A motion to dismiss the complaint from Kalshi concerning sports prediction contracts in Nevada has led to the court looking for more information.
The motion to dismiss was made after the District of Nevada’s granted Kalshi’s motion for preliminary injunction. The Nevada Gaming Commission, Nevada Gaming Control Board, and Nevada Attorney General collectively filed a motion to dismiss Kalshi’s complaint.
Nevada raised a number of procedural and substantive arguments to no avail, as the court determined that Kalshi’s offering of sports-related event contracts in the state could continue pending final ruling from the court.
However, in doing so, the court stated its desire to hear further arguments on many key issues raised in Nevada’s motion, in addition to other statements made in other proceedings by Kalshi regarding the positioning of its event contracts, some of which have begun to face heightened scrutiny in other jurisdictions.
Nevada not immune from federal court jurisdiction
First, the state alleged that it was immune from litigation in federal court based on the Eleventh Amendment, and that it had not been properly named as party or served, each for the purpose of arguing that the district court did not have jurisdiction to hear Kalshi’s case.
While noting that simply defending against legal action does not constitute consent, the court held that these defenses had effectively been waived when Nevada – in an effort to obtain affirmative relief – motioned the court to enjoin Kalshi from operating in the state.
The court ultimately concluded that it would be an unequitable application of the law to allow Nevada to argue the court lacked legal authority to render rulings, while simultaneously asking it for relief.
Kalshi complaint plausibly states a claim for relief
Turning to the merits of Kalshi’s complaint, Nevada stated that Kalshi’s claims should be dismissed, because Kalshi fails to allege facts demonstrating violations of the Supremacy Clause by any of the individual defendants (i.e. those members named in their official capacities).
In reviewing a motion to dismiss, courts are required to take all well-pleaded allegations of fact raised in the complaint as true, and must construe all allegations in a light most favorable to the non-moving party. As a result, the district court may not grant dismissal for failure to state a claim for relief unless it appears beyond a doubt that Kalshi can prove no set of facts in support of the arguments or relief sought in its complaint.
Here, the court determined that Kalshi’s complaint sufficiently alleges each of the following:
- the Nevada Gaming Control Board is the state agency in charge of enforcing state laws and regulations governing gaming;
- the Nevada Gaming Commission is the state agency with final authority over state gaming licensing matters;
- both the NGCB and NGC utilize its powers to regulate gaming;
- the individual members/officers of the NGCB and NGC have the power to implement or prevent either agency from enforcing civil or criminal action against Kalshi;
- the Nevada Attorney General was also connected to the state’s potential enforcement actions, as he could act at the recommendation of the NGCB or NGC and otherwise had general authority to enforce state laws.
As a result, the court held the members of each agency/office in charge of overseeing Nevada’s gaming laws and regulations were properly named as respective parties.
Preemption arguments denied as premature
Nevada next argued that Kalshi’s complaint fails to state a claim because the Commodity Exchange Act does not preempt Nevada’s gaming laws, and that its interpretation of the CEA violates the 10th Amendment by infringing on the state’s ability to enforce its laws, again highlighting the main dispute tied to the entire premise of Kalshi’s operations.
The court highlighted its prior statements in its order granting Kalshi’s motion for preliminary injunction that Kalshi had demonstrated a likelihood of success on the merits of its preemption claim; thus, Nevada’s attempt to now argue that the claim was not properly pled appeared to carry little weight with the Court.
Rightfully understanding that Kalshi’s preemption claim is the gravamen of its case, this argument was denied without prejudice as premature, with the judge stating he “would benefit from further briefing on the preemption issue before I make a final decision on the merits.”
Notwithstanding, the court’s assessment regarding Nevada’s 10th amendment argument determined that the “anti-commandeering principle” inherent within the law – which “prohibits the federal government from compelling states to implement, by legislation or executive action, federal regulatory programs” – was not implicated by Kalshi’s interpretation because Kalshi operates in interstate commerce (to which the CEA applies) and preemption only precludes Nevada from enforcing its own regulatory framework but would not compel the state to implement any federal program.
Judicial estoppel may hurt Kalshi in court
Lastly, in an effort to demonstrate that Kalshi’s current stance regarding the permissibility of its sports-related event contradicts that raised in previous litigation, Nevada argued “Kalshi should be judicially estopped from arguing that its sports event-based contracts are not gaming because of arguments Kalshi made before the Court of Appeals for the D.C. Circuit” and that “Kalshi admitted before the D.C. Circuit that the legislative history shows that Congress did not want sports betting on derivatives markets.”
In response, Kalshi argued “the fact that it sometimes refers to its event contracts as bets is of little import because companies and others refer to investments in financial markets as bets,” but such companies or markets remain nonetheless not subject to state gaming laws.
As with the matter of preemption, the court punted on this issue in denying Nevada’s motion to dismiss on this basis, but mentioned the state could again raise this argument in future briefings.
Kalshi yet to receive injunction in Maryland
The issue of judicial estoppel was also raised during hearing on Kalshi’s motion for preliminary injunction against Maryland, following which the US District Court for the District of Maryland issued an order requiring supplemental briefing before making a ruling. Specifically, the judge asked for “supplemental briefing on the effect, if any, of the representations and positions that Kalshi has taken in [the D.C. Circuit].”
The parties initial briefs are due June 13, with responses due June 25. How Kalshi handles explanation of its previous statements will prove vital not only to its chances to operate in Maryland, but also to the claims and defenses raised in pending litigation against other states.
Nevada Resorts Association, Crypto.com join the legal battle
Prior to denying Nevada’s motion to dismiss, the court did provide the state its first legal victory by granting the Nevada Resort Association’s (NRA) motion to intervene over Kalshi’s objection. The court held each of the elements required to allow intervention were met, the highlight being recognition of the NRA’s “significantly protectable interests” in protecting their Nevada gaming licenses and avoiding being placed at “considerable competitive disadvantage” should Kalshi be allowed to operate outside the state’s gaming laws.
As an intervenor defendant, the NRA now has the right to participate in the lawsuit by filing briefs and/or conducting discovery from a perspective not generally afforded to Nevada’s regulatory defendants.
Crypto.com – another CFTC-designated exchange – has also been identified in the lawsuit as a party having a potential stake or legal interest in the outcome. However, unlike NRA, Crypto.com does not have the right to actively participate in proceedings.
Coincidentally, on the same day Nevada’s motion to dismiss was denied, Crypto.com filed its own lawsuit against Nevada seeking declaratory and injunctive relief from the state on the basis of CFTC preemption. The state’s response to Crypto.com’s motion for preliminary injunction is due June 19. As it stands, there is no reason to believe that the Nevada district court won’t similarly grant the operator its requested relief.
