CFTC’s Ninth Circuit Amicus Overshadowed As Nevada Regulator Sues Kalshi In State Court

The Commodity Futures Trading Commission’s (CFTC) hotly anticipated amicus brief in the Ninth Circuit was arguably overshadowed Tuesday as the Nevada Gaming Control Board (NGCB) took the opportunity to sue Kalshi in state court after the prediction market was denied an administrative stay.

Followers of prediction market litigation spent much of Tuesday waiting for the CFTC’s amicus brief in the U.S. Court of Appeals for the Ninth Circuit, where Crypto.com is appealing an October decision to deny the business an injunction in a lawsuit against the state of Nevada.

CFTC Chair Michael Selig said in January that the regulator would get involved in court cases about prediction markets. Earlier this month, the regulator requested time to file an amicus brief in Crypto.com’s Ninth Circuit case. On Monday, Selig published an op-ed in The Wall Street Journal defending the CFTC’s jurisdiction over prediction markets and revealing that an amicus would be filed Tuesday. On Tuesday morning, Selig said, in a video uploaded to social media site X that received more than 3 million views, that the amicus had been filed.

But just minutes before the CFTC’s brief would be published, the U.S. Court of Appeals for the Ninth Circuit revealed that it had denied Kalshi’s emergency request for an administrative stay of enforcement. 

Kalshi is still seeking a regular stay, but the administrative stay would have ensured that Nevada could not enforce its gambling laws against the business while the court considered the main stay request.

While the longer-term implications of the denial are not yet clear, it temporarily left Kalshi in a position where it was not protected from Nevada enforcement by any kind of injunction, temporary restraining order, or stay, allowing the state to enforce its gambling laws against the business.

Nevada sues Kalshi

With no stay in effect, Nevada’s Gaming Control Board quickly filed to sue Kalshi in state court. Kalshi, in response, filed to have the lawsuit moved to federal court. 

“The Board continues to vigorously fulfill its obligation to safeguard Nevada residents and gaming patrons, and uphold the integrity of a thriving gaming industry,” NGCB Chairman Mike Dreitzer said in a press release.

Kalshi aims to have the case heard by the U.S. District Court for the District of Nevada. The district court will determine whether it should hear the case or send it back to state court.

Kalshi’s argument that the case should be heard by a federal court relies on the principle of “complete preemption.” This is typically a higher standard than field or conflict preemption, which have been core principles in most of Kalshi’s lawsuits against states.

This doctrine applies when Congress has specifically set out a cause of action — a system where parties can sue in federal court for violations of the law. Congress must also have intended this cause of action to be the only way to sue for breaches of the law in question. If so, state law is considered to be completely preempted and so a federal court must hear the case instead.

These proceedings will at minimum buy Kalshi more time before it may have to restrict access to its contracts in Nevada.

Kalshi flagged cases involving Coinbase and Polymarket, which were both also sued by the NGCB in state court, were both required to shut off access to sports event contracts in Massachusetts, and both sued to have a federal court hear the cases instead. Coinbase, which is not an exchange itself but instead offers access to Kalshi contracts, had its request denied.

The Polymarket case is being heard by Judge Miranda M. Du. Kalshi may hope to have the case put in front of Du rather than Andrew Gordon, who dissolved Kalshi’s injunction in November.

In Massachusetts, Kalshi was sued by the state in September and filed to have the case moved to federal court. In October, however, a federal judge said state gambling laws were not completely preempted, and sent the case back down to state court. That decision would not bind the District Court for Nevada.

Last month, the state court granted Massachusetts an injunction that would have forced Kalshi to shut down its sports contracts. However, Kalshi received an emergency stay Tuesday, which will be in effect while the Massachusetts Appeals Court hears Kalshi’s appeal.

CFTC amicus brief

The decision to deny Kalshi an administrative stay may have taken some of the spotlight away from CFTC’s highly anticipated amicus brief in Crypto.com’s Ninth Circuit lawsuit against Nevada.

The CFTC brief made many arguments similar to those raised by Kalshi at points in its various litigations. For example, it noted the history of states arguing that traditional commodities were gambling.

“Even accepting arguendo that regulation of gambling is a historic police power of the states, the Court should not apply a presumption against preemption,” the CFTC’s lawyers wrote. “The entire purpose of the exclusive jurisdictional provision in CEA § 2(a)(1)(A) is to provide national uniformity for derivatives trading and to prevent 50 different states from undermining this national regulatory structure by claiming derivatives markets are subject to state gambling laws. Congress’s ’clear and manifest purpose’ was indeed to preempt these historic police powers.” 

It also argued that definitions of a “swap” that exclude sports event contracts are not based on the actual text of the Commodity Exchange Act. A swap — a type of financial instrument traditionally used for hedging, which event contracts fall under — includes “any agreement, contract, or transaction … that 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.”

The CFTC’s brief argues that the most straightforward interpretation of that language would include sports contracts.

“The final score of a sporting event is a future occurrence whose outcome is uncertain until the game concludes and falls easily within the broad language of the swap definition as well as the broad definitions of ‘event’ or ‘contingency,’” the brief said. 

Brief says little on how state laws interfere

The brief said little about how the CFTC currently regulates event contracts and how enforcement of state gambling laws would interfere with this.

It did note that “a DCM is required by federal law to provide ‘impartial access’ to all eligible participants nationwide,” adding that “if a state bans the contract, the DCM cannot fulfill its mandate to provide impartial national access.” However, the regulator has not taken action against DCMs like Crypto.com, Polymarket U.S., or CME (which is the exchange behind DraftKings and FanDuel’s prediction markets), whose sports event contracts are only available in certain states.

The question of state gambling laws interfering with the CFTC’s ability to regulate would be one area where the CFTC’s opinion would be most significant. In contrast, the CFTC’s view about Congress’ intent when it passed the Commodity Exchange Act would not be seen as significantly more important than any other party’s view.

Following the Supreme Court’s 2024 Loper Bright Enterprises v. Raimondo decision, courts are no longer expected to defer to federal agencies’ interpretations of ambiguous laws, a process often referred to as Chevron deference.

In January, Selig said that the CFTC was drawing up rules for event contracts, but it has not published these yet and it is not clear what they may include.

Crypto.com not geofencing in Nevada

While the Ninth Circuit considers Crypto.com’s appeal, the exchange cannot accept any sports event contract purchases from Nevada residents. However, the business is not geofencing the state, instead only using residence information that users provided when they created their accounts.

This means that a resident of another state who is visiting Nevada can still purchase sports event contracts.

It appears that the state agreed to allow Crypto.com to use residence rather than geolocation, at least temporarily.