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In a potentially pivotal case, a bipartisan group of state attorneys general, and tribal and commercial gaming associations have all filed legal briefs urging a federal appeals court to reinstate New Jersey’s enforcement authority over prediction market Kalshi's sports-event contracts.
The separate amicus briefs filed by 36 state attorneys general, a coalition of 60 Native American tribes and nine tribal groups, the Casino Association of New Jersey and by the American Gaming Association are all seeking to convince a panel of judges from the U.S. Court of Appeals for the Third Circuit to support New Jersey’s effort to halt trading on sports betting contracts.
A coalition of anti-gambling groups, including Stop Predatory Gambling, Texans Against Gambling and the Association of American Physicians and Surgeons, also filed amicus briefs last week in the increasingly high-profile appeals case.
“I can’t think of another time in the history of the industry that you have had regulators, attorneys generals, operators, the sports leagues, and anti-gamers on the same side of the issue,” said Brendan Bussmann, managing partner with B Global, a Las Vegas-based advisory firm.
The Court of Appeals for the Third District is the first appellate-level federal court to consider the issue of whether Kalshi and other federally-licensed prediction markets may offer trading on sports events outside of the licensing and enforcement purview of state laws and tribal gaming compacts.
Legal experts believe a ruling either in favor or against New Jersey would be highly significant, although other appellate courts and other federal courts outside the Third Circuit, including those in Nevada, could still disagree with a ruling.
“It’s my belief that this is going to go all the way to the Supreme Court, but should they ultimately rule against states’ rights, there still is a solution to prevent this and hand this back into the rightful holders of gaming,” Bussmann said, referring to the regulation of sports betting and casino gaming for state and tribal governments.
“I would be hard pressed to see an easy majority of both house of Congress that not only not intended this in the legislative history but can eliminate this avenue quickly.”
Kalshi has continued to operate in New Jersey since April, thanks to a preliminary injunction obtained in federal district court in response to a cease-and-desist letter issued by the New Jersey Division of Gaming Enforcement (DGE) in March.
The ruling in New Jersey came about three weeks after Kalshi was also granted a temporary injunction by a federal judge to prevent similar enforcement action by the Nevada Gaming Control Board (NGCB). A federal judge in Nevada then later denied the control board’s request to dismiss Kalshi’s case.
Kirk Hendrick, whose last day as chairman of the NGCB was Friday (June 20), declined to comment further on the case since litigation is ongoing.
“I think I would add that I have no doubt that the state of Nevada will do everything necessary to protect its rights as well as those rights of its citizens and visitors. Beyond that, I’ll let the court pleadings speak for themselves,” Hendrick told Vixio.
Kalshi has also filed suit in federal court in Maryland to prevent state regulators from enforcing their own cease-and-desist letter. In total, seven states have sent cease-and-desist letters in recent months insisting that Kalshi violating state laws on gambling and sports betting through its sports-event contracts.
States, Tribal Rights To Regulate Gaming
The amicus brief filed on behalf of 34 states, the District of Columbia and the Northern Mariana Islands was submitted jointly by Ohio Attorney General Dave Yost, a Republican, and Nevada Attorney General Aaron Ford, a Democrat.
The coalition of attorneys general argues that the federal Commodity Exchange Act (CEA), under which Kalshi offers prediction markets, does not preempt a state’s right to regulate sports betting and enforcement its sports wagering laws against unlicensed operators.
Ohio was among the group of states to issue cease-and-desist order to Kalshi earlier this year but has not been taken to court by the exchange operators. Other states signing on to the amicus brief include major sports-betting markets such as Pennsylvania, Illinois and Michigan, as well as Utah and Hawaii, which have no legal gaming.
“Stripping away the semantics, this case most directly concerns gambling on sports,” wrote Ford and Yost.
By its own admission, Kalshi has advertised that sports betting is legal in all 50 states through its federally-regulated platform.
“Kalshi makes the bold legal claim... that the states have no power to regulate its conduct, regardless of whether these so-called events contracts qualify as sports betting under state law,” Ford and Yost wrote.
New Jersey and Nevada have argued, so far unsuccessfully, that sports-based contracts are not a federally-regulated commodity hedging tool that Congress intended when it adopted and later amended the CEA.
Kalshi, for its part, maintains that it is regulated at the federal level by the Commodity Futures Trading Commission (CFTC) and that the CEA preempted the states from exercising authority over sports betting when that betting is offered through a so-called events contract subject to federal authorization.
“If that sounds farfetched, that is because it is,” wrote Ford and Yost. “When Congress removes the states’ historic police powers, it does not whisper in the dark of night. Rather, courts expect Congress to speak clear as day when it intends a dramatic shift in our country’s traditional balance of power.”
Gaming industry representatives and legal advisors have also argued that Kalshi’s sports-event contracts violate the federal Wire Act, which criminalizes the interstate transmission of bets or wagers, and the Indian Gaming Regulatory Act (IGRA) of 1988 that established a jurisdictional framework to govern Indian gaming.
In a brief submitted on behalf of tribes and tribal associations, leading tribal gaming attorneys Joe Webster of Hobbs, Straus, Dean & Walker and Scott Crowell, with Crowell Law Group, stated that Kalshi’s sports-event contracts constitute Class III gaming as defined by IGRA.
“KalshiEX LLC’s unlawful and unfair entrance into the gaming market has adversely impacted tribal gaming revenue and the benefit of tribes’ bargained-for compacts,” the brief stated. “Additionally, by offering its so-called sports-event contracts under the guise of commodity trading pursuant to the [CEA], Kalshi impedes tribes’ inherent sovereign right to regulate gaming activity on Indian lands.”
Contrary to Kalshi’s arguments, Webster and Crowell wrote, the CEA does not govern its gaming-related event contracts, and such contracts are expressly prohibited by the CEA and the CFTC’s own regulations, so therefore federal, state and tribal gaming laws must apply to the contracts, including IGRA.
The CFTC’s own regulation, Rule 40.11(a)(1), prohibits the offering of event contracts involving or relating to “gaming” or any “activity that is unlawful under state or federal law.”
The stakes in the Third Circuit case could barely be higher for both commercial and tribal gaming interests, say legal experts.
“If companies like Kalshi are deemed to be legal, they will be able to enter every state and offer what, effectively, is sports betting,” Robert Jarvis, a professor with Shepard Broad College of Law at Nova Southeastern University in Fort Lauderdale, Florida, told Vixio.
“That would not only undermine tribes like the Seminole [Tribe of Florida] that have exclusive sports-betting rights, (but) it would also introduce sports betting into states that have affirmatively said they do not want sports betting, such as Hawaii and Utah,” Jarvis said.
Although it is difficult to estimate the actual financial impact for states, tribes and gaming interests, Jarvis said, “there is no doubt that a finding in favor of Kalshi would be a real game-changer”.
Jarvis also believes it would increase the calls, made ever since the U.S. Supreme Court overturned the federal ban in May 2018, for Congress to pass new federal legislation governing the regulation of sports betting, something that many states are adamantly against.
The case between the New Jersey Division of Gaming Enforcement and Kalshi is currently on the Court of Appeals for the Third District’s docket, but no oral proceedings have yet been scheduled.
The next key date is July 24, when Kalshi must file a brief in response to New Jersey’s argument that the Third Circuit should overturn the lower court ruling.
