Washington is the latest state to sue Kalshi, arguing that the business’ contracts — both on sports and other topics — “meet every definition of gambling under state law” and attempting to force it to pay back trader losses.
Washington Attorney General Nicholas W. Brown filed the lawsuit in King County Superior Court Friday.
King-Co-lawsuit“Under longstanding, well-established, and unambiguous Washington state law, Kalshi’s gambling operation is illegal,” the complaint said.
Washington defines gambling as “staking or risking something of value upon the outcome of a contest of chance or a future contingent event not under the person’s control or influence, upon an agreement or understanding that the person or someone else will receive something of value in the event of a certain outcome.”
The complaint says that Washington has “some of the most restrictive gambling laws in the United States.” Sports betting in Washington is only legal at tribal casinos.
Washington is the fourth state to sue Kalshi in state court, after Massachusetts, Nevada, and Michigan. Arizona’s attorney general, meanwhile, filed criminal charges against the prediction market.
To date, Nevada is the only state where Kalshi has had to take down any of its contracts. The prediction market stopped offering sports contracts and at least most of its politics and entertainment contracts in the state after receiving a temporary restraining order.
The Washington lawsuit said that both Kalshi’s sports and non-sports markets qualify as illegal gambling under the state’s definitions.
“On Kalshi, bettors wager on issues ranging from sports scores, political elections, popular culture to you-name-it. Each bet risks money, relies in part on chance, and promises a payout to winners,” it said.
State gambling law carveout
Not included in the excerpt from the definition of gambling quoted by the state, though, was an exception for “bona fide business transactions valid under the law of contracts, including, but not limited to, contracts for the purchase or sale at a future date of securities or commodities.”
The carve-out does not specifically refer to event contracts, but event contracts are covered by the same set of laws as commodity futures contracts, and the use of the phrase “not limited to” suggests the exception applies to more than just traditional futures, though its exact limits could be up for interpretation.
Arizona’s state laws have a similar carveout, but the state still brought criminal charges against Kalshi for violating those laws. A judge has not yet ruled on whether Kalshi would qualify for the exception.
Besides the general prohibition on unlicensed gambling, the state claims that Kalshi violates laws against “professional gambling” by charging fees for every bet, and laws against bookmaking by operating its in-house market-making arm Kalshi Trading.
The complaint adds that the prediction market also “transmits gambling information on the internet and maintains equipment to do so, in violation of Washington law,” and violates Washington’s prohibition on “gambling records and unlicensed gambling devices.”
State trying to recover trader losses
The state is suing Kalshi not just under the state’s Gambling Act and Consumer Protection Act, but also under The Recovery of Money Lost at Gambling Act.
That Act says that “[a]ll persons losing money or anything of value at or on any illegal gambling games shall have a cause of action to recover from the dealer or player winning, or from the proprietor for whose benefit such game was played or dealt, or such money or things of value won, the amount of the money or the value of the thing so lost.”
The complaint goes on to add that “illegal gambling and the recovery of money lost at gambling is a matter of public concern” and that therefore “the Attorney General is entitled to recover all money Washingtonians have lost through Defendant Kalshi’s illegal gambling operation.”
It is not clear how much money Washingtonians have lost on Kalshi, and the complaint does not refer to a specific number. In total, users of the platform have staked around $55 billion since it was created and Kalshi has made around $600 million in fees, according to an InGame analysis. It is not clear exactly how losses would be calculated. Washington represents around 2.4% of the U.S. population, but may make up a higher share of Kalshi activity as it does not have statewide legal online sports betting.
Will Kalshi try to move to federal court?
Given the pattern in other states, the next step is likely to be a motion from Kalshi to move the case to federal court. Federal courts are generally perceived to be more likely to be sympathetic to its arguments that state laws do not apply to the business.
There are three main types of argument Kalshi could use to try to convince a federal court to take the case.
First, Kalshi could point to the exception for “bona fide business transactions valid under the law of contracts,” in order to argue that there is a federal question – namely, “Are Kalshi’s contracts considered transactions valid under the law of contracts?” – embedded within the state’s complaint. In this case, a judge would have to determine whether this question is an essential part of the complaint itself, or merely part of Kalshi’s defense, which would not be enough to move the case to federal court.
Second, the business could argue that state law is “completely preempted” by the federal Commodity Exchange Act (CEA). This doctrine of complete preemption is a higher bar than regular preemption, which has been at the center of a number of Kalshi’s other lawsuits. Complete preemption requires Kalshi to prove that the CEA makes clear that the only way to sue for violations of the law is in federal court. Federal courts in Nevada and Massachusetts have already rejected Kalshi’s “complete preemption” argument.
Third, the prediction market could argue that it is acting as a federal officer when it regulates trading on its platform, pointing to actions such as banning and fining insider traders. Polymarket US made this argument in Nevada and it was rejected, but Kalshi may hope that having actually taken action against some traders, its argument is stronger.
