The tide could be turning for Kalshi and sports predictions in the courtrooms.
On the heels of the chairman of the Commodity Futures Trading Commission’s remarks supporting prediction markets, the United States District Court for the Middle District of Tennessee granted Kalshi’s motion for preliminary injunction.
This legal win follows a string of losses suffered in other states, and effectively allows Kalshi to continue operating in the state pending overturn on appeal or the outcome of trial.
TN says sports predictions are ‘swaps‘
As with other cases regarding the operation of prediction markets, Kalshi’s lawsuit filed against the Tennessee Sports Wagering Council and its officials centers on its argument that, as a federally regulated DCM, Kalshi is not required to comply with Tennessee’s laws governing sports betting.
In reviewing Kalshi’s motion, the court framed the issue as “whether the event contracts Kalshi offer are “swaps,” and therefore, subject to the CEA’s grant of exclusive jurisdiction to the CFTC.”
The Commodities Exchange Act defines a “swap” as “any contract . . . that provides for any purchase, sale, payment, or delivery . . . that is [1] dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency [2] associated with a potential financial, economic, or commercial consequence.” The court held that Kalshi demonstrated a likelihood of prevailing on the issue of whether its sports event contracts depend on the occurrence of events because, based on the plain language of the statute, an “occurrence” could also include an “outcome” of an event.
This conclusion is in direct contrast with that provided by the US District Court for the District of Nevada, which dissolved the preliminary injunction it previously granted to Kalshi based on holding sports predictions 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.”
As to the second requirement, the court concluded that such element was also met due to the statute’s use of the word “potential” defining swaps broadly enough to allow for incidental and/or non-immediate financial, economic, or commercial consequences to occur. The court disagreed with the state’s argument that such consequences must “naturally follow” or be inherently connected to the outcome of the event. The court also accepted Kalshi’s argument that its sports event contracts concerned “financially significant events” due to Kalshi’s representation that it screens and limits its sports event contracts to those that are associated with a potential financial consequence.
Conflict preemption applies
The court additionally found that Kalshi was likely to succeed on its Supremacy Clause claims regarding preemption. It specifically focused on conflict preemption, which provides that federal law preempts state law if: (1) complying with both is impossible, or (2) state law stands in the way of accomplishing Congress’ objectives.
The court found Kalshi likely to prevail on its impossibility argument that compliance with Tennessee law would violate the CEA’s requirement that Kalshi provide impartial access to its market and services, because it would require creation of a Tennessee-only exchange on which only those located in Tennessee could trade amongst each other and excludes non-Tennesseans.
The court rejected the state’s reliance on the order issued by the District of Maryland denying Kalshi’s motion for preliminary injunction based on, in part, finding conflict preemption did not apply. Whereas the Maryland court concluded that Kalshi’s obtainment of a sports gambling license to operate in the state should satisfy the CEA’s impartiality requirement, the Tennessee court stated such action was not reasonable for a federally regulated nationwide exchange.
Nonetheless, the court additionally held that enforcement of Tennessee’s gambling laws presented an obstacle to Congress’ objectives, i.e., the CEA’s uniform regulation of derivatives (prediction) markets. Specifically, the court determined that “[s]tate law would directly affect trading on Kalshi by limiting who can trade with whom.”
Kalshi files TN order as supplemental authority
Kalshi has filed the Middle District of Tennessee’s memorandum as a supplemental authority in the United States Court of Appeals for the Third Circuit. That is where the New Jersey Division of Gaming Enforcement is currently appealing the United States District Court for the District of New Jersey’s decision to allow Kalshi to continue operating in the state.
Kalshi (and other prediction market operators) will undoubtedly use the Tennessee ruling as supplemental authority in each of the other prediction market cases currently being litigated across the country.
