Kalshi has won a major legal victory in New Jersey, as the first ever circuit court decision on sports event contracts went in the prediction market’s favor just three days after a major setback in Nevada.
The U.S. Court of Appeals for the Third Circuit on Monday upheld a District Court ruling granting Kalshi an injunction that prevents the state of New Jersey from enforcing its gambling laws against the business. With the 2-1 decision by the judges, it becomes the first federal appellate court to issue a ruling in either direction about whether state sports betting laws apply to prediction markets.
Third-circuit-opinionThe ruling comes after a Nevada state court’s decision last week to extend a ban on Kalshi’s sports contracts, as courts continue to disagree on how state and federal law should apply to prediction markets. The level of disagreement may be a sign that prediction market cases will ultimately need to be settled by the U.S. Supreme Court.
Preemption and swaps question central to debate
In the Third Circuit, Chief Judge Michael A. Chagares and Judge David J. Porter sided with Kalshi, while Judge Jane Richards Roth sided with the state. Porter wrote the majority opinion, while Roth provided a dissent.
Federal courts considering whether to grant or uphold injunctions requested by Kalshi consider two main questions. First, whether the federal Commodity Exchange Act (CEA) preempts, or supersedes, state gambling laws. And second, whether Kalshi’s contracts can be categorized as “swaps” – a type of financial derivative traditionally used for hedging – and are therefore covered by the CEA in the first place.
Kalshi — which argues its contracts are swaps and state gambling laws are preempted — needs the court to agree with its arguments on both subjects. Accepting the state’s arguments on either point would mean a victory for the state.
CEA preempts field of trading on DCMs?
Each half of the argument between Kalshi and states can be broken down further. There are multiple different types of preemption for which Kalshi contends it qualifies, with field preemption and conflict preemption being the two most prominent.
Field preemption is when Congress writes a law that is intended to preempt a specific field, by so wholly regulating a topic that all state laws on this topic are preempted. It is widely accepted that the CEA preempts the field of traditional commodity futures, but whether this preemption also extends to state gambling laws has been debated.
In this case, Porter wrote that the CEA does indeed preempt the field of state gambling laws if the gambling activity in question occurs on a registered designated contract market (DCM).
“The District Court considered whether the Act impliedly preempted state regulation of DCMs and concluded that ‘at the very least field preemption applies,’” he wrote.
In the majority opinion, Porter wrote that the “field” in question, where all state laws were preempted, was trading on a DCM, rather than gambling. He noted that gambling is “a broader and traditionally state-regulated field,” and so if that was the topic at hand, it would have made the case for preemption weaker.
Kalshi has also argued for conflict preemption — that it would be impossible for it to comply with both federal and state law. While the court noted that finding only one form of preemption was sufficient, the court said that conflict preemption applies too.
Porter wrote that New Jersey gambling laws “stand as an obstacle” to the goals of the CEA.
“Allowing New Jersey to enforce its gambling laws and state constitution would create an obstacle to executing the Act because such state enforcement would prohibit Kalshi, which operates a licensed DCM under the exclusive jurisdiction of the CFTC, from offering its sports-related event contracts in New Jersey,” he wrote. “This state regulation is exactly the patchwork that Congress replaced wholecloth by creating the CFTC.”
Broad definition
Looking at whether Kalshi’s contracts are swaps, the court — as Porter had suggested in oral arguments — pointed to the fact that the definition of a swap in the CEA is broad.
Per the CEA, a swap 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 majority opinion said that New Jersey’s argument — that the financial, economic, or commercial consequence must be a major part of the event at the center of the contract — is reading something into the law that is not there.
“New Jersey argues that Kalshi’s event contracts are not ‘swaps’ covered by the Act ‘because the outcome of a sports game is not “joined or connected” with a financial, economic, or commercial instrument or measure,’” Porter wrote. “But its proposed ‘joined or connected’ requirement raises the bar beyond what the Act requires.”
He noted that there are many possible financial or economic consequences to the outcome of a sporting event, with “sponsors, advertisers, television networks, franchises, and local and national communities” all possibly being affected.
One judge dissents
In her dissent, Judge Roth opened by noting that Kalshi’s “offerings are virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel.”
“I see Kalshi’s actions as a performative sleight meant to obscure the reality that Kalshi’s products are sports gambling,” she wrote. “Because Kalshi is facilitating gambling, it can be subjected to state regulation.”
With regards to preemption, Roth wrote that the court should be especially skeptical of assuming federal law can overrule state law because gambling is a field traditionally regulated by the states, where a “presumption against preemption” generally applies.
Roth argued that the majority judges did not put enough thought into their decision on exactly which field is being preempted. She wrote that the field of “trading on a DCM” is not the type of comprehensive area where field preemption usually applies.
“Subjects where field preemption have been found to apply include broad areas of law such as foreign affairs, international relations, and immigration,” she wrote. “DCM trading is not the sort of comprehensive field where the federal interest is so dominant that Congress intended for the ‘complete ouster of state power.’”
Roth added that Congress did not have a “clear and manifest purpose” in preempting the field of sports betting, as it didn’t appear to consider the fact that it was giving the Commodity Futures Trading Commission (CFTC) power over sports betting at all.
Looking at whether Kalshi’s contracts are swaps, Roth noted that she did not need to make a decision, as if state laws aren’t preempted, the swaps definition is irrelevant. However, she cautioned against taking the definition of a swap in the CEA too literally.
“We should not read statutes literally ‘if reliance on that language would defeat the plain purpose of the statute,’ or would‘def[y] rationality,’” she wrote, quoting two Supreme Court opinions.
Follows Nevada defeat
The victory for Kalshi comes less than 72 hours after a major defeat for the prediction market. In Nevada, a state court — the Carson City District Court — on Friday extended the ban on the platform’s sports, entertainment, and politics contracts until April 17. The extension allows time for Kalshi and the state to work out details of an injunction that would ban it for even longer.
The injunction may force Kalshi to geofence Nevada instead of relying on user registration data to ban Nevada residents. Currently, a resident of another state who visits Nevada is still able to use the prediction market to bet on sports.
“I find based on the arguments that have been presented that it is a gaming activity that is prohibited for any non-licensee to engage in,” Judge Jason Woodbury said in a hearing on the matter.
Nevada is so far the only state that has actually banned any class of Kalshi contracts.
Jessica Whelan, representing Nevada, said in the hearing, “There’s no real dispute that Kalshi is not in compliance with Nevada gaming regulations. Kalshi’s primary argument is that it does not need to comply with Nevada wagering law.”
She argued that an injunction should be granted on a shorter time frame because, “Kalshi has been on notice since over a year ago, when the board sent Kalshi a cease-and-desist letter.”
Kalshi lawyer Grant Mainland of Milbank LLP argued that the Nevada Gaming Control Board did not have the standing to ask for an order to ban Kalshi in the first place, as it must instead ask the attorney general to request the order.
He also argued that the standard for an injunction should be higher than for the temporary restraining order that was already granted, because Kalshi is being ordered to geofence, which is an order to actively do something as opposed to an order to stop doing something.
