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In a potentially pivotal legal step for the future of sports prediction markets, exchange operator Kalshi has filed lawsuits against gaming regulators in Nevada and New Jersey seeking to prevent state enforcement against the federally-regulated offerings.
Following cease-and-desist letters sent by the Nevada Gaming Control Board (NGCB) earlier this month and by the New Jersey Division of Gaming Enforcement (DGE) last week, Kalshi filed separate lawsuits before federal district courts in Nevada on Friday (March 28) and New Jersey early Saturday (March 29).
In the lawsuits against two of the most prominent gaming regulatory agencies in the United States, Kalshi is asking federal courts to rule that federal law, including the Supremacy Clause of the U.S. Constitution, preempts states from attempting to shut down sports prediction markets and taking criminal action against the company for offering what the NGCB and DGE contends to be unlawful sports wagering.
The company also wants a preliminary injunction and a temporary restraining order against each state regulator, prohibiting action against Kalshi until the case is settled.
In both filings, Kalshi argues that the Commodity Futures Trading Commission (CFTC) has “exclusive jurisdiction” over federally regulated exchanges.
Although the CFTC has ordered a review of sports-event contracts offered by competing exchange Crypto.com, it has not done so with Kalshi, making the contracts lawful and allowing them to take effect.
“Unless and until the CFTC takes action on Kalshi’s sports-related contracts, they remain authorized under federal law,” the company wrote in its filing.
In New Jersey's cease-and-desist letter, DGE director Mary Jo Flaherty demanded that Kalshi not only cease offering the markets, but also void “any such wagers already placed”.
The DGE also sent a similar letter to Robinhood, which announced later in the day that it would not allow New Jersey residents to open new positions based on sporting events, even though Robinhood does not believe the contracts “run afoul of any state laws”.
In response to the DGE's letter, Kalshi said it was infeasible to unwind existing contracts without jeopardizing CFTC requirements and added that requiring the geofencing of customers in different states would create “massive technical challenges”.
“Shutting down its event contracts in New Jersey would threaten Kalshi’s viability and require devising complex technological solutions whose feasibility is entirely untested and unclear,” the company wrote.
“Defendants’ acts would also impair Kalshi’s existing contracts with consumers, subject Kalshi’s users to uncertainty and loss, and undermine confidence in the integrity of Kalshi’s platform.”
In the filings, the company maintained that its sports-based markets include significant differences from what would be an unlawful sports-betting product.
“Kalshi’s sports-related contracts involve the outcomes of sporting events, but there are crucial differences between Kalshi’s exchange and a sportsbook that justify the very different regulatory models under which they function,” the company wrote.
“A financial exchange is an investment marketplace where traders enter into contracts with other traders, not with a casino or 'house'. In financial exchanges for event contracts, moreover, the market sets the contract price rather than the price being set by the house.”
The legal filings also reveal that Kalshi has retained a high-powered legal team to defend the legality of its sports-based event contracts.
Attorneys representing the company before federal courts include Neal Katyal, a partner with Milbank law firm who served as acting Solicitor General of the United States under President Barack Obama from May 2010 through June 2011 and has argued more than 50 cases before the U.S. Supreme Court.
In addition, the company’s legal team in New Jersey includes Gurbir Grewal, who recently served three years as director of the division of enforcement for the U.S. Securities and Exchange Commission and, prior to that, was New Jersey’s attorney general for three years, overseeing the DGE.
Grewal’s successor, Attorney General Matthew J. Platkin, is also a named co-defendant in the New Jersey suit, as are Flaherty, the DGE, the New Jersey Casino Control Commission and the individual members of the commission.
The DGE’s cease-and-desist letter gave Kalshi a deadline of Friday to comply. After negotiations between the two sides were unsuccessful at reaching an agreement, the state agreed to extend its deadline to April 7 to avoid the need for emergency proceedings, according to Kalshi’s filing.
In Nevada, co-defendants include both the NGCB and Nevada Gaming Commission, as well as the individual members of each body and Nevada Attorney General Aaron Ford.
According to Kalshi’s filing, the NGCB has declined to hold Kalshi harmless pending a decision from the court after extending an initial deadline for the company to comply with its cease-and-desist order from March 14 to March 28.
Counsel for the board indicated to Kalshi that the NCGB could initiate further enforcement proceedings as early as Wednesday (April 2).
