In recent months, numerous online commodity trading markets have begun to offer sports-based event contracts concerning the outcome of various sporting events. These event contracts—which are a type of derivative contract—entitle buyers to a payout when they accurately predict the outcome of a sporting event. Some states, Nevada first among them, have reacted with cease and desist letters advising that these designated contract markets, or “DCMs,” are operating unlawfully under state law and ordering that they cease operating there. In response to Nevada’s move, the operator of one such exchange, KalshiEX, LLC (“Kalshi”) sued to enjoin state enforcement, arguing that federal law preempts state regulation of these exchanges. On April 8, a federal court in Nevada decided round one for Kalshi, holding that Kalshi has a reasonable likelihood of prevailing on the merits, and issuing a preliminary injunction preventing regulators from enforcing their cease and desist demand.
Nevada’s Action and Kalshi’s Reaction
On March 4, the Nevada Gaming Control Board (“NGCB”) sent a letter to Kalshi advising that its offering of events-based contracts concerning elections and sporting events amounted to operating an unlicensed sports pool in violation of Nevada law and ordered Kalshi to cease and desist such activities in Nevada. In response, Kalshi filed suit in federal district court in Las Vegas, arguing that, because its activities as a DCM are subject to the exclusive jurisdiction of the federal Commodities Futures Trading Commission (“CFTC”), Nevada is preempted from exercising its jurisdiction over such activities and cannot order Kalshi to take or refrain from taking any action with respect to such activities. Specifically, Kalshi argued that its activities must be seen as legal under federal law because the CFTC has not prohibited Kalshi from offering sporting event contracts and a federal district court in Washington, D.C., previously authorized Kalshi’s political event contracts.
On Tuesday, April 8, Judge Andrew Gordon determined that Kalshi was likely to prevail and has preliminarily enjoined Nevada’s gaming regulators from taking any enforcement action against Kalshi with respect to its activities as a DCM in Nevada while the case proceeds. Essentially, the judge accepted Kalshi’s federal preemption argument, finding that the plain language of the Commodities Exchange Act (“CEA”) and its legislative history support the conclusion that Congress intended to occupy the field and preempt state law from applying to CFTC-designated exchanges. The judge concluded as follows:
In sum, if Kalshi were offering its contracts without CFTC designation, then the [state] could regulate it. But because Kalshi is a CFTC-designated DCM, it is subject to the CFTC’s exclusive jurisdiction and state law is field preempted. Nevada regulatory agencies thus have no jurisdiction to decide that Kalshi’s conduct violates state law where, at least at present, those activities are legal under federal law.
This is clearly a big, if only preliminary, victory for Kalshi, similarly situated DCMs and their partnered futures commission merchants (“FCMs”). With a preliminary injunction now in place, Kalshi can continue to operate as a DCM (and its FCMs can continue to offer trading in sporting event contracts) in Nevada without state regulatory interference. The issued preliminary injunction is immediately appealable to the U.S. Court of Appeals for the Ninth Circuit, but at the time of this writing, the NGCB had not announced its intentions. In the absence of such an appeal, the likely next step in the case will be cross-motions for summary judgment wherein each side will essentially reiterate the legal arguments already made to the same judge who has already ruled in Kalshi’s favor. Whether now, or after the trial court’s final decision, an appeal to the Ninth Circuit seems inevitable.
Other State Regulatory Actions
Following Nevada’s lead, on March 27, the New Jersey Division of Gaming Enforcement (“DGE”) sent similar cease and desist letters to Kalshi and at least one FCM. Kalshi sued the New Jersey regulators in federal district court in New Jersey, making the same arguments it made in Nevada and seeking the same injunctive relief it was able to win there. Gaming regulators in several other states, including Illinois, Maryland, Montana and Ohio, have taken similar action against several companies while other states, including at least Michigan and Connecticut, have signaled that they have launched investigations. The various states’ letters and investigations contain a common theme: the commodity trading markets clearly constitute sports wagering and are being offered to the public in violation of state gaming and criminal laws. Kalshi obviously disagrees and, so far, is winning the legal argument. Apparently confident that its luck will continue, Kalshi continues to offer sporting event contracts in all 50 states, including contracts on the result of this past weekend’s Masters golf tournament.
What’s Next?
First, we must see whether the New Jersey federal district court agrees with its Nevada counterpart. If it does not, its decision and subsequent appeals court rulings could create a circuit split that could eventually lead to a showdown at the U.S. Supreme Court. It is unclear how the Supreme Court, whose current majority might look at the federal preemption argument with skepticism, would view the case.
