Kalshi appeared in Massachusetts Tuesday morning to defend its sports contracts from being prohibited in the state. It’s the first case to be heard in state court instead of federal court.
Judge Christopher K. Barry-Smith began with the preemption question. He opened by asking whether Kalshi could “grow” into preemption. Judge Barry-Smith noted that even though Congress may not have intended for sports contracts to displace state sports betting laws, Congress did give the CFTC exclusive jurisdiction over these types of contracts.
Barry-Smith ended by noting that he did not know which way he was going to rule but hoped to release an opinion at the beginning of the new year, sometime in January.
Kalshi’s main arguments in MA state court
Kalshi counsel Grant Mainland argued that the Special Rule anticipated certain contracts that would fall within the enumerated categories. Congress addressed that problem by giving the CFTC exclusive authority to conduct a public interest review over certain contracts. Mainland also quoted the Supreme Court of Illinois’ “just gambling” argument about grain futures.
Barry-Smith pushed back and asked how old opposition to grain futures could carry over to “trivial” questions like who will win a game. Mainland responded that sports contracts were not “trivial,” and noted that Congress found it in the national interest to give exchanges a single regulator instead of making them navigate 50 interpretations of law.
Questioned on the use of prices and why sports contract prices matter, Mainland argued that sports is a “massive industry” that has serious economic consequences. NFL games may be traded on for fun, but traders also speculate in other markets and with other financial instruments. There are still economic consequences that sports contracts can allow traders to hedge against.
The Special Rule and Congressional intent
Mainland argued for the two-step public interest review process, explaining that the CFTC has the discretion to conduct a public interest review. Barry-Smith asked whether regulatory action by the CFTC would affect preemption.
Mainland responded that Dodd-Frank gave the CFTC authority to further define the word “swap.” The CFTC defined it to exclude trading off its regulated exchanges, maintaining a separation between state-regulated sports betting and CFTC-regulated sports contracts. Mainland concluded that preemption is secured by the Commodity Exchange Act (CEA).
Mainland also addressed congressional intent in banning sports betting under PASPA. He brought up UIGEA’s carveout for financial transactions, arguing that Congress wanted to maintain a separation between CFTC-regulated contracts and gambling transactions. This separation preserved state police power over gambling while protecting derivatives markets from state intervention, the attorney maintained.
Massachusetts main arguments
Assistant Attorney General Louisa Castrucci of the Attorney General Office’s gaming enforcement division argued that Congress did not use the term “bet” or “wager” in the CEA or the statutes governing the CFTC. She believes without an explicit overturning of state authority to regulate gaming and sports betting, Kalshi cannot overrule state gaming law by offering sports contracts.
Barry-Smith asked why sports contracts weren’t swaps. Castrucci argued that it would result in “absurd” results under statutory interpretation. Allowing a federally-regulated financial exchange to offer sports wagers in states that prohibit it would be the kind of “absurd” outcome a judge is required to rule in order to prevent, she affirmed.
Barry-Smith asked whether Castrucci read the Special Rule the same way as Kalshi’s counsel, in which they argued the CFTC had the discretion to conduct a public interest review. She read the first section of the Special Rule as a prohibition and argued that the CFTC did not have the authority to allow sports contracts on its regulated exchanges at all.
Can preemption be dynamic?
Castrucci argued that legislation like The Wire Act and PASPA supported the argument that Congress left gambling regulation to the states and that Congress has not made a “clear and manifest” decision to give a different regulatory body authority over gambling products. Without that clear intent to overturn state law, Judge Barry-Smith should presume that preemption does not apply in this case, she argued.
Barry-Smith pressed Castrucci on whether preemption can be “dynamic.” Only one or two states had legal sports betting in the 1970s and in 2010. Today, about three-quarters of the states have legal sports betting, and the outcome of nationwide sports betting becomes less absurd under statutory interpretation.
Castrucci argued that there is an “inherent public interest” in a state’s decision to allow sports wagering. While many states have allowed it, she noted they have done so under “strict regulatory oversight,” including extensive licensing reviews that include criminal background checks and financial disclosures.
A sharp line between on-exchange vs off-exchange transactions
Mainland cited statutory language clarifying that the CFTC can draw a sharp line between on and off-exchange transactions, preventing sports contracts from overturning other gambling legislation.
Barry-Smith also asked him to address the CFTC advisory, which required DCMs to prepare for potential adverse rulings against sports event contracts that could result in geofencing. Mainland responded that an unfavorable ruling is a possibility, and there should be contingency planning in place. He also argued that the CFTC didn’t come out in disagreement with state regulators, but they told the D.C. Circuit in the election contract case that event contracts always preempt state law.
Mainland returned to the theme of growing into preemption. He pointed to a 2008 concept release from the CFTC that related to event contracts, in which the outcome of particular entertainment events was part of the definition and that event contract regulation preempted state gambling law. He reiterated that state authority over sports betting is preserved for off-exchange transactions, and that state anti-fraud statutes remain in effect.
He also pushed back against the perception that DCMs are unregulated or under-regulated. Mainland pointed out that Kalshi is subject to licensing, reporting, and liquidity requirements. He also noted that sportsbooks and exchanges run on different business models and rejected the possibility that licensed sportsbooks would flee en masse to become DCMs.
Disagreement on age requirements and consumer protections
Castrucci argued that the public interest for Massachusetts included the state regulations that secure sportsbook integrity or prevent advertising to underage users. She also brought up the state’s self-exclusion program, which allows gamblers to exclude themselves from participation in state sportsbook apps and casinos.
Mainland brought up the Administrative Procedures Act (APA), which governs the way regulations are promulgated. He argued that the state should challenge the CFTC rather than the platform. Barry-Smith asked how the state would challenge a non-action by the CFTC following self-certification. Mainland replied that the state could still challenge the non-action.
He moved to rebuttal, beginning with the different age requirements on sportsbooks and prediction market exchanges. Mainland argued that the age requirement was a different policy preference, noting that 18-year-olds can purchase lottery tickets, so an injunction based on the 18 vs. 21 issue would be unreasonable.
Mainland also noted that Kalshi offers a voluntary trading break or opt-out feature, an equivalent to self-exclusion at the state level.
The preliminary injunction question
Barry-Smith asked how Kalshi would react to a decision that allowed open contracts to settle, but prohibited new ones from being offered in Massachusetts. Mainland argued that tradability made prediction markets “what they are” and argued that it would be disruptive to the exchange. Then Barry-Smith argued that this could not be an unexpected disruption, because sports contracts were always expected to be controversial.
Mainland argued that Kalshi could experience issues with its regulator (the CFTC) for blocking new contracts from a single state. He also pointed to the disruption that would likely follow one state imposing its regulations on a federal exchange.
Castrucci pointed to the problem gambling protections that Massachusetts offers and argued that the forecasting value of Kalshi’s contracts comes at the expense of people who lose gambling on the platform. She also noted that the Commonwealth cannot sue the CFTC based on the APA and does not believe that the CFTC’s action on sports contracts could preempt state gambling law.
Castrucci took issue with Kalshi’s argument on the 18 vs. 21 issue, then moved on to the preliminary injunction. She explained she was open to keeping current contracts open and preventing new sports contracts in Massachusetts. She also pointed to Rule 2.8 in Kalshi’s rulebook, which allows the platform to unwind contracts in emergencies, reiterating that any harm to Kalshi would be a result of its own choices.
