Congress explicitly stipulated the cases where the federal Commodity Exchange Act (CEA) preempts state law and excluded any category that would apply to Kalshi, the state of Maryland argued in its latest legal brief against the prediction market.
Maryland submitted a response brief late Monday night in its case in the U.S. Court of Appeals for the Fourth Circuit. It addressed many of the claims that Kalshi had made in its appeal after the prediction market failed to win an injunction to block Maryland from shutting down its sports event contracts.
Central to the response brief were discussions about preemption: the question of when federal law supersedes state law. Kalshi argues that the federal CEA gives the Commodity Futures Trading Commission (CFTC) the “exclusive jurisdiction” over contracts traded on CFTC-registered exchanges and that state gambling laws do not apply. Maryland argues that any preemption of state laws by the CEA would apply only to laws that are actually about commodity exchanges and cannot reach into gambling law as well.
Preemption has been especially central to the Maryland case. In district court, Judge Adam Abelson determined that federal commodities law did not preempt state gambling laws and denied Kalshi an injunction in August.
That ruling is in contrast with Nevada, where Kalshi had an initial injunction dissolved last month. In that case, the judge instead focused on the argument about whether Kalshi’s sports contracts were swaps — eventually determining that they were not and therefore preemption arguments were irrelevant.
As a result, the question of whether state gambling laws were preempted was the main focus of Maryland’s arguments.
Maryland says Congress made preemption clear
Maryland’s lawyers said that “Kalshi is the type of creative entity Congress had in mind” when it aimed to ensure that commodity exchanges couldn’t be used to offer gambling.
The state argued that Congress couldn’t have intended federal law over swaps to preempt state gaming laws because it set out the cases where the CEA did preempt state laws and didn’t include an example that would apply to Kalshi.
The law, Maryland notes, does include instances where state gaming laws are explicitly prohibited.
However, these instances do not include swaps. It refers to transactions between banks, foreign currency, government securities, contracts with actual delivery of a commodity, plus “hybrid instruments,” which include both commodities and securities and are generally regulated by the Securities and Exchange Commission (SEC).
In theory, if there was a way for a sports contract to be offered under one of these categories, it appears that the law would clearly state that state gaming laws do not apply. However, in practice, it’s not clear how a sports event could be brought under any of those areas.
The state added that before 2010, the law would have covered swaps, too, but now it does not.
“Consequently, the current Section 12(e)(2) reflects a deliberate choice by Congress to preempt the application of state and local gaming laws to certain commodity futures but not to swaps,” Maryland’s lawyers wrote.
The CEA, Maryland’s lawyers added, goes on to list a type of state law that is explicitly preempted when it comes to swaps, namely insurance law. By not mentioning gaming laws here, they said, Congress signaled that they still apply to swaps.
“The statute’s other express preemption provision, 7 U.S.C. § 16(h), expressly preempts the application of state insurance laws to swaps,” it said. “It does not preempt the application of any other state laws to swaps. Thus, this provision reflects a choice by Congress to insulate swaps from insurance regulation but not from other areas of state law, including state gaming laws.”
In a thread on social media site X, Andrew Kim, a partner at Goodwin Law who has observed the case but is not involved, said the reference to certain preemptions was a “good point,” but that the idea that listing one item implicitly means the omission of unlisted items is not always a good indicator of Congress’s intent.
Elsewhere, Maryland’s lawyers note, the CEA says “[e]xcept as hereinabove provided, nothing contained in this section shall supersede or limit the jurisdiction at any time conferred on the [SEC] or other regulatory authorities under the laws of the United States or of any State or (II) restrict the [SEC] and such other authorities from carrying out their duties and responsibilities in accordance with such laws.”
This, they say, shows that state law was meant to work alongside the federal law.
‘From cocaine to dogs’
The reply adds that Kalshi’s argument would put no limit, aside from the discretion of the CFTC, on what kind of contracts can be offered on a federally regulated exchange.
“A person could self-certify a swap in anything from cocaine to dogs and claim that the application of narcotics laws or puppy mill laws is preempted,” it said.
Maryland’s lawyers go on to argue that state law is not preempted because there is no contradiction in complying with both its own gaming laws and federal law. While the reply acknowledged that its gaming laws would impose new rules for a company like Kalshi, it said that this does not mean it couldn’t comply with them.
The reply also says that Kalshi is approaching the preemption question backwards. It says it starts with the idea that futures trading is a topic generally regulated by the federal government. However, Maryland’s lawyers say that what matters is the area of state law in question, and in this case it is gambling, which is widely recognized as an area of state control.
“Kalshi does not seriously dispute States’ historic power to regulate sports wagering,” Maryland’s lawyers wrote. “Instead, Kalshi maintains that the presumption against preemption does not apply because futures trading is not an area of historic police power.
“But that approach erroneously emphasizes the federal scheme rather than the state field, and the Supreme Court has rejected this same switch in emphasis.”
Kalshi must submit its reply to Maryland’s brief by Jan. 26. California Attorney General Rob Bonta is planning to sign on to an amicus brief supporting Maryland, according to California Nations Indian Gaming Association Chair James Siva.
Robinhood: Nevada case is complex
There were other legal updates filed Monday night in federal courts around the country.
In the U.S. District Court for the District of Nevada, Robinhood filed a reply brief in its case against the state after a judge had already denied Crypto.com an injunction and dissolved one that had been previously granted to Kalshi.
Kalshi’s contracts — which Robinhood offers access to — are still available in the state while Kalshi appeals the district court decision.
Robinhood’s brief centered on the idea that the legality of sports event contracts was clearly a complex question and that therefore the court should uphold the status quo rather than blocking it from offering sports contracts.
“The Court has already recognized that the issues raised in this litigation are complex, open to different interpretations, and will be resolved only by the appellate courts (including, potentially, the United States Supreme Court),” it said. “The Court itself has come out in two different ways on these issues in the past eight months, first granting Kalshi an injunction against Defendants on the ground that state law is likely preempted and then finding otherwise (including in this case) and vacating that initial injunction.
“Given the serious questions at issue, and the good faith actions of Robinhood, the Court can and should grant a temporary injunction pending appeal to maintain the current status quo and avoid irreparably injuring Robinhood (and its customers).”
Kalshi’s NY reply discusses swaps definition
In the U.S. District Court for the Southern District of New York, Kalshi submitted a reply to New York’s brief as the prediction market again seeks an injunction to keep its sports contracts active in the state.
In this case, the argument centered more on the question of whether Kalshi’s contracts were swaps.
After New York had cited the decision in Nevada as an argument that Kalshi’s contracts were not swaps — a decision which rested on the definition of the words “event” and “occurrence”– Kalshi’s new brief said that the court was “the first and only U.S. court to conclude that ‘outcome’ was an archaic definition of ‘event.’”
It went on to repeat arguments that have come up in other cases against states, such as the idea that sports events have a financial consequence – another component of the definition of “swap” – and that the CEA preempts state gaming laws because it followed a long history of states attempting to use gaming laws to shut down futures trading.
