The judge in Massachusetts’ lawsuit against Kalshi examined a previously overlooked passage in the law that may inform whether sports event contracts count as “swaps,” and mulled whether federal preemption is a topic that can change over time, as he considered whether to block the platform in the Bay State.
Suffolk County Superior Court Judge Christopher Barry-Smith heard comments from both Kalshi’s and Massachusetts’ lawyers in a hearing Tuesday on whether to grant an injunction that would block Kalshi from operating in the state.
Massachusetts Attorney General Andrea Joy Campbell sued Kalshi in state court in September, becoming the first state AG to sue the prediction market. In other cases, Kalshi has sued states in federal court after receiving cease-and-desist letters.
Kalshi initially aimed to have the case heard in federal court, but the U.S. District Court for the District of Massachusetts determined that the state court still had jurisdiction so the case should be heard there.
Two questions have been central to past lawsuits between Kalshi and states. The first concerns preemption — the question of when federal law supersedes state law. States have argued that the Commodity Exchange Act (CEA) may overrule state laws that are specifically about commodity exchanges, but that any preemption wouldn’t also extend to cover sports betting laws. In a case against Maryland, a judge agreed with the state that sports betting laws were not preempted.
The second question is whether Kalshi’s sports contracts count as “swaps” — a type of financial instrument traditionally used for hedging. States have argued that sports event contracts don’t meet the definition of a swap because they are not “associated with a potential financial, economic, or commercial consequence.” If they are not swaps, states argue, they wouldn’t be covered by the CEA and so preemption wouldn’t apply.
This argument convinced a federal judge in Kalshi’s case against Nevada, who said that swaps might include a contract on whether a sporting event occurs, but not who wins.
Although this is the first of these lawsuits to take place in state court, rather than federal, versions of those same issues are central to the case.
Can an action ‘grow into preemption’?
The topic that the judge said was at the front of his mind during the hearing was “whether a practice can grow into preemption.” This, he explained, refers to the fact that Congress likely did not intend for state sports betting laws to be preempted when the CFTC was created in the 1970s, but that circumstances in the ensuing years make the case for preemption stronger today.
“Can you grow into preemption with a new action and a product that wasn’t contemplated by Congress?” he asked.
That question, he said, is not one with an easy answer.
During the Commonwealth’s time to speak, he discussed his idea further after its counsel Louisa Castrucci referenced the Absurdity Doctrine.
“There’s a rule against finding absurd results,” she said. “Courts would refrain against finding absurd results when there is an alternative definition.”
Barry-Smith was sympathetic to the idea that this may have been relevant if sports event contracts were offered in the 1970s, but wasn’t sure how to apply it in 2025.
“The reason I’m asking whether the concept of preemption can be dynamic is I go back to your question of whether the result would be absurd,” he said.
“In 1972, it would be very surprising, even absurd, for Congress to offer something that would have a side door to betting on sports. In 2010, it still would have been surprising, if not absurd.
“But in 2025, when there are many more states that have sports gaming, it goes from absurd and overruling state policy positions, to just providing for another form of sports gaming regulation. The more prevalent sports betting becomes, the less absurd it gets.”
In his opening comments, Barry-Smith asked both sides for precedent or analogies that may help him decide whether the scope of preemption is something that can change over time. However, neither party seemed to provide much guidance on this specific question.
Kalshi lawyer disagrees with judge’s framing
Kalshi lawyer Grant Mainland said he didn’t fully agree with Barry-Smith’s framing of the “dynamic preemption” question, as he believed that state laws around sports betting had always been preempted by the CEA.
“Whether or not they’re thinking about sports, the nature of event contracts is that there’s an infinity of events,” he said.
“But I think it’s blindingly clear from the overall history that states saying ‘these contracts have to stop from trading’ is not what was intended.”
He pointed to the history of states considering forms of financial trading to be gambling, and said that therefore the CEA was specifically designed to preempt state laws related to gambling, including sports betting laws.
Mainland added that since at least 1888, states have attempted to present trading in commodity futures as a form of illegal gambling.
“The entire history of this act is the attempt to try to use state gambling laws to rein in derivatives markets,” he said.
He also argued that Congress has the opportunity to include provisions that would have made clear that if a contract was gaming, state gaming laws would still apply. Instead, he noted the “Special Rule” for certain types of contract, including those that “involve gaming.” That rule says “the [CFTC] may determine” that these contracts “are contrary to the public interest” and prevent them from being listed. By naming the CFTC here, Mainland argued, Congress intended federal authorities to have power even over gaming-related contracts.
“What congress did not do is say, ‘To the extent that it fits into one of the enumerated categories, the preemption doesn’t go that far,’” he said. “What Congress did instead was allow the CFTC to express its authority.”
New standard for what counts as a swap?
The judge also considered the limits on what counts as a swap.
Typically, that discussion has centered on the way the word “swap” is defined in the CEA. The Act says 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.” States have argued that this would be intended to include sports bets, but Kalshi says they would still be included.
However, Barry-Smith pointed to the introduction to a section of the CFTC rules on swaps, 7 U.S.C. § 5a, which suggests a potentially narrower test for what qualifies.
“The transactions subject to this chapter are entered into regularly in interstate and international commerce and are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities,” it says.
Sports event contracts, Barry-Smith said, are more difficult to include under this definition.
“I understand that who wins a game has an economic impact, but how about 5a, when it talks about price risk?” Barry-Smith asked. “Why does it matter?”
Mainland rejected the idea that this passage was intended to set the boundaries of what could be counted as a swap.
“The passage you’re referencing is a preamble, and what really matters is are these or are they not swaps?” Mainland said.
In addition, he said that there would be plenty of reason why price risks and pricing information might be relevant when it comes to who wins a sporting event.
“Sports is a massive industry,” he said. “Just because it’s fun doesn’t mean there’s no hedging activity against it.
“Now are people also trading for fun? I’m sure they are. I’m sure they’re also trading in grain futures or corn futures just to make money.”
Decision not likely until new year
When it came to questions about the effects of winning the injunction, rather than likelihood of each party winning on the merits, Mainland noted that this case was different from previous instances in which judges have decided on injunctions in Kalshi-vs.-state cases. In those cases, state regulators have aimed to ban Kalshi’s sports contracts and the prediction market sought injunctions to prevent the regulators from doing so. Kalshi won an injunction in New Jersey and one in Nevada that was later dissolved, while in Maryland its bid for an injunction was rejected.
In this case, however, it is the state seeking the injunction, which would block Kalshi from offering sports contracts in the state.
Barry-Smith said he was unlikely to decide on whether to issue an injunction until the new year. When he does, he said, he planned on calling both sides for a meeting first, so that both parties can be prepared for next steps.
“Don’t expect anything before January,” he said. “And whatever happens, I’ll try to be orderly about it. Which doesn’t mean I’d definitely stay any orders.”
