On Friday, Jan. 17, the Court of Appeals for the D.C. Circuit heard another round of oral arguments from Kalshi, a commercial prediction market company, and its regulator, the Commodity Futures Trading Commission (CFTC).
Kalshi sued the CFTC to list event contracts on U.S. congressional control. In October 2024, the District Court sided with Kalshi. The CFTC appealed, arguing that Kalshi’s election contracts were against the public interest.
The oral arguments are three days before President-elect Trump’s inauguration. Trump’s son joined Kalshi as a strategic advisor on Jan. 13, reflecting general support for prediction markets, and more specifically, Kalshi’s election markets, from the incoming administration.
Both sides’ oral arguments revolved around the interpretation of the Special Rule of the Commodity Exchange Act (CEA). The Special Rule prohibits event contracts on or that involve “terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law.” Events that are “similar” and that the CFTC rules are against the public interest are also prohibited.
Robert Schwartz argued on behalf of the CFTC, and Yaakov Roth argued for Kalshi.
CFTC argues for textual interpretation
Schwartz argued that the CFTC has the right to prohibit Kalshi’s election contracts based on the CEA’s Special Rule. Finding that Kalshi’s election contracts were similar activities to gaming would also allow the CFTC to prohibit election contracts.
Schwartz was pressed on the expansive definition of gaming. If gaming is a contest of others, then any event contract could qualify as gaming. He responded by saying the CFTC did not consider other hypothetical contracts. Rather, the CFTC looked at the facts specific to election contracts.
The circuit panel also focused on the definitions of activities similar to prohibited event contracts. Schwartz had to answer what the five prohibited contracts had in common to identify “similar” event contracts that could be banned. For example, Schwartz suggested that a contract similar to war might be an overtly hostile act against a country short of war.
The panel argued that if “involve” included the trading of the contract itself, as Kalshi argued the CFTC interprets the word “involve,” then any event contract would count as gaming. It has been one of Kalshi’s most prominent arguments throughout the case, and the Circuit panel seemed swayed by it throughout Schwartz’s arguments.
The panel pushed Schwartz on whether the underlying event of an event contract was enough for a contract to “involve” or whether the trading itself constitutes gaming. Schwartz defended the CFTC’s textual reading of the Special Rule and that it did not ban all election contracts.
Schwartz made headway when the panel acknowledged that not all event contracts were subject to public interest review. Since Congress was focused on certain problematic event contracts, and the CFTC has the authority to decide which of those contracts violate the public interest.
Kalshi focuses on the underlying event
The panel began by questioning Roth’s understanding of the word “involve.” Roth argued that “involve” doesn’t help understand what “gaming” is because gaming can include playing games or playing games for stakes. He remained convinced that election contracts aren’t gaming because elections are not games.
The panel pushed back, saying that in practice, betting on the election could still “involve” gaming. That led to Roth’s two definitions of gaming: a narrow one that’s on games and a broad one that encompasses all event contracts.
The panel also pointed out that there were event contracts based on price information on commodities for hedging and clear “frivolous” entertainment contracts. That would create a subset of event contracts that the CFTC could use to prohibit event contracts. Roth pointed out that if the CFTC could differentiate between “entertainment” and “non-entertainment” contracts, then the case would remain unresolved.
The questions about Congress’ intent were prominent because “gaming” is a broad term. It allowed Roth to argue that the narrow interpretation of gaming should be used since the broad definition is unworkable.
The panel pushed back, arguing that Congress did not need to know that an entire category of event contracts would be gaming in advance. That was the point of the CFTC’s public interest review. Roth challenged the definition of “contests” in statutes, arguing that the usage referred to traditional sports and casino games, not elections.
The panel challenged Roth on the Special Rule’s carveout for “similar activities” to the prohibited event contracts. Roth acknowledged Congress’ concern about widespread gaming but believed the concern was focused on sports events rather than all event contracts. He also argued that state bucket shop laws were subject to carveouts from CFTC-regulated products.
However, Roth still had to defend Kalshi’s election contracts in light of state laws that prohibited election betting. He returned to his argument that the underlying event was the way to decide whether a contract should be available to trade.
CFTC repeats its key issues
Schwartz repeated his argument that Kalshi misinterpreted the Special Rule’s text, then moved on to a new argument. He invoked New Mexico’s law that called election betting gaming and therefore prohibited it.
He also took issue with Roth’s definition of the word “contest.” Schwartz pointed out that Washington State had “expressed outrage” that the election betting it had banned at the state level was now available federally. So, Schwartz argued the CFTC sought guidance from state election laws to see how to approach Kalshi’s election contracts.
Next, Schwartz argued that the CFTC shouldn’t have had to speculate about the impact of hypothetical contracts. The panel pushed back, noting Schwartz’s previous argument that this case would have unfavorable consequences going forward. The panel told him he “was trying to have it both ways.”