Calling Kalshi’s request to move its case from state court to federal court “inappropriate,” Kentucky Attorney General Russell Coleman late Monday wrote that “a preemption defense cannot support removal.”
The brief is the latest in the state’s lawsuit, which seeks to prohibit Kalshi from operating within Kentucky’s borders. Coleman initially filed the case in Franklin Circuit Court, and Kalshi in June filed a motion to move the case to the U.S. District Court for the Eastern District of Kentucky.
The machinations are not unusual — several other states have filed cases against the prediction market in state court, presumably believing the landscape would be more favorable, while Kalshi has filed every one of its cases in federal court and requested state court cases be moved. Since the Professional and Amateur Sports Protection Act (PASPA) was overturned in 2018, sports gambling regulation has fallen to states, but Kalshi and all prediction markets are federally regulated financial platforms.
At least three states, including Massachusetts, Michigan, and Nevada, have filed in state court and Kalshi has attempted to have the cases moved. Ultimately, federal courts in those jurisdictions sent the cases back to state court. In Michigan and Nevada, regulators have already started enforcing bans on Kalshi. In Washington, a ban for residents is in effect, with geofencing to begin Wednesday.
Kentucky: CEA doesn’t preempt state law
Coleman’s main argument for sending the case back to state court is that Kalshi’s contention that the Commodities Exchange Act preempts state law isn’t a valid argument when it comes to whether a state or federal court should hear a case. He sites several cases, including the 2005 Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mf and 1987 Caterpillar Inc. v. Williams. The Grable case, he wrote, says a “court may exercise federal question jurisdiction over state law claims only when those claims ‘necessarily raise a stated federal issue.'”
Coleman quoted from Caterpillar: “[I]t is now settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of pre-emption, even if the defense is anticipated in the plaintiff’s complaint, and even if both parties concede that the federal defense is the only question truly at issue.”
In the initial complaint, the state of Kentucky contends that Kalshi is guilty of “false, misleading, and deceptive” advertising and marketing in Kentucky, but that the issue is not a federal issue because the complaint is focused on Kalshi’s actions in Kentucky. In addition, Coleman wrote in the complaint that Kalshi’s sports contracts are not swaps and therefore are not beholden to federal regulation.
“Kalshi’s argument gets it backwards,” the motion to remand reads. “The Commonwealth’s unfairness claim rests on the assertion that Kalshi is running an unauthorized sports wagering operation in contravention of public policy.”
AG: State court right to reject loss recovery
Ultimately, the arguments from both parties are not new — at issue across the country with regard to sports event contracts is whether or not federal law preempts state law and if the contracts meet the definition of a swap. Courts have been divided on these issues, and it appears likely that a decision about the status of sports event contracts will be decided by the U.S. Supreme Court. New Jersey Attorney General Mary Jo Flaherty has until Thursday to file in the Supreme Court for a petition for a writ of certiorari after the Third Circuit in April ruled in Kalshi’s favor.
Later in the motion to remand, Coleman brought Kentucky’s loss recovery — or Statute of Anne — act into play. Broadly, the acts allow a third party to sue for gambling losses and recoup up to treble damages. The attorney general argued that the state court’s opinion to “reject its argument that the Loss Recovery Act’s statutory exception for ‘betting, gaming, or wagering that has been authorized,’
KRS 372.005, supports removal” was correct.
Among the other arguments Coleman made:
- Kalshi is misinterpreting a key state statute, KRS 230, which “defines ‘sports wagering’ as wagering ‘in conformance with federal law and authorized by the corporation [Horse Racing and Gaming Corporation].’ … KRS Chapter 230 does not say that wagers on sporting events (e.g., a bet placed with the bookie on the football game) are not sports wagers under Kentucky law unless they conform with federal law.” Kalshi trades are not currently “authorized” by the state.
- Preemption would “disrupt the Federal-State balance.” In essence, the state is arguing that its sovereignty would be violated, and calls it “no small thing for the federal government to prevent a sovereign state from asserting its own laws within its own courts.”
- Kalshi misinterprets a key part of a federal law, USC 1442. Per the brief, a “property holder” is defined as one “whose title is derived from [a federal] officer,” and only when “such action … affects the validity of any law of the United States.” While Kalshi is licensed via a federal agency, the state calls into question the idea that there is no “titled” property — defined as real or physical property — in question.
- The state is not looking to other states or other decisions in its motion to remand. Rather, it is focused solely on Kalshi’s activity in Kentucky.
The CFTC is also in court with the state, but Coleman wrote that that case has no bearing on the state’s complaint against Kalshi.
