Prediction Markets Still Legal In Minnesota, But Kalshi At Risk Of New York Ban

In a mixed day for prediction market litigation, Kalshi, Polymarket, and the Commodity Futures Trading Commission (CFTC) secured a big win in Minnesota Monday, but Kalshi suffered a major defeat in New York hours later.

Prediction markets will remain legal in Minnesota for now, as the U.S. District Court for the District of Minnesota issued an injunction to stop a ban from going into effect. However, Kalshi is at risk of having to block all customers in New York, as the U.S. District Court for the Southern District of New York rejected an emergency bid for an injunction pending appeal.

Minnesota lawsuit different from others

While prediction markets like Kalshi have been involved in lawsuits against states across the country, the Minnesota lawsuit is different because it concerns a brand new law that specifically addresses prediction markets — rather than a state’s existing sports betting laws — and it covers virtually all prediction market contracts rather than just sports.

The law was set to go into effect on Aug. 1, which would have meant all prediction market operators would have had to cease business in the state.

At a hearing this month, Judge Katherine Menendez appeared to believe that the law may be valid with regard to some prediction market contracts, but it could be preempted by the federal Commodity Exchange Act (CEA) when it comes to other contracts. She asked lawyers from both sides what the correct path would be if that were the case.

In her opinion on the decision to pause the law going into force for now, the judge wrote that both sides told her that the compromise solution she felt was fairest was off the table. 

“Regrettably, although the briefing from both parties here is excellent, both sides have treated the issue before the court as all-or-nothing propositions — either the CEA preempts any enforcement of the Minnesota law or it doesn’t,” she wrote. 

Menendez was also convinced by Kalshi that the CFTC’s argument that the “special rule” in the CEA — often seen by prediction market opponents as a sign that Congress did not intend sports event contracts to be legal — gave authority over these contracts to the CFTC, preempting state laws that may otherwise apply.

“In combination with the congressional decision to give the CFTC exclusive jurisdiction over swaps, allowing the CFTC to either permit event contracts in these categories or declare them contrary to the public interest suggests, at least preliminarily, that Congress intended DCM-based transactions over these prediction markets to be governed by the CFTC,” she wrote.

The litigation over the Minnesota law will still go on as the court considers a final judgment on whether the law is valid.

New York emergency injunction rejected

In New York, Judge Analisa Torres had initially ruled that the state’s gambling laws are not preempted by the CEA and therefore can be enforced against Kalshi, denying the prediction market an injunction that would have shielded it from enforcement, on July 7.

Borrowing from an August decision in Maryland, Torres determined that the CEA may preempt some state laws about commodities regulation, but not gambling laws. She added that because it does not preempt gambling laws, she would not have to decide whether sports event contracts qualify as “swaps” under the Commodity Exchange Act — another central argument in the question of whether sports event contracts are legal.

Kalshi is appealing Torres’ initial decision to the U.S. Court of Appeals for the Second Circuit. It also applied for an emergency injunction that would have ensured the state cannot take action while the Second Circuit hears the appeal.

However, that appeal has now been rejected, which could mean that the prediction market will potentially have to stop offering sports event contracts in the fourth-most populous state in the U.S., where it is headquartered.

If New York chooses, it could sue Kalshi in state court, seeking an order to force the prediction market to stop offering sports contracts in the state. In April, it sued Gemini and Coinbase over their offering of sports event contracts.

State courts have generally been more open to the argument that states have jurisdiction over sports event contracts. State courts in Nevada and Michigan have issued bans that are currently in effect, while a Massachusetts court issued an injunction banning Kalshi’s sports contracts, which is currently under appeal and not yet in force. No state court has yet ruled Kalshi’s way on the question of whether its contracts should be banned.

There are set to be more major courtroom events for prediction markets this week. On Thursday, the U.S. Court of Appeals for the Sixth Circuit will hear oral arguments in the case between Kalshi and Tennessee. In February, Kalshi won an injunction to continue operating in Tennessee, which the state appealed to the Sixth Circuit. Central to that decision in February was an argument that it would be impossible to comply with the CEA and Tennessee’s state gambling laws at the same time.