Fourth Circuit judges may feel that Kalshi is not operating within the spirit of the law, but their questioning Thursday suggests they may believe the letter of the law is on the prediction market’s side.
Lawyers for Kalshi and Maryland argued at the U.S. Court of Appeals for the Fourth Circuit, before judges Roger Gregory, DeAndrea Gist Benjamin, and Stephanie Thacker. The appeal follows the court’s decision in August to deny Kalshi an appeal that would have protected it from enforcement of Maryland’s sports betting laws.
More on the fence than Third, Ninth circuits
The questioning from the judges seemed more on the fence than that of judges in the Third Circuit, who sided with Kalshi, or in the Ninth Circuit, who have not yet ruled but appeared very skeptical of prediction markets’ arguments.
Another parallel worth noting is the U.S. District Court for the Northern District of California, which denied a request from three tribes to ban Kalshi’s sports contracts on their lands. Judge Jacqueline Scott Corley’s opinion in that case showed that judges may view the letter and the spirit of the law differently.
That case dealt with a different set of legal questions, because it concerned the interaction between two federal laws rather than federal law and state law. However, the district court’s opinion — following oral arguments in which the judge showed sympathy for the tribes’ point of view — appeared to express a sentiment that Kalshi’s actions may not have been in the spirit of the law, but were legal.
At the federal courthouse in Richmond on Thursday, the judges appeared to view sports event contracts as a form of gambling that lacks appropriate rules, but one which may still, whether intentionally or not, have been permitted by Congress. Despite describing the product as gambling and questioning Kalshi’s marketing of it, the judges’ comments about the main legal questions in the case appeared favorable to Kalshi.
Swaps and preemption questions
As with all Kalshi vs. state lawsuits, two main questions — which each contain further sub-questions — are at the heart of the case. First, does the federal Commodity Exchange Act (CEA) preempt, or supersede, state sports betting laws? Second, do sports event contracts meet the definition of a “swap” – a type of financial instrument traditionally used for hedging – and therefore fall under the jurisdiction of the CEA?
Thacker began by asking a question that has come up regularly in sports event contract lawsuits: If these contracts are swaps, then are all traditional gambling businesses actually dealing in unregulated financial products?
“If there is exclusive jurisdiction over this, it seems to me that there might be exclusive jurisdiction over all gambling, including state lotteries,” Thacker said.
Kalshi attorney Will Havemann said exclusive jurisdiction would not extend that far, as the preemption of state law only applies to products traded on a designated contract market.
Stronger response to 40.11 question
Havemann faced further questions about the CFTC’s Rule 40.11, which refers to a “prohibition” on contracts involving, among other subjects, gaming. The rule was a major hang-up in arguments before the U.S. Court of Appeals for the Ninth Circuit, with one judge in particular struggling to look past the fact that gaming contracts appear to be prohibited by CFTC rules.
This time, Havemann appeared to handle the questioning more convincingly than the lawyers in the Ninth Circuit case. Rather than arguing about whether the rule is a flat-out ban, or the definition of a contract involving gaming, Havemann turned the discussion back to federal preemption and challenged whether the rule was actually relevant to the topic before the court.
“There’s two questions — there’s the question of whether it’s a categorical prohibition and it’s a very difficult regulation to understand,” he said. “We don’t read it as a categorical prohibition because 40.11 (c) refers to approval or disapproval of the contracts. There’s also a question of whether or not the contracts involve gaming.
“There is a real question about whether 40.11 amounts to a categorical prohibition at all and there is a real question about whether these contracts amount to gaming, but the most fundamental part that I would press upon the court is that whatever the regulation says, it doesn’t mean states get to regulate us. We might have some trouble with our federal regulator, but it doesn’t mean these contracts aren’t swaps. They’re contracts on a designated contract market. If we’re in violation of a federal regulation, then the CFTC can take appropriate action.”
Light-touch regulation
The judges also noted that, currently, CFTC rules do not appear designed for sports contracts. The regulator is in the early stages of a rulemaking process for event contracts, which may include new rules that would affect sports event contracts. But right now the contracts are governed by similar rules to other types of swaps such as interest-rate contracts.
Gregory asked why there were no rules that appeared designed for sports event contracts at this point.
“There was a proposed rule, but the logic of the rule was invalidated by Judge Cobb’s opinion in the D.C. Circuit,” Havemann said, referencing Kalshi’s 2024 lawsuit against the CFTC that allowed the business to list election contracts. “Then there was a process to find a new chair, and when the new chair was appointed they got to work on the rules.”
Havemann at one point also described the self-certification process by which contracts are listed as a “passive” process, which the judges questioned.
“Passive regulation sounds like you’re not being regulated,” Thacker said. “What does passive regulation even mean?”
Havemann said the approval process for new contracts was passive, but not the regulation as a whole, and added that this is how it worked for all CFTC-regulated exchanges, including traditional commodity exchanges.
State faces more specific legal questions
When the state’s lawyer Max Brauer spoke, it seemed the discussion got more into the specifics of the legal questions that define the case. Like judges in the Third Circuit — which ultimately sided with Kalshi — the judges pointed out that the wording of the CEA suggests that the definition of a swap is extremely broad.
Brauer argued that there are certain “limiting principles” in the CEA which prevent sports event contracts from qualifying as swaps. One of those is that swaps must be associated with a potential financial, economic, or commercial consequence. Another is the use of the word “outcome,” which Brauer said can refer to whether a game happens, but not the eventual winner.
“The Super Bowl occurring is an event,” he said. “Winning the Super Bowl is an outcome.”
The Fourth Circuit’s Gregory, though, said the broad wording of the definition of a swap seemed like a deliberate choice in order to encompass a wide range of possible contracts. The CFTC, in turn, would then make decisions as they come up.
“It seems like the whole point is that they wanted it to be a field preemption” he said. “These things that you say are broad are meant to be broad. That’s what they wanted to do — they wanted to cover the field. That’s why they use broad language.
“I suppose they would say that’s why it’s been a while to write these rules, because they want to see how they’re going to regulate it and they’ll fine-tune it.”
Brauer said that preempting the field — when Congress writes a law that is meant to be comprehensive enough to preempt all state laws about the same subject — was a rare move.
“Field preemption only applies in rare cases as to where Congress legislated so comprehensively as to leave no room for state regulation,” he said.
Gregory replied, “Well this sounds like one.”
Does conflict preemption apply?
Judge Benjamin argued that another form of preemption may apply — conflict preemption. This is where state law and federal law come into direct conflict, so that it is impossible to comply with both, or where complying with the state law would defeat the purpose of the federal law.
“How is it not conflict preemption if you have one state doing this, another state doing that, the CFTC there too?” she asked.
Brauer said the two laws were not truly in conflict, because if Kalshi wanted to offer sports betting in Maryland it could simply apply for a Maryland sports betting license.
“We have to ask, ‘Is it impossible to comply with both state law and federal law?’ And Kalshi can just get a license,” he said. “Since it’s not impossible to comply with both statutes, and since sports betting laws do not conflict with any of the purposes that led Congress to pass Dodd-Frank, Maryland sports betting laws cannot be preempted.”
Could ‘special rule’ help Kalshi?
Judge Benjamin argued that it would appear that the CEA specifically considers that gaming contracts could be swaps, via its “special rule.” The rule covers contracts on gaming, war, assassination, and terrorism. While it allows the CFTC to ban gaming contracts, Kalshi has argued that by doing so it asserts CFTC jurisdiction over them.
(C)Special rule for review and approval of event contracts and swaps contracts
(i)Event contracts
In connection with the listing of agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(2)(i) [2] of this title), by a designated contract market or swap execution facility, the Commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve—
(I)activity that is unlawful under any Federal or State law;
(II)terrorism;
(III)assassination;
(IV)war;
(V)gaming; or
(VI)other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.
“How does this work with the special rule where they add gaming?” Benjamin asked. “The plain language of it says gaming.”
Brauer disagreed with that framing, noting that the rule also covered categories beyond gaming where the idea of existing laws being preempted would have unusual consequences.
“The special rule gives the CFTC authority to police its own turf,” he said. “It does not allow the CFTC to preempt other turf.
“The special rule gives the CFTC authority to prohibit contracts including gaming, assassination, terrorism, war, or any activity illegal under federal law. But you can’t say it’s giving the CFTC authority to preempt gaming law any more than it’s giving the CFTC authority to preempt assassination law, war, or even, more broadly, anything unlawful under state law.”
Headed for the Supreme Court
Despite Kalshi failing to receive an injunction, Maryland agreed not to enforce its gambling laws against the business until the appeal is heard.
It could be months before the court makes a decision on whether to grant an injunction. By that point, the Ninth Circuit may already have given its decision. A disagreement between circuit courts on a significant legal question is often the determinant for if a case gets picked up by the Supreme Court.
Given the range of disagreement on the key questions from district courts, it is widely expected that the case will reach the highest court in the nation at some point.
Judge Gregory at one point in the arguments noted that “this will probably end up with the Supreme Court.”
