Kalshi and New Jersey faced off in oral arguments before a panel of judges at the Third Circuit on Wednesday.
New Jersey was the second state to publicly send Kalshi a cease-and-desist letter over the platform’s contracts on the outcomes of sports matches. Kalshi launched sports contracts shortly after the Trump administration took office.
Kalshi won a preliminary injunction after convincing a District Court that it was likely to win on the merits and would suffer “irreparable harm” by complying with New Jersey’s cease-and-desist letter. New Jersey appealed that court’s decision and the fast-tracked appeal is now playing out.
New Jersey maintains that, because Kalshi’s sports contracts are functionally identical to sports betting, the state gaming regulator should be the one to regulate them. Kalshi counters that the Commodity Futures Trading Commission (CFTC) is the only regulator that Congress endowed with the power to regulate the swaps on designated contract markets (DCMs).
The consensus among viewers was that Kalshi outperformed New Jersey after New Jersey’s counsel began by arguing that sports contracts are not swaps. That opened the door for Kalshi’s lawyer to offer up their own convincing argument, shifting the focus from other arguments that led to the original victory for Maryland.
In our latest episode of the Prediction News Update podcast, sports betting and gaming lawyer Daniel Wallach pointed out a stronger argument that New Jersey could have made and offers thoughts on how states that want to put up a better fight should frame their arguments:
“…Ultimately, for me, this comes down to, how are you going to argue if you’re the states? Are you going to get into the weeds of the CEA and argue as to what is a swap and what is not a swap? Or are you going to deal with it at a higher level, from what Congress, what congressional intent entails, and is this the kind of activity that Congress intended to be traded on derivatives markets in light of the legislative history of the statute, and in light of Kalshi’s own prior statements?”
New Jersey’s oral arguments in the Third Circuit
Stephen Ehrlich spoke on behalf of New Jersey and began by arguing that Kalshi’s sports contracts were not swaps, since sports wagers aren’t the types of financial instruments that Congress intended for the CFTC to regulate. However, one of the panel judges countered that the definition of swaps was broad.
It’s an agreement, contract or transaction “…that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence…”
Ehrlich countered that while the swaps definition may have been intentionally broad, Congress also consistently protected states’ rights to regulate gambling. Still, the panel wondered whether the broad definition was for Congress to remedy rather than the judiciary branch.
Kalshi defends preemption of on-exchange swaps
William Havemann argued on behalf of Kalshi. He rehashed the argument that federal regulation of a DCM preempts state gaming law. Havemann also pointed out that federal finance law does not prevent state regulators from regulating off-exchange transactions, like casino or sportsbook wagers. Under that reading of the law, sportsbooks and DCMs could offer the same or similar products without one regulator interfering with the other.
He also noted that there are limitations on the swaps that can be traded on DCMs. The events tied to these contracts must be outside the control of the parties involved, and the CFTC has the authority to decide which contracts can or cannot be offered.
The panel asked Havemann to respond to New Jersey’s point that a financial exchange was offering products that states have traditionally regulated. Kalshi responded that New Jersey can regulate products that are offered off of an exchange. But that the CFTC should remain the sole regulator of on-exchange products, even if they’re identical to wagers overseen by state gaming regulators.
Responding to federal IGRA and UIGEA
Finally, Havemann argued that the Indian Gaming Regulatory Act (IGRA) gives states and tribes the authority to regulate gaming, not trading. Potential federal IGRA violation has been routinely cited in states’ cases against sports event contracts and is the core argument in a case that three California tribes recently launched against Kalshi and Robinhood.
Havemann also pointed out that the Unlawful Internet Gambling Enforcement Act (UIGEA) included a carve-out excluding products traded on federal exchanges from the gambling designation.
