Friday was a big day for US election betting site PredictIt as the Fifth Circuit Court of Appeals in New Orleans gave the company a big win it has been hoping for since the Commodity Futures Trading Commission (CFTC) revoked a no-action letter that provided the site with a form of legal cover.
PredictIt has operated since 2014 under a no-action letter that CFTC issued to a New Zealand university. The site was one of only two US election betting markets operating under the protection of a no-action. The other, at the University of Iowa, was much smaller in scale and scope.
The decision, while a big win for PredictIt and a group of plaintiffs that included researchers and site users, was split. Two of the country’s more conservative judges siding with the election market site, and one judge dissenting in favor of the CFTC. A win is a win, but the split likely sets up a petition for rehearing and, failing success there, a petition to the Supreme Court.
How we got here in US election betting
PredictIt is a politics-centric exchange market that allows users to trade contracts on political events. All contracts total $1; in other words, a contract for the presidential election in 2024 might have President Joe Biden contracts trading at $0.55 and Donald Trump at $0.43, with Ron DeSantis at $0.02.
The contract would pay the correct predictor of the election $1 after the election results were verified. As the price fluctuates, it reflects the beliefs of the market, so if Biden is favored at $0.55, the market believes that there is a .55 probability that Biden wins reelection.
The site has been popular with investors, political junkies, political bettors, but has also been followed significantly by the media because of the predictive value of prediction markets, which are typically more accurate than traditional polling.
What no-action letter meant for PredictIt
The CFTC issued a no-action letter in 2014, allowing Victoria University in New Zealand to operate a second-of-its-kind election market in the United States. In August 2022, the CFTC revoked the letter, arguing that Victoria University was out of compliance with the terms of the letter.
In September 2022, a lawsuit was filed by a number of individuals, including the site and operator Aristotle International, but not Victoria University. After a magistrate judge ruled the case should be moved to a federal court in Washington D.C., the plaintiffs ended up appealing as the deadline for shutting down the site approached.
The Fifth Circuit Court of Appeals issued a preliminary injunction in January 2023, and then heard oral arguments the following month. In March 2023, the CFTC withdrew the rescission of the no-action letter. The agency then sent a new letter, declaring the previous letter void.
The CFTC then argued the appeal was moot because of the new letter, but the clever move did not work and the Court denied the motion for mootness.
Breaking down PredictIt decision
The decision address four necessary issues:
- Whether the appeal is moot;
- Whether the withdrawal of the no-action letter is ‘final agency action;’
- Whether that withdrawal is unreviewable prosecutorial discretion; and
- Whether the appellants (plaintiffs) have standing.
On the issue of mootness, after the CFTC switched out the letters of revocation, the majority of the panel argues that “post-filing events do not moot a case,” as long as there continues to be an interest of the party in the litigation. The Court of Appeals was unconvinced that the new letter erased the questions caused by the first letter.
On the second issue of whether there was final agency action (a necessary step for judicial review,) the Fifth Circuit finds that a no-action letter is agency action under the Administrative Procedure Act. On the question of whether the action is final, the CFTC argued neither granting nor revoking a no-action letter is final agency action, as the letter itself does not create any actual legal consequences (enforcement under the Commodity Exchange Act would but that has not happened).
Appeals court denies argument
The Court of Appeals was unmoved, however, finding that at least withdrawal of the letter constitutes final agency action.
This brings the question of agency discretion, which effectively asks whether a court can review the withdrawal or if it is an internal agency decision, not subject to a court’s review. The Court’s majority, as you might have guessed by this point, did not buy that argument.
The final question that the panel wrestled with was whether the plaintiffs have standing in the absence of Victoria University. The Court here concludes:
Appellants—market operators, traders, and academics claiming to be impacted by the no-action letter’s rescission—easily satisfy the standing requirements. At this stage, they have shown numerous injuries stemming from the letter’s withdrawal and the resulting impact on the PredictIt Market. Academics will lose a research tool that was PredictIt’s raison d’être. Traders will lose value in compromised contracts. And PredictIt’s service providers will incur costs from having to prematurely shut down operations.
The majority concludes that this means that there are injuries, and they are directly traceable to the no-action letters withdrawal. The panel then concludes that the District Court should have issued a preliminary injunction and remands for the District Court to do so, and hear the merits of the claims.
A concurrence …
Judge James Ho concurred in the result, but expressed some skepticism as to whether the withdrawal of the letter constituted final agency action, noting:
To my knowledge, no circuit has held that a no-action letter or its withdrawal is sufficient to constitute “final agency action” under the Administrative Procedure Act.
Nonetheless, Ho would issue the preliminary injunction and let the trial court sort out the merits.
… and a dissent
Judge James Graves dissented; while he agreed the old switcheroo pulled by the CFTC did not moot the matter, he would not issue a preliminary injunction. Instead, he argues that the appellants have not demonstrated a substantial likelihood of success on the merits, one of the threshold requirements for a preliminary injunction.
But, as the saying goes something about “horseshoes and hand grenades something something,” dissents do not count for a lot.
Senators look to stop PredictIt competition?
The PredictIt decision at the Fifth Circuit was a boost to those seeking to prevent the shutdown of the exchange, but PredictIt got another potential win when a group of US Senators sent a letter to CFTC Chairman Rostin Benham, urging the CFTC to reject approval of an application by KalshiEX, LLC to offer election based contracts. The letter refers to the contracts as:
a clear threat to our democracy and elections.
While the CFTC is an independent federal agency, a letter from a group of powerful Democratic senators including Elizabeth Warren, Sheldon Whitehouse, Ed Markey, and Dianne Feinstein will undoubtedly cause the agency to ensure that all i’s are dotted and t’s crossed in its evaluation of Kalshi’s application.
What now in US election betting matter?
On the PredictIt case, now we go back to waiting to find out what the CFTC is going to do. In the meantime, PredictIt will continue operating.
The CFTC could petition for a rehearing, or a rehearing en banc, or seek to go straight to the Supreme Court, though seemingly unlikely.
They could also do nothing and just seek to move forward with the case on the merits at the District Court. At the CFTC, all eyes are waiting on a response to Kalshi’s application.
Meanwhile, neighbors to the north have the option to get involved in US election betting.