Kalshi’s lawyers filed a brief in the Third Circuit Court of Appeals that made one of the strongest cases for federal preemption of state gaming laws.
It’s the latest action in Kalshi vs. the New Jersey Division of Gaming Enforcement (NJDGE) after the NJDGE appealed to overturn a ruling granting Kalshi preliminary injunction, keeping the platform’s sports event contracts live in the Garden State.
What’s in Kalshi reply brief to NJ appeal?
The 77-page brief argued that Congress’ intent was to give the Commodity Futures Trading Commission (CFTC) sole authority in regulating contracts traded on a designated contract market (DCM), which describes Kalshi. It points to previous cases in which states considered derivatives forms of gambling, but courts ruled in favor of federal regulation of financial exchanges.
Kalshi’s lawyers argue that states have only been able to regulate sports betting since 2018, and many states have legalized it for less time than that. They also argue that gaming isn’t the relevant field for states to lay claim to:
“Any presumption against preemption does not apply because the CEA [Commodity Exchange Act] does not preempt state laws in their entirety, but only as narrowly applied to regulating trading on DCMs. States have not traditionally occupied the field of trading on DCMs–Congress has.”
Another sticking point is each side’s reading of Rule 40.11, also known as “the Special Rule,” which has been a constant source of conflict between the federal exchanges and the states.
Different readings of Rule 40.11
CFTC Regulation 40.11 lists categories of event contracts the CFTC can prohibit from being traded on an exchange and the process the CFTC can take to evaluate such contracts. Kalshi’s lawyers argue that the CFTC may prohibit these contracts, but they do not have to.
“While Section 40.11(a) generally bars DCMs from listing contracts that reference ‘gaming,’ Section 40.11(c) reserves the CFTC’s discretion to review contracts referencing ‘gaming’ and to ‘issue an order approving’ those contracts…Defendants’ contrary reading would bring Section 40.11 into conflict with the Special Rule itself, which permits the CFTC to prohibit a contract within the enumerated categories only upon ‘determin[ing]’ that the contract is contrary to the public interest.”
The opposing view is that Rule 40.11(a) prohibits event contracts that “involve” any of the enumerated categories, including gaming. So, the courts should find that Kalshi’s sports contracts “involve” gaming and prohibit them, a view spelled out by sports betting and gaming lawyer, Daniel Wallach on X:
A couple of observations on Kalshi’s Third Circuit brief:
It is certainly well-written and a strong work product. I would expect nothing less from a law firm of the caliber of Milbank. Clearly, Kalshi has retained top-flight counsel.
BUT:
Kalshi’s distortion of Rule 40.11(a)(1) continues.
Rule 40.11(a)(1) imposes a blanket ban on all event contracts involving “gaming,” “war,” “terrorism,” “assassination,” and “activity that is unlawful under State or Federal Law.”
Acting CFTC Chairman Caroline D. Pham has acknowledged that Rule 40.11(a)(1) sets forth a per se prohibition on any event contract which “involves, relates to, or references” any of the enumerated categories such as ‘gaming.’
He goes on in the tweet regarding why he believes it to be a “per se prohibition.”
Important Kalshi vs. Maryland ruling coming soon
While the Third Circuit is the first appeals court to hear one of Kalshi’s cases against state gaming regulators, many eyes are on the District Court in Maryland.
Instead of accepting Kalshi’s federal preemption arguments immediately as Nevada and New Jersey did, Maryland’s judge ordered supplemental briefing. Stakeholders from across the gaming industry–and some financial organizations like Better Markets–raised concerns about sports contracts and their similarities to sports betting.
While supplemental briefing does not mean that Kalshi will lose, Judge Abelson was the first at the District Court level to show as much skepticism regarding Kalshi’s arguments. Maryland is an important crossroads for Kalshi and for the states.
The final briefs have been submitted in that court, so a decision is expected any day.
