A court’s finding against Crypto.com that sports contracts do not meet the definition for a swap could could impact other predictions cases.
Following Kalshi’s initiation of legal action against the Nevada Gaming Control Board, Cyrpto.com brought its own lawsuit, claiming that the Commodities Exchange Act preempts state law and seeking to permanently enjoin the regulatory body and Attorney General’s office from pursuing civil or criminal enforcement against the company for offering sports-related event contracts in the state.
Also like Kalshi, Crypto.com filed a motion for preliminary injunction seeking to preclude the state’s pursuit of legal action pending the outcome of its case. Crypto.com’s filing followed the US District Court for the District of Nevada’s granting of Kalshi’s own motion for preliminary injunction against the state. Presumably believing that the court was likely to rule in a similar fashion, Crypto.com also filed a motion for judgment on the pleadings based on the argument that the CFTC has exclusive jurisdiction over event contracts offered by designated contract makers.
However, unfortunately for Crypto.com and likely stemming from Kalshi’s recent unsuccess in the courtroom, the court denied its motions, paving the way for Nevada to pursue legal action against the platform.
Sports contracts are not ‘swaps’
In the court’s prior ruling (Kalshi v. Hendrix), the court held that Kalshi was likely to succeed on the merits of its supremacy clause claim because the court agreed with its position that “the [Commodities Exchange Act] preempts state law due to the [Commodity Futures Trading Commission]’s exclusive jurisdiction over a [designated contract maker], which Kalshi is.”
In the order rendered for Crypto.com v. Nevada, the court reiterated this position. Nonetheless, the court reached a different decision based on its interpretation of what constitutes a “swap,” the analysis of which was not previously provided in Kalshi v. Hendrix. In reaching a different conclusion in Crypto.com, the court stated:
- In order to fall within the CFTC’s exclusive jurisdiction under the CEA, the item offered by the DCM must be a “swap or a contract of sale of a commodity for future delivery…”
- The court has authority to interpret the CEA, including its definition of a “swap.”
- The CEA defines “swaps” as “any agreement, contract, or transaction…that provides for any purchase, sale, payment, or delivery…that is dependent on the occurrence, nonoccurrence, or the extent of an occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
- The CEA does not define “occurrence” or “event”; therefore, the court must interpret each term, respectively, in accordance with its “ordinary meaning” at the time Congress passed the CEA.
- The Court finds that the “ordinary meaning” of (1) “occurrence” is “something happened” (i.e. something happened, did not happen, or happened to a certain extent), and (2) “event” is “a happening of some significance that took place or will take place, in a certain location, during a particular interval of time” (i.e. a particular sporting event or organized activity for a particular group).
- Equating use of the term “event” to mean an “outcome” or “result” is an archaic use of the word and not its “ordinary meaning” as interpreted within the CEA.
Based on the foregoing, the court held that Crypto.com’s sports-related event contracts are not swaps, because “these contracts turn on the outcome of the live event, not on the ‘occurrence, nonoccurrence, or the extent of the occurrence’ of a live event.” Specifically, because Crypto.com’s sports-related event contracts do not specifically relate to whether an event will occur or not occur, but on the outcome of such event, it falls outside the realm of the CEA’s statutory provisions.
In doing so, the court shifted its review of the parties’ dispute from a policy issue that needed to be addressed with Congress and/or the CFTC, to a matter of statutory interpretation with a concentrated focus on Congress’ intent on passing the CEA. In sum, the court ruled that Crypto.com was not likely to succeed on the merits of its supremacy clause claim (and, thus, was not entitled to judgment on the pleadings), because even though the CEA preempts state law, sports-related event contracts do not fall under the defined offerings that are subject to the CFTC’s exclusive jurisdiction.
Does Crypto.com ruling put Kalshi at risk?
The court’s ruling in Crypto.com does not distinguish itself from or otherwise expressly overturn the ruling rendered in Kalshi v. Hendrix. Notwithstanding, as it is a related case based on a similar fact pattern, the ruling provides a basis for which Nevada could seek relief from the previous preliminary injunction order granted in Kalshi’s favor.
Fed. R. Civ. P. 60(b) provides the court the ability to relieve a moving party from a final judgment, order, or proceeding for a number of reasons, including: (i) applying it prospectively is no longer equitable, or (ii) any other reason that justifies relief.
By stating in Cyrpto.com that Nevada would suffer substantial hardships if Crypto.com were allowed to continue offering sports-related event contracts, the court laid the groundwork for the NGCB to allege that it should no longer be enjoined from seeking action against Kalshi’s offering of similar contracts. It is likely that Crypto.com seeks appeal of the court’s decision before the state can go such route. In any event, other states litigating against Kalshi and its affiliates have already notified their respective forum of the Cyrpto.com ruling in hopes of using it in their favor.
Furthermore, on the heels of the Cyrpto.com decision, the NGCB issued a memo:
“The Board considers offering sports event contracts, or certain other events contracts, as constituting wagering activity under NRS 463.0193 and 463.01962. Wagering occurs whether the contract is listed on an exchange regulated by the Commodity Futures Trading Commission (CFTC) or elsewhere.”
Such memo, coupled with the recent court ruling, only serves to embolden Nevada’s attempts to shut down prediction marketplaces in the state.
