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The ongoing legal battles surrounding the expansion of prediction markets will continue to be an important topic to monitor over the coming months and potentially years, including a key step this month.
Oral arguments will be heard in the U.S. Third Circuit Court of Appeals in Philadelphia on Kalshi’s lawsuit on September 10 against New Jersey state regulators and law enforcement officials to prevent the state from taking enforcement action against the prediction exchange for offering unlicensed sports betting.
Kalshi scored an early victory in the case, with Judge Edward Kiel granting a preliminary injunction in April, following a similar ruling by a federal judge in Nevada.
After the defeat, New Jersey appealed the ruling to the Third Circuit, making it the highest court to date to consider the issue of prediction market expansion into sports contracts.
Buoyed by the two wins, Kalshi continued to expand its offering of sports event contracts, including single game markets and proposition-type markets, as well as recently beginning to offer markets on point spreads and over/under totals.
However, Kalshi suffered its first legal setback since beginning to offer sports event contracts earlier this year, with a federal judge in Maryland denying its injunction, potentially opening the company up to enforcement action.
That case also remains under appeal, and Maryland regulators told Kalshi that they would not take enforcement action against the company pending the result of the appeal, but the Maryland ruling will likely make up a key part of the arguments for New Jersey attorneys as they argue the lower court erred in saying that federal law, via the Commodity Exchange Act, preempts New Jersey’s gaming laws.
"In Kalshi’s telling… Congress silently undid decades of federal gambling policy and superseded all state gambling laws by adding the word 'swaps' to the [Commodity Futures Trading Commission’s] 'exclusive jurisdiction' as part of the 2010 Dodd-Frank reforms,” attorneys for the state wrote in a brief.
“The upshot is that Kalshi thinks it is exempt from state gambling laws simply because it offers sports wagers in a new format (called event contracts) on a CFTC-designated market.
“Kalshi is wrong,” the attorneys continue. “The CFTC’s jurisdiction does not include wagers based on the outcome of athletic events and, even if it did, that would not preempt state gambling laws under any theory of express or implied preemption.”
Kalshi argues that the CFTC holds “exclusive jurisdiction” over trading on designated contract markets under federal law.
“If New Jersey could enforce its laws against Kalshi, so could 49 other states, subjecting Kalshi to a patchwork of contradictory regulation, interfering with the CFTC’s uniform oversight, and conflicting with Kalshi’s federally imposed obligation to provide impartial access to its exchange,” attorneys for the company wrote in its reply to the appeals court.
“Allowing states to use their gambling laws to regulate such trading would nullify the CFTC’s authority and undermine the nationwide uniformity necessary for derivatives markets to work — the very consequences Congress sought to avoid when it subjected federal exchanges to the CFTC’s exclusive jurisdiction.”
