A lawyer for Polymarket argued that the platform is “a regulator,” while Kalshi’s lawyer argued that Nevada gambling laws already include a carve-out for federally registered exchanges, in a federal hearing that could prove crucial to both prediction markets’ operations in the Silver State.
Judge Miranda Du held a joint hearing Tuesday to hear oral arguments for both Kalshi and Polymarket’s arguments to move state-court enforcement cases into federal court, and the state’s argument to have the cases sent back down to the First Judicial Court of Carson City.
In Polymarket’s case, the state has already won a temporary restraining order (TRO) against the business, which forced Polymarket to exit the state. Kalshi remains active in Nevada, but the state is aiming to win a similar injunction.
Before the TRO, Polymarket’s operation in Nevada, like all U.S. states, was only for users who had been rolled off a waitlist. Users with U.S. IP addresses are blocked from trading on Polymarket’s better-known global exchange.
Kalshi had been protected against state-level enforcement by a federal injunction issued by a different Nevada District Court judge, Andrew Gordon. However, Gordon later dissolved this injunction after determining that Kalshi’s sports contracts don’t meet the definition of a “swap” under the Commodity Exchange Act (CEA).
Kalshi is appealing the dissolution in the Ninth Circuit, and had hoped to win a stay to prevent enforcement while the appeal was being considered. However, an initial request for an administrative stay was denied last week, opening the door for Nevada to begin action in state court. Kalshi is still awaiting a decision on a regular stay that could also shield it from enforcement action.
Polymarket points to Federal Officer Removal Statute
While Kalshi argued based on the doctrine of “complete preemption,” Polymarket invoked the Federal Officer Removal Statute. Under that statute, any entity acting as a federal officer is shielded from state-level lawsuits for actions undertaken in their federal officer capacity. Polymarket argues that it is acting on behalf of the CFTC when it enforces rules on its platform or determines who may use it.
Nevada’s lawyer Jessica Whelan argued that this was not applicable, as the only authority Polymarket could point to regarding its acting on behalf of the CFTC concerned its own exchange, when it takes acts like self-certifying contracts instead of applying directly for approval.
“Even though the CFTC has delegated Polymarket and other markets some level of authority over the listing of certain derivatives, this does not bestow Polymarket the authority of a federal officer,” Whelan said. “It is self-regulating but it is not regulating any third parties. In the Watson vs Philip Morris case, the Supreme Court determined that an entity isn’t acting as a federal officer just because it is operating in a regulated industry.
“And if you look at the Watson case, it’s clear that there has to be some regulation of third parties for there to be a federal officer case for removal.”
However, Polymarket’s lawyer Tom Dupree argued that participants on its exchange counted as third parties.
“We do many things that involve regulation of third parties,” he said. “We are acting as a regulator. We are a regulated party to be sure, but for the purposes of removal — we are the regulator.”
Dupree added that Polymarket’s role as a federal officer was directly related to Nevada’s complaint about the business.
“The plaintiff’s core theme is that we are unlawfully allowing access to people from Nevada,” he said. “And that goes directly to our role in exercising delegated authority to write rules concerning market access. That is the core of the state’s complaint and it goes to one of our core regulatory functions.”
Dupree went on to argue that the accepted legal standard for a judge to invoke federal officer removal was low, and so even if there was some doubt over whether Polymarket was truly acting as a federal officer, the court could still remove the case to federal court.
“The Supreme Court has said to err on the side of allowing removal,” he said. “If there is any doubt, removal is permissible.”
Kalshi focuses on complete preemption
The discussion with Kalshi did not discuss federal officer removal, and instead focused on the doctrine of complete preemption. Complete preemption is when Congress has specifically set out a cause of action — that is, a system where parties can sue in federal court for violations of the law. It must also have intended this cause of action to be the only way to sue for breaches of the law in question.
Complete preemption is generally a higher standard to meet than field preemption or conflict preemption, which have been at the center of most of Kalshi’s lawsuits against states.
“The core issue here is not whether Kalshi has a gaming license under state law,” he said. “The core issue here being considered by this court is whether state gaming laws can be used to regulate conduct occurring on a federal DCM.”
Whelan noted that even if Kalshi uses the argument that state laws are preempted by federal law as a defense, that does not mean that the case has to be heard in federal court.
“Certainly the parties will raise federal preemption … but it’s black-letter that federal defense — even if it’s anticipated, even if it’s the only issue at play — is not enough to justify removal,” she said.
Judge Du did not appear to be convinced by Kalshi’s arguments. She said she was inclined to agree with Judge Gordon’s determination that it wouldn’t be impossible for Kalshi to be licensed by Nevada alongside its federal licensing. She added that complete preemption is “rare” and there was no precedent of it ever being applied with regard to the CEA.
Kalshi lawyer says Nevada gaming laws include federal carve-out
The U.S. District Court for the District of Massachusetts — faced with a similar question of whether to have federal or state court hear a state-level enforcement action against Kalshi — determined that there was not complete preemption in this case, and sent the case back down to state court.
However, Laroche noted some differences between the Massachusetts and Nevada cases. He pointed to a portion in Nevada’s law which says “except as otherwise provided by law, it is unlawful” to accept wagers “without having first procured, and thereafter maintaining in effect, all federal, state, county, and municipal gaming licenses as required by statute [or] regulation.” He argued that the use of the phrase ”except as otherwise provided” and the reference to federal licenses means that if Kalshi’s event contracts are gaming, the business is already appropriately licensed under federal law.
“The state can’t have it both ways,” he said. “Either event contracts are gaming, and Kalshi has federal gaming licenses, or event contracts are not gaming.”
Decision may be next week
Du said that she aimed to have a decision on whether to send the case back to state court or hear it in federal court by Friday, but as the court was busy the decision could easily move into early next week.
A delay could help Kalshi and Polymarket. Polymarket’s temporary restraining order will expire Friday, though Whelan said the state was likely to push for a further extension of the TRO if one is needed.
Kalshi is still awaiting a decision on a regular stay from the Ninth Circuit. If it takes longer to decide whether to hear the state’s enforcement suit in federal or state court, it may be able to get that stay before any enforcement action is taken.
