Kalshi and its pursuit of nationwide trading on the outcome of sporting events hit a significant roadblock when the United States District Court for the District of Maryland denied the company’s motion to enjoin Maryland from attempting to enforce the state’s gambling laws.
Unlike the federal courts in Nevada and New Jersey that elected to preserve the “status quo” regarding the legality of Kalshi’s event contracts by leaving the determination thereof within the discretion of the CFTC, the District of Maryland held that Kalshi’s preemption argument failed to meet the necessary burden needed to shield the company from potential state enforcement.
Kalshi found not likely to succeed on merits
The party seeking preliminary injunction must satisfy four elements in order to obtain relief:
- likelihood of success on the merits;
- likelihood of irreparable harm;
- balance of hardship weighs in favor of injunction;
- injunction is in the public interest.
As in Nevada and New Jersey, Kalshi argued that it was likely to succeed on the merits of its Supremacy Clause claim – i.e., that the CEA preempted state gambling laws as applied to Kalshi’s offering of sports-event contracts – due to Kalshi’s status as a CFTC-designated contract market (DCM).
The District of Maryland cited to the Supreme Court case of Medtronic, Inc. v. Lohr to establish the principle that “There is a strong presumption against preemption.”
In doing so, the court stated Kalshi needed to “establish that Congress clearly and manifestly intended to strip states of their authority to regulate gambling if the company offering such wagering opportunities has been approved to sponsor a designated contracts market for commodities trading.”
Why Kalshi failed to meet the burden
The court determined Kalshi failed to meet its burden for at least each of the following reasons:
- The “Special Rule” prohibiting event contracts involving activity deemed unlawful under state law supports the idea that Congress intended for at least some state laws to operate alongside the CEA and not be preempted.
- Though the CFTC has exclusive jurisdiction over DCMs, the existence and ambiguous nature of the savings clause included in the CEA – which preserves certain state and SEC causes of action – “cuts against a finding of field preemption.”
- States have a strong interest in regulating gambling within its jurisdiction.
- Kalshi’s preemption argument draws into question whether other federal laws such as the Wire Act and IGRA are subject to preemption.
- Kalshi has not demonstrated why obtaining a mobile sports wager license in Maryland would conflict with the CEA.
Maryland differs from Nevada, New Jersey
The District of Maryland mentioned the difference in its analysis of Kalshi’s motion versus that of its federal counterparts.
Whereas Nevada and New Jersey agreed with Kalshi’s position that the “plain and unambiguous language” of the CEA preempts state law and that any issues with Kalshi’s sports-related event contracts must be raised with the CFTC, Maryland viewed this approach as too broad of a reading of Kalshi’s field preemption claim.
Noting that “some” but not “all” of the CEA preempts state law, Maryland disagreed that the CEA was unambiguous for the purpose of creating blanket preemption or that the legislative history demonstrated congressional intent to preempt state regulation of sports betting.
Conflict with DC?
Maryland’s ruling also bears conflict with the United States District Court for the District of Columbia’s ruling that paved the way for Kalshi’s expansion. Particularly, in interpreting the Special Rule, the court stated: (i) that it is unlawful to conduct sports wagering without a license in the state and, (ii) the offering of sports-related event contracts “violate Maryland sports-wagering laws and thus constitute an ‘activity that is unlawful’ under state law.”
However, this interpretation of what constitutes “unlawful activity” strays from that established in the DC court, in which it was held that an event contract involves unlawful activity “if the contract or transaction’s underlying event relates in some way to activity that is illegal — not if the act of staking money on the contract’s underlying would be unlawful under any state law.”
Thus, the subject matter of the contracts – here, sporting events – must be illegal in order to involve “unlawful activity” under the Special Rule (and, even so, such should only trigger CFTC review). Notably, the New Jersey court agreed with DC’s reading of the “Special Rule” in granting Kalshi’s motion for preliminary injunction.
Next steps For Kalshi
Kalshi has filed a notice of appeal with hope that a higher court will overturn the district court’s decision. Kalshi’s initial brief is due Sept. 15, with the state’s response due Oct. 15.
Kalshi has also filed another motion for preliminary injunction pending appeal, seeking to obtain the ability to continue operating in the state in the meantime.
