Kalshi has initiated legal action in response to cease-and-desist letters from the Nevada Gaming Control Board and the New Jersey Department of Gaming Enforcement, respectively, seeking a court order allowing it to continue operating its sports prediction marketplace in each state.
Kalshi’s suits seek to challenge each state’s “intrusion into the federal government’s ‘exclusive’ authority to regulate future derivatives trading” on financial exchanges subject to oversight by the Commodity Futures Trading Commission. Both states, meanwhile, want to protect their regulated sports betting businesses that bring in crucial tax dollars to each state.
Kalshi further states that compliance with either state’s demand would “subject Kalshi to the patchwork of state regulation that Congress created the CFTC to prevent…” and that “Kalshi is entitled to declaratory and injunctive relief to prevent [either state’s authorities] from enforcing their preempted state laws” against the company. Both court filings are available at the bottom of this story.
Other States Issue C&Ds, Too
More states are getting in on the action against Kalshi.
The Ohio Casino Control Commission has also sent Kalshi a cease-and-desist, though there is no accompanying legal action yet.
In Illinois, the Gaming Board issues cease-and-desists to Kalshi, Robinhood and Crypto.com.
Kalshi Top Lawyer Out
Kalshi also has another legal issue to deal with.
Its Chief Regulatory Officer and general counsel, Eliezer Mishory, left the company last week to join DOGE, according to Bloomberg News.
Mishory will lead the DOGE team at the SEC. He was one of two named in Illinois’ C&D.
Kalshi’s Pursuit For Preliminary Injunction
Kalshi alleges one count pursuant to which it seeks relief — namely, supremacy clause — preemption by Commodity Exchange Act. Therein, Kalshi asserts the following:
- The supremacy clause states that federal law shall preempt state law “in any field over which Congress has expressly or impliedly reserved exclusive authority to the federal government, or where state law conflicts or interferes with federal law.”
- Via passage of the Commodity Exchange Act, Congress gave the CFTC “exclusive jurisdiction” to regulate futures trading on approved exchanges.
- State attempts to regulate or otherwise prohibit Kalshi’s offering of event contracts (i) impede the CFTC’s authority, (ii) violate the supremacy clause, and, as a result, (iii) may not be enforced.
Kalshi also filed motions for a temporary restraining order and preliminary injunction, seeking an order to immediately prohibit each state from attempting to regulate Kalshi’s prediction marketplace during the pendency of the lawsuit.
How Will Courts Review Requests?
A court reviews multiple elements — utilizing a “sliding scale” approach that allows the court to afford more weight to certain factors than others — to determine if a preliminary injunction should be granted:
- Likelihood of success on the merits. Kalshi argues that it is likely to succeed on the merits of its claims because (i) state gambling laws are preempted by the CFTC’s exclusive regulatory power over “transactions involving swaps or contracts of sale of a commodity for future delivery” as provided under the CEA; (ii) Kalshi’s event contracts are traded on its CFTC-approved prediction marketplace; and (iii) subjecting Kalshi’s event contracts to state laws would undermine Congress’ intent of granting exclusive power to the CFTC. Kalshi notes that states have authority to regulate commodities and futures contracts traded outside of CFTC-designated exchanges. However, it maintains that such power does not extend to exchanges that have taken the step of being licensed by the CFTC.
- Likelihood of irreparable harm if relief not granted. Kalshi claims that it will suffer irreparable harm if a restraining order is not granted because (i) if Kalshi chooses not to comply with state orders, Kalshi and its officers risk civil liability and/or criminal prosecution; (ii) potential partners have and will continue to decline working with Kalshi (e.g., Robinhood announced that it would no longer offer sports-related event contracts in New Jersey); (iii) Kalshi will suffer economic and operational hardship; (iv) forcing Kalshi to unilaterally terminate contracts or pause trading would unduly impact its users nationwide; and (v) ceasing operations on a state-by-state basis would risk Kalshi’s CFTC designation.
- Balancing of equities among the interested parties.
- Whether injunction is in the public interest. For the third and fourth element, Kalshi (i) cites that it would be inequitable and not in the public’s interest to allow states to violate requirements of federal law; and (ii) claims that neither state can have reciprocal interest because it cannot enforce a state law that is preempted.
What Is The Argument Against Kalshi?
A hearing on Kalshi’s motion against New Jersey was originally scheduled before the United States District Court of New Jersey on Wednesday. However, per the parties’ agreement on a briefing schedule, New Jersey has now been provided until April 18 to file an opposition brief, with Kalshi’s reply due April 23 in hopes of having the matter heard before the New Jersey Department of Gaming Enforcement’s new cease-and-desist deadline of April 30.
Nevada’s response to Kalshi’s motion before the United States District Court of Nevada is currently due Thursday. A hearing date has been set for April 8.
In each instance, the state is likely to counter-argue with variations of a few arguments:
- Kalshi is not likely to succeed on the success of its merits due to the notion that Kalshi’s event contracts violate applicable state laws and/or otherwise are being offered in violation of CFTC’s right to prohibit event contracts involving gaming or unlawful activity.
- The irreparable harm alleged by Kalshi is the result of its own doing and/or otherwise too speculative in nature (especially if state regulators agree not to pursue civil or criminal penalties until resolution of the case).
- It would be inequitable and against public interest to prevent a state from enforcing its laws.
The factor most likely to determine whether Kalshi is entitled to preliminary injunction is whether Kalshi can succeed on its claim that federal law preempts state law in this circumstance. This would seem to be a tough hurdle for either state to overcome, as the CEA specifically preempts the application of state law over CFTC-designated markets. See 7 U.S.C. § 2(a)(1)(A).
It can be presumed that the state’s argument will be based on its position that Kalshi’s sports-related event contracts exceed the intended scope of the CEA. Alternatively, because the CFTC has the right to review event contracts involving gaming or unlawful activity, the door could be open for states to argue additional reasons that Kalshi is unlikely to succeed because Kalshi’s sports-related event contracts are contrary to public interest and being offered in violation of the CEA based on violation of other federal laws (i.e. the Wire Act).
Potential Impact For Prediction Markets
The granting of a preliminary injunction is an “extraordinary remedy.” While the DC Circuit US Court of Appeals’ pending decision could prove penultimate to Kalshi’s ability to offer its challenged event contracts, Kalshi’s sports-related event contracts were not available at the time of the DC Circuit’s decision. The issue could therefore present itself as a matter of first impression before each court, thereby allowing it to make a ruling on its merits.
However, there exists a possibility that neither Nevada’s nor New Jersey’s respective district court grants Kalshi’s motion for preliminary injunction if such an act would maintain the “status quo” established by the US District Court for the District of Columbia’s decision that brought us to where we are today.
Assuming a more long-term favorable resolution, Kalshi will surely use such victory as another tool to counter other state actions.
Notwithstanding, any positive impact from Kalshi’s receipt of its requested relief would have zero impact on other prediction marketplaces offering event contracts, as Kalshi readily admits that states have the right to police non-CFTC exchanges.
