A federal judge in Tennessee handed Kalshi a major courtroom win Thursday by granting an injunction that will allow the prediction market to keep offering sports event contracts in Tennessee. But the ruling, based on different arguments to past Kalshi injunctions, highlights the level of disagreement among the judiciary about the questions at the heart of all of Kalshi’s litigations with states.
Judge Aleta Trauger of the U.S. District Court for the District of Tennessee granted Kalshi an injunction that prevents the state from enforcing its gambling laws against the business, determining that those state laws are overruled by federal law. The lawsuit began after the state’s Sports Wagering Council sent Kalshi a cease-and-desist last month.
Kalshi-TN-opinionIn the short term, the win ensures that Kalshi will not have to shut off access to its sports contracts in Tennessee, at least until the court makes a final decision on the case itself, or an appeals court overturns the injunction decision.
But it also involved yet another new interpretation of the legal questions at the heart of the case, highlighting the complexity of the issue and furthering the impression that it may ultimately go to the Supreme Court.
Swap definition and preemption dominate suits
Kalshi’s lawsuits against states have generally hinged on two questions: whether the federal Commodity Exchange Act (CEA) “preempts” — or supersedes — state laws, and whether sports event contracts meet the definition of a “swap” as defined in the CEA. If the answer to either question is “no,” then state gambling laws would apply to the contracts, making them illegal.
A swap is a type of financial instrument traditionally used for hedging risk. 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.”
Within the preemption question, there are two main strands: conflict preemption and field preemption. Conflict preemption is when it is impossible to comply with a state law and a federal law at the same time, or impossible to comply with a state law while fulfilling Congress’ goal when writing a federal law. In those circumstances, the federal law takes precedence.
Field preemption is when Congress writes a federal law that is broad enough to supersede all state laws on a given topic — or “preempt the field” of laws in that area. It is generally accepted that the CEA preempts the field of laws explicitly about regulation of traditional commodity futures, but there is more debate over whether this field preemption extends into state gambling laws as well.
District courts disagree on multiple questions
Other district courts have already come to conclusions on whether to grant injunctions. These are not final rulings on a case as a whole, but the likelihood of winning the case on the merits has been central to determining which way to rule. While some courts have rules against Kalshi, the exchange has been able to keep offering sports contracts in all 50 states as it has appealed those rulings.
In Nevada, the court first ruled that sports event contracts were swaps and that the Commodity Exchange Act preempted the field, and therefore granted Kalshi an injunction. It then dissolved that injunction, determining that sports event contracts were not swaps.
In Maryland, the court ruled that state gambling laws are not preempted by any doctrine of preemption, and ignored the question of whether sports contracts are swaps because if preemption does not apply, the swaps question would be irrelevant. A state court in Massachusetts later came to a similar conclusion, though not before the judge mulled a new legal standard for determining when a contract counts as a “swap” during a hearing.
In New Jersey, the court accepted that sports event contracts were covered by the CEA — with virtually no discussion of the specifics of the “swaps” question — and then ruled that state gambling laws do not apply due to the doctrine of field preemption.
Separately, Kalshi is engaged in lawsuits with tribes in California and Wisconsin, which turn on different legal doctrines as they concern the interaction between two federal laws rather than state vs federal law.
Now, the District Court for the District of Tennessee has determined that sports event contracts are swaps, and argued that state gambling laws do not apply due to a different preemption doctrine — conflict preemption.
With the latest decision, federal courts have now ruled both ways on just about all of the legal questions at the heart of sports event contract litigation.
That kind of disagreement among judges could be a sign that the matter may ultimately only be able to be resolved by the Supreme Court.
Judge addresses swaps question
Much of the court’s opinion dealt with the swaps question.
Tennessee, like other states, argued that Kalshi’s contracts fail to meet the definition of a swap. The state said that a contract on the winner of a sports game was not an event itself, but instead the outcome of an event.
“The defendants argue that, with respect to sports, the occurrence of an event relates to whether a game takes place at all, whereas Kalshi’s event contracts — regarding who wins, or how many points a player scores — concern the outcome of an event, not the event’s occurrence or nonoccurrence,” Trauger wrote, summarizing Tennessee’s arguments.
That argument convinced a federal judge in Nevada to dissolve an injunction he had previously granted to Kalshi. However, it did not sway Trauger.
“Even accepting the defendants’ proposed definitions, if, for example, the Titans won a Super Bowl, that would be a significant occurrence, something that happened or took place, and an occurrence of some importance with an antecedent cause — perhaps better coaching,” she wrote. “Put another way, a three-hour-long game, and the Titans winning that game, are both occurrences of events.”
Trauger pointed to a Second Circuit ruling concerning non-sports swaps, where the court determined that the exchange rate between the U.S. dollar and South African rand falling below 12.50 was an “event,” and therefore a contract based on that movement would be a swap.
“The same analysis applied to this case means that a contract providing for payment, for example, if ‘at any point during the game one team leads another by at least 20 points’ would fall squarely within the CEA’s regulation of swaps,” Trauger wrote.
Do the contracts have financial consequence?
Tennessee also argued that Kalshi’s contracts cannot be swaps because they are not “associated with a potential financial, economic, or commercial consequence.” Here — again mirroring previous litigations — the state argued that the consequence in question must be “inherent” to the contract, while Kalshi argued that the wording was intentionally broad in order to allow for even loose or downstream commercial consequences.
Trauger said the inclusion of the word “potential” suggests that Congress did not intend to refer only to inherent consequences.
“Congress could have imposed a more stringent requirement,” she wrote. “Or it could have omitted a qualifier altogether. Congress chose to use ‘potential,’ which is broad.”
The court noted that during oral arguments, Kalshi’s lawyers said that the exchange would not offer a contract on what color of Gatorade shower the Super Bowl winning head coach would receive.
Conflict preemption
Having determined that Kalshi’s contracts were swaps, Trauger moved to the question of whether the CEA preempted state gambling laws.
Kalshi put forward multiple arguments for how state gambling laws are preempted, including both conflict and field preemption, but as only one would need to be accepted for Kalshi to win an injunction, Trauger focused on conflict preemption — which she said applied here.
“Under the doctrine of conflict preemption, ‘federal law preempts state law if the two “directly conflict,”’ which occurs when complying with both is ‘impossible,’ or when ‘state law “stand[s] as an obstacle to the accomplishment” of Congress’s objectives,’” Trauger wrote. “Kalshi is likely to succeed on either conflict preemption theory.”
Kalshi argued that it would be impossible to comply with Tennessee’s requirement that all bettors be “physically located within” the state while also fulfilling the requirement for “impartial access.” Tennessee argued that the impartial access requirement was about economic means rather than physical location.
“This may be so, but the defendants have pointed the court to no caselaw stating that the purpose of CFTC’s impartiality requirement, as promulgated, so limits its application,” Trauger wrote.
Some exchanges already limit their sports event contracts offering to certain states. For example, Crypto.com and Polymarket’s contracts are not available in Nevada, and the exchanges do not appear to have faced consequences from the CFTC. However, in an amicus brief filed in the Ninth Circuit earlier this week, the CFTC appeared to endorse Kalshi’s interpretation of impartial access, writing, “if a state bans the contract, the DCM cannot fulfill its mandate to provide impartial national access.”
Trauger added that she was unconvinced by the argument that Kalshi could simply obtain a Tennessee sports betting license and follow the rules set for state-licensed sportsbooks. The U.S. District Court for the District of Maryland had rejected Kalshi’s conflict preemption argument by arguing the exchange could just get a license.
“This court does not see how Kalshi could allow impartial access nationwide when those within Tennessee can only trade with others in the state, who are over 21 years old, and those outside the state cannot trade with those within the state,” Trauger wrote. “It is hard to see how a federally regulated nationwide derivatives exchange could function in this way, as the plaintiff argues.”
Trauger then wrote that even if state and federal laws are not directly in conflict, applying state gambling laws to Kalshi would still be an obstacle to the main objective of the CEA: creating a uniform set of federal rules for commodity exchanges.
“State law would directly affect trading on Kalshi by limiting who can trade with whom,” she wrote.
Tennessee could appeal the decision to the U.S. Court of Appeals for the Sixth Circuit.
The Third, Fourth, and Ninth Circuits are already hearing appeals concerning Kalshi and New Jersey, Maryland, and Nevada, respectively.
