Judges appeared ready on Thursday to side with the states over Kalshi in oral arguments before the U.S. Court of Appeals for the Sixth Circuit, with one judge questioning why the prediction market was “so disparaging of” the idea of state regulation.
Counsel for Kalshi, Tennessee, and Ohio made their arguments before judges Eric Clay, Rachel Bloomekatz, and Julia Gibbons. The Sixth Circuit heard appeals after the U.S. District Court for the Middle District of Tennessee ruled that a state cannot ban sports event contracts while the U.S. District Court for the Southern District of Ohio ruled that it can.
Clay did most of the questioning, with Bloomekatz also asking several questions, generally diving more into specific details, while Gibbons was less vocal. Clay and Bloomekatz appeared to push back much more on arguments from Kalshi’s side than from the states, suggesting that at least a majority of judges on the bench may be likely to rule the way of the states.
Is it possible to comply with state, federal law?
Whether it is possible for prediction markets to operate under state regulation may be more important in this case than other appellate cases regarding sports event contracts. One of the two District Court decisions that led to the case, from the U.S. District Court for the District of Tennessee, found that it would be impossible for Kalshi to comply with state law and the Commodity Exchange Act. While other courts have ruled Kalshi’s way, the District Court in Tennessee is the only one to do so on the grounds that it would be impossible to comply with both regimes, a form of conflict preemption sometimes called impossibility preemption.
Judge Clay, however, seemed to take a different view. When Kalshi lawyer Will Havemann argued that “it makes sense to have two different sets of regulations” — state-by-state for sportsbooks and federal for prediction markets — Clay said Havemann was making a policy argument that didn’t seem to be universally true.
“Why are you so disparaging of state regulators and state policymarkers?” he asked. “There are all kinds of different situations and objectives that vary from state to state that involve enormous consequences. You’re making a policy-based argument that things come out badly when they fall within the purview of state regulators. I’m not sure I’m following that argument that all things are better when they come from the federal government.”
Havemann said he didn’t think “all things” were better if organized by the federal government, and then began to argue that it was Congress who said the federal government, not states, should regulate a company like Kalshi. However, Clay stopped him early into this line of argument.
“I don’t know if Congress has said all that,” he said. “The statute has examples of swaps like currency. An immediate gambling transaction doesn’t seem to satisfy that.”
When Havemann argued that Kalshi couldn’t operate under 50 different state regimes, Clay pushed back again.
“What Congress unquestionably decided is that with regards to a nationwide derivatives exchange like Kalshi, it just cannot operate if it is subject to 50 different state regimes,” Havemann said.
Clay questioned that, pointing out that he was being asked to largely take Kalshi’s word that it would fail under a state-by-state system.
“We don’t know if that’s the case because the industry hasn’t been put to the test in that regard,” he said.
Ohio lawyer points to state insurance laws
The states’ lawyers had much less pushback on their arguments. Ohio’s lawyer Mathura Sridharan said that the idea it was impossible for a company like Kalshi to follow different state laws failed because industries like insurance, which are closer to traditional derivatives markets, have little difficulty operating under this structure.
“There’s some discussion about conflict preemption today and Kalshi keeps pushing a policy-based argument that uniformity must be pursued at all costs,” Sridharan said.
“But here’s the rub. Insurance — which is much more similar to a traditional derivative — is regulated state by state.”
Sridharan also suggested an interpretation of the definition of “swap” — the category of product that event contracts are classed as — that would exclude sports event contracts.
“Traditional financial markets include speculation,” she said. “But Kalshi flips that on its head. It starts with speculation and builds a market around that.”
Sridharan also said that Kalshi’s argument that the CEA gives the CFTC “exclusive jurisdiction” over swaps, therefore cutting out states, is a misunderstanding of the phrase, which she argued was meant to refer only to exclusivity among federal regulators.
“‘Exclusive jurisdiction’ is a really weird way to say preemption, especially when the CEA elsewhere uses much clearer preemptive language like ‘supersedes and preempts,’” she said.
Meanwhile, Tennessee’s lawyer Aaron Bernard pointed out that while Kalshi’s sports event contracts differ in some ways from sportsbook bets, they look more similar to other forms of state-regulated peer-to-peer gambling, such as parimutuel wagering.
Busy week in courts
A decision from the Sixth Circuit could still be months away. So far, only one circuit court, the Third Circuit, has issued an opinion on sports event contracts, and it found in Kalshi’s favor. Two conflicting rulings from circuit courts could be a trigger for the Supreme Court to ultimately take up the case. The Ninth Circuit heard oral arguments in April and its judges also appeared more sympathetic with the states.
The hearing came in a busy week for prediction market legal news. On Monday, a district judge in Minnesota issued an injunction blocking the state’s ban on prediction markets from going into effect. The same day, a district court in New York denied Kalshi an emergency injunction that would have shielded it from state enforcement while it appealed a decision to deny an earlier bid for an injunction — that potentially puts Kalshi at risk of being sued in a state court in New York and having to block sports contracts in the state.
On Wednesday, a district judge in Wisconsin denied the CFTC’s motion for a preliminary injunction to block the state from enforcing its gambling laws against prediction market operators including Kalshi, Crypto.com, Coinbase, Robinhood, and Polymarket.
