In the latest brief filed by the state of Ohio in its case with Kalshi, the state took a zoomed-out view to argue that sports event contracts are not swaps, and therefore are illegal sports betting. If the definition of a swap is meant to be read broadly enough to include sports contracts, the state argues, then large parts of the definition serve no purpose. The brief was filed Thursday in in the U.S. Court of Appeals for the Sixth Circuit.
Ohio’s response brief in Kalshiex LLC v Ohio came after Kalshi’s initial brief appealing a decision from the U.S. District Court for the Southern District of Ohio. The District Court had ruled that Ohio was allowed to enforce its sports betting laws against Kalshi.
OH-briefWhile many of the arguments made by Ohio were similar to past lawsuits between prediction markets and states, the state brought forward a new focus on how the prediction market’s interpretation of the law would make other parts of the Commodity Exchange Act (CEA) irrelevant.
One of the key questions in the litigation over sports event contracts is whether prediction markets meet the definition of a swap — a type of financial instrument traditionally used for hedging — as defined in the CEA.
That discussion has usually hinged on the phrase “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 definition.
States argue that sports contracts are not dependent on the “occurrence” of an event, but rather its outcome, and that they are not associated with potential financial, economic, or commercial consequences. Kalshi argues that they are, because it says the text of the definition is intentionally broad and does not discount an event’s downstream or secondary consequences.
Six swap definitions
But Ohio’s brief zooms out to argue against this point. The state’s lawyers point out that this line is actually part of only the second out of six definitions for a swap. If the definition was broad enough to include distant downstream potential consequences, and count anything that can be bet on as an “occurrence of an event,” then it would encompass almost any type of contract. If this was the case, the state argues, there would be no need to list five more definitions, because any contract that fulfills one of the other five criteria would already be covered by the “potential economic, commercial, or financial consequences” definition.
“Reading the second definition of swap as broadly as Kalshi does — to capture anything with some conceivable downstream economic consequence — renders the remaining five definitions of swap largely meaningless,” the state’s brief says.
The state added that it is a basic legal principle that the courts should not read portions of the law in a way that makes the rest of the text irrelevant.
“It is ‘basic’ that a statute should be read in a way that gives effect ‘to all its provisions, so that no part will be inoperative,’” the brief said. “Courts thus read statutes with ‘the common sense intuition that Congress would not ordinarily introduce a general term that renders meaningless the specific text that accompanies it.’”
Though not specifically mentioned in Ohio’s brief, the fourth definition is arguably broad too, referring to “an agreement, contract, or transaction that is, or in the future becomes, commonly known to the trade as a swap,” while the sixth definition includes “any combination or permutation of, or option on” any of the previous five. The other three definitions describe products such as interest rate or currency swaps.
Like other states, Ohio argues that an occurrence of an event must mean whether something actually happens or not, rather than who wins a game, and there must be a limiting principle for economic consequences.
“If the Court reads ‘associated with’ too broadly, it becomes ‘meaningless,’” the state said. “After all, ‘everything’ is associated with ‘everything else’ in some loose sense. But that cannot be what Congress meant. The more natural reading is to require ‘a connection that is not tenuous, remote, or peripheral.’”
Other federal laws made irrelevant too?
Ohio argues that these additional definitions in the CEA would not be the only parts of federal law that would become meaningless. It points to two other federal laws, which both directly address gambling – the Indian Gaming Regulatory Act (IGRA) and the Wire Act.
“Kalshi’s broad reading of the CEA would damage other federal laws,” the state argues. “The Wire Act, for example, prohibits the use of interstate wire communications to facilitate sports betting unless such bets accord with the laws of the sending and receiving.
“But if Congress legalized interstate sports betting under the CEA, then the Wire Act’s prohibition loses almost all of its practical meaning.”
It made a similar point about IGRA, which tribes have also argued would be made irrelevant by Kalshi’s interpretation.
“The Indian Gaming Regulatory Act gives Tribes the ‘exclusive right’ to decide their gambling policies,” Ohio’s brief says. “But if the CFTC truly calls the shots, that right vanishes as to sports betting.”
Tribes have said that Kalshi’s arguments would mean that Congress repealed portions of IGRA by implication when it passed the Dodd-Frank Act in 2010, which introduced the definition of a swap into the law.
Ohio says that PASPA — repealed in 2018 by the Supreme Court — also would have been made irrelevant eight years before it was struck down, with nobody noticing.
“That Act prohibited the States from further legalizing sports betting,” the state said. “That prohibition was in place at the time of Dodd-Frank, and the Supreme Court had not yet found it unconstitutional. There is no reason to think Congress attempted to make that prohibition meaningless. But, under Kalshi’s reading of Dodd-Frank, that is what Congress did.”
Outside of the swap question, Ohio also took aim at the other main pillar of Kalshi’s legal argument — that the CEA preempts state gambling laws.
“Kalshi must thus show more than some preemption; it must show that preemption is broad enough to capture the States’ sports betting authority,” the state argued. “For example, preemption as to civil-court proceedings does not extend to administrative-agency proceedings. Likewise here, preemption of state regulation of traditional derivatives does not mean preemption as to sports betting. Several parts of the CEA cut against extending preemption that far.”
When will it reach SCOTUS?
The Sixth Circuit is one of four appellate courts that has heard or is currently considering a case about sports event contracts. The Third Circuit is the only one to issue an opinion, having granted Kalshi an injunction to protect it against enforcement from New Jersey.
The Fourth and Ninth Circuits have yet to issue decisions. Experts say it is likely that the Supreme Court will take the case after two circuit courts issue conflicting rulings, but probably not before then.
