. Instead, cases have involved topics such as U.S. forces capturing Venezuelan President Nicolas Maduro, George Santos’ appearance at the State of the Union, and Google’s Year In Search lists. As a result, it is not clear exactly how a ruling on sports contracts would actually have any impact on the enforcement cases.
However, defendants in the Maduro and Google cases have argued that the CFTC does not have jurisdiction because the markets are not swaps and are instead closer to gambling products.
Dickman also added that he felt Congress did anticipate the rise of sports event contracts when it wrote Dodd-Frank.
“I disagree that Congress didn’t anticipate the potential for these contracts to come into this picture,” he said. “Congress said the CFTC can prohibit swaps that involve gaming, and sports is the quintessential game.”
Judge asks if NY can pause enforcement
When New York’s lawyer Ester Murdukhayeva spoke, much of the discussion turned away from the merits and toward the balance of harms.
Walker asked whether it was possible for the state to simply hold off on enforcing its gambling laws against Kalshi, as it did until a district court denied the exchange an injunction.
“You put off until July any regulation,” he said. “Why couldn’t you continue that?”
He then asked the state to confirm that the injunction Kalshi faces “would have an impact over the whole country.”
Connecticut lawyer Michael Nunes followed and said that Kalshi was valuable enough that the harm from losing sports contracts should not be considered irreparable. He noted that the business last week closed a $1 billion funding round at a $40 billion valuation.
However, Walker questioned whether that valuation was simply due to sports event contracts, meaning that the business would indeed struggle without them.
