As Kalshi rakes in unprecedented volume on football trading markets, the company’s legal battles roll on. Just last week, Nevada denied Kalshi’s motion to dismiss discovery on Wednesday, and California tribes filed a request for preliminary injunction on Thursday to stop Kalshi from offering event contracts on tribal lands.
These are not immediate losses for Kalshi. However, both cases put the prediction market exchange on the defensive, in contrast to the cases against state regulators where Kalshi filed suit first.
Discovery ruling in Nevada
Kalshi had argued that the question of whether its contracts were swaps was a question of “pure law” that didn’t require discovery. Nevada countered that some of Kalshi’s claims needed to be defended, like the impact of geofencing costs or the impossibility of complying with both CFTC and state gaming regulations. Judge Brenda Weksler wrote in her opinion:
“Defendants should be able to inquire, by way of example, into the way in which eliminating contracts in Nevada would risk and/or facilitate market manipulation and the Core principles Kalshi maintains would be violated (and on which its federal designation depends) should it attempt to comply with cease-and-desist letter [sic].”
With this ruling, Nevada could potentially depose the CFTC, geofencing company GeoComply, and even Kalshi’s founders. State lawyers may also be able to present advertisements in which Kalshi uses gambling terminology to the Nevada District Court.
Kalshi’s advertisements are the subject of another case in the same region.
Federal legal conflicts and alleged false advertising
Back in July, three California tribes filed suit against Kalshi and Robinhood, leaning on the argument that Kalshi’s event contracts violate the federal Indian Gaming Regulatory Act (IGRA) which grants tribes the exclusive right to regulate and conduct gaming on Indian reservations.
On Thursday, the same California tribes requested preliminary injunctive relief, requesting a court order to stop Kalshi from offering its sports contracts on tribal lands as the case plays out.
Kalshi’s sports contracts are available in all 50 states, including on Native American land. In the brief, the tribes argue that Kalshi infringes on IGRA, a federal law not easily dismissed by Kalshi’s preemption arguments.
This brief also introduces a new argument against Kalshi’s advertising tactics, building on the claims already brought in the initial complaint. In the new brief, the tribes accuse Kalshi of false advertising under the Lanham Act, the federal law prohibiting false advertising. The brief argues that because Kalshi’s sports contracts are not swaps, advertising “legal sports betting in all 50 states” was misleading. It went on to argue that Kalshi’s ads were “misleading” even if they weren’t found to be literally false:
“Kalshi’s advertisements on its social media accounts use the terms ‘betting’ and ‘trading’ in close proximity to one another, and sometimes within the same advertisement…The concern and confusion of the public is evident in social media users’ comments on Kalshi’s on-line advertising: ‘Betting culture is crazzyyy’; ‘Didn’t Enron do the exact same thing?’; ‘I bet not traded’; ‘Enron is back baby!’; ‘Calling it a ‘trading app’ is crazy.’; and ‘1-800-GAMBLER’.”
A hearing on the motion is scheduled for Oct. 9.
Imminent Third Circuit hearing
Both new legal developments precede Kalshi’s Sept. 10 oral argument before the Third Circuit Court of Appeals. There, Kalshi will be defending its preliminary injunction in New Jersey.
The case will be interesting in part because of the likely Supreme Court appeal that will follow. Whichever side loses can appeal to have the case heard before the Supreme Court. If the Supreme Court declines to hear the case, then the appellate decision will hold.
As gaming regulators and the tribes probe for legal weaknesses, Kalshi is set to face its highest-stakes case so far. Meanwhile, trading on football event contracts rolls on at a meteoric pace nationwide.
