The New Jersey Attorney General’s office filed its brief opposing Kalshi’s motion for a preliminary injunction on Saturday. The brief is the latest development in an ongoing battle between state regulators and Kalshi, a CFTC-regulated prediction market.
After New Jersey sent Kalshi a cease-and-desist letter ordering the company to remove sports contracts from the state in March, Kalshi responded by suing New Jersey’s gaming regulators. That set up a new fight over whether the states have a say in regulating contracts that are functionally the same as sports wagers.
New Jersey’s brief argues that Kalshi’s event contracts don’t fall under the Commodity Exchange Act (CEA). It also argued that the CEA preempts some state laws but not the Sports Wagering Act, which regulates the state’s sports betting industry. The brief states:
"...perhaps most importantly, Congress specifically intended to prohibit event contracts that impermissibly involve, among other things, ‘gaming’ or ‘activity that is unlawful under any Federal or State law.’"
However, New Jersey’s argument runs up against acting CFTC Chair Caroline Pham’s concerns about how much the federal agency relied on state law in discussions concerning Kalshi’s election contracts.
How much should state law matter?
In her May 2024 dissent from the CFTC’s decision to prohibit Kalshi’s election contracts, Pham criticized the agency’s overreliance on state definitions of gaming. The CFTC argued that the act of entering a trade on the election was considered “gaming.”
At that time, Pham considered the CFTC’s definition too broad. Her preferred interpretation was that elections were neither games nor activities illegal under state law, so the CFTC rule prohibiting event contracts in those categories did not apply.
...when the act of entering into a derivatives contract that meets the Proposal’s overbroad definition of gaming, drawn from dozens of State laws, is now gaming under the Commission’s jurisdiction, we begin encroaching on State gaming oversight,” Pham said. “State-regulated sportsbooks, in trying to comprehend where the Commission’s gaming derivatives begin and traditional bets end, will be captured in this confusion and question the need to register with the Commission as exchanges. I certainly don’t want the Commission to be registering Las Vegas sportsbooks and other betting venues.
Pham’s concerns about consequences beyond election contracts are proving well-founded. A company called DraftKings Predict registered to become a member of the National Futures Association that summer. As of mid-April, DraftKings Predict was no longer a pending member of the NFA. The company offered no explanation for its changed application status, but a DraftKings spokesperson told reporters that the company “continues to monitor developments related to prediction markets.”
New Jersey’s brief proposes a solution to the problem of states’ roles in setting the line between gambling and finance. Andrew Kim, a litigator who has argued federal cases concerning both the gambling and finance industries, summarized New Jersey’s argument on this point:
"...New Jersey points out that the exclusive jurisdiction provision doesn’t do what Kalshi says it does. The CFTC’s jurisdiction is exclusive as to other federal agencies like the SEC; it’s not intended to knock out state law. It asks: why would the CEA have provisions protecting state jurisdiction if Congress wanted the CFTC to displace the states?"
Kim considers New Jersey’s arguments stronger than Nevada’s, which raises questions about how representative Nevada’s case will turn out to be.
Will Kalshi’s early Nevada victory hold?
On April 9, Kalshi secured an early legal victory after a Nevada District Court granted its temporary restraining order and preliminary injunction.
The judge in that case noted that Kalshi still had to offer its contracts in part because the CFTC’s core principles require Kalshi to offer its contracts to everyone qualified to participate. Pulling out of one state could spell trouble for Kalshi with its federal regulator. The district judge ultimately decided:
"To the extent the States or other interested parties object to Kalshi offering sports and election event contracts, they must take that up with the CFTC and Congress. Such policy issues are beyond the jurisdiction of this court."
If New Jersey is also redirected to a case against the CFTC or Congress, then other states may adjust their legal challenges accordingly. Sports betting attorney Daniel Wallach outlined an argument that neither Nevada nor New Jersey have made. In its self-certification for its sports markets, Kalshi stated that its contracts “complied with” CFTC regulations. However, Rule 40.11 prohibits event contracts on “gaming.” So, Wallach argued:
"...a state could argue that Kalshi has ‘unclean hands’ (and therefore is ineligible for a preliminary injunction) because it falsely certified to the CFTC that its sports-related event contracts comply with CFTC Regulations, with full knowledge that Rule 40.11(a)(1) prohibits event contracts relating to ‘gaming’ and after having asserted in prior judicial proceedings that the ‘gaming’ category includes sports-related event contracts."
CFTC leans in favor of sports event contract offerings
Trump’s nominee for CFTC chairman, Brian Quintenz, has argued that all events are commodities and that the CFTC can allow event contracts under prohibited categories as long as the CFTC refrains from a public interest review.
In defending ErisX’s right to offer sports contracts in 2021, Quintenz noted that the CEA requires both a contract to be part of a prohibited category and the CFTC to find it contrary to the public interest to prohibit an event contract. CFTC Rule 40.11 prohibited event contracts in prohibited categories in 2012. So, Quintenz seems poised to justify sports contracts with the statutory language in the CEA instead of the agency’s regulation, which can be changed.
Kalshi’s CEO, Tarek Mansour, has told audiences that his company would take the sports contracts down if the CFTC ordered it. As the courts resolve state complaints against Kalshi, regulators could begin targeting the CFTC instead. That would move the next round of lawsuits from the companies offering contracts to the federal regulator allowing them to be offered over state objections.
