News: Federal Judge Says 'Kalshi Has Shown A Likelihood Of Success On The Merits'
'Federal law allows Kalshi to offer both sports and election-based event contracts on its exchange," judge writes; written order in Kalshi's lawsuit against Nevada is a huge early win.
A federal judge handed prediction market platform Kalshi a significant early win in defending against cease-and-desist orders from states around the country.
District Judge Andrew Gordon granted Kalshi’s request for a preliminary injunction on Tuesday and issued a written order on Wednesday. That will stop Nevada from enforcing its cease-and-desist order that argues that Kalshi is offering illegal sports betting in the state.
While we knew about the granting of the preliminary injunction previously, the tone of the judge’s written order was a massive win for Kalshi.
Two key passages from the ruling:
“I have no evidence that (at least thus far) the [Commodity Futures Trading Commission] has taken action to prevent Kalshi from offering sports-based event contracts. As a result, at this point in time, federal law allows Kalshi to offer both sports and election-based event contracts on its exchange.”
“Nevada regulatory agencies thus have no jurisdiction to decide that Kalshi’s conduct violates state law where, at least at present, those activities are legal under federal law. Because the CFTC has approved (or at least not yet disapproved) Kalshi’s sports-related contracts, the defendants cannot pursue civil or criminal liability against Kalshi for offering those contracts.”
“Judge Gordon’s new ruling represents a first-round win for Kalshi in what will likely be a long legal fight in multiple federal courthouses,” Ryan Rodenberg, a professor at Florida State University who has been following the current Kalshi litigation closely, told The Closing Line. “Moving forward, it will be revealing to see if the CFTC intervenes directly into any of these lawsuits.”
Andrew Kim, a partner in Goodwin Procter’s appellate and Supreme Court litigation and gaming, gambling and sweepstakes practices, said he believes that Kalshi’s early win is due at least in part to the idea that “quality advocacy wins the day.” Kalshi made a more compelling argument, and Nevada offered a “bad brief,” Kim said.
“This result isn't surprising in the least,” Kim told The Closing Line. “Nevada was too ‘in the weeds’ and too focused on trying to protect its gaming interests that it missed the bigger picture, which is that this is really a federalism fight. It’s a case of bringing a knife to a gunfight.”
Twitter/X thread from Kim here for more of his thoughts on the ruling.
Quick backstory on Kalshi vs. Nevada
Kalshi has been offering the equivalent of sports betting via sports event contracts dating back to January, and expanded to single-game outcomes on college basketball in March.
Nevada argued that Kalshi is offering illegal sports betting via its sports event contracts, and sent a cease-and-desist letter in early March. Five other states have done the same since then.
Kalshi then filed a lawsuit in US District Court for the District of Nevada to stop enforcement of the C&D.
What the Nevada order says about Kalshi and sports betting
I’ll pull out some of the relevant passages from the order below. Italics are judge’s words; emphasis/bolding is mine. (CEA = Commodity Exchange Act)
More on the CEA and states
The judge believes that the CEA puts everything in the CFTC’s hands, and that states don’t have recourse via the law and courts at this point:
“Section 2’s plain and unambiguous language grants the CFTC exclusive jurisdiction over accounts, agreements, and transactions involving swaps or contracts of sale of a commodity for future delivery that are traded or executed on exchanges that the CFTC has designated under section 7. The second sentence in section 2 — which states that nothing in section 2 supersedes “other regulatory authorities” under state law — does not give states regulatory authority over CFTC-designated exchanges because that language is limited by the phrase “[e]xcept as hereinabove provided.” Section 2’s first sentence supersedes the SEC and state regulatory authorities’ jurisdiction for contracts on a CFTC-designated exchange. The remainder of th second sentence preserves the SEC and states’ regulatory authority over exchanges or transactions that are not covered by the CFTC’s exclusive jurisdiction. For example, the defendants could pursue an entity that offered sports or election event contracts that were not listed on a CFTC-designated exchange.”
…
Even if section 2’s plain and unambiguous language does not amount to express preemption, it reflects congressional intent to occupy the field of regulating CFTC-designated exchanges and the transactions conducted on those exchanges. I agree with the Second Circuit that section 2’s “exclusive jurisdiction” language “preempts the application of state law.” The CFTC also views its exclusive jurisdiction as preempting state law. In its brief on appeal in the D.C. Circuit, the CFTC stated that “due to federal preemption, event contracts never violate state law when they are traded on a DCM.” KalshiEX LLC v. U.S. Commodity Futures Trading Commission, 2024 WL 4512583, at *27 (Appellant CFTC’s Br.). The defendants have not cited any authority that the CFTC does not have exclusive jurisdiction over the exchanges it designates. In sum, if Kalshi were offering its contracts without CFTC designation, then the defendants could regulate it. But because Kalshi is a CFTC-designated DCM, it is subject to the CFTC’s exclusive jurisdiction and state law is field preempted.”
States can’t regulate a national exchange
“At the hearing, the defendants noted that other States have taken an interest in Kalshi’s contracts and have sent or intend to send Kalshi cease-and-desist letters. But that merely highlights the problem of allowing the States to regulate a national exchange. It raises the possibility that another State would have different rules than not only than the CFTC, but other States. Preventing the difficulties that would create is the reason Congress granted the CFTC exclusive jurisdiction over CFTC-designated exchanges.”
States have to go to the CFTC and Congress
“Kalshi is, in some sense, proceeding at its own risk and creating its own harms. Things might turn out differently with election contracts if the D.C. Circuit rules against Kalshi or if the CFTC takes action against Kalshi’s sports contracts. But for now, I will preserve the status quo, which is that these contracts are legal under federal law. So requiring Kalshi to stop altogether and lose goodwill or damage its reputation; to spend millions to geofence, which might result in losing its CFTC designation; or to continue doing what it is doing and face civil and criminal liability in Nevada suffices to show a likelihood of irreparable harm for at least a short term injunction. 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.”
That Kalshi has argued that sports events is ‘gaming’ doesn’t matter
“The defendants argue that Kalshi is judicially estopped from challenging the application of Nevada gaming law to its sports contracts based on an argument that Kalshi made in its litigation against the CFTC. There, Kalshi argued its election contracts do not involve gaming because an event contract involves gaming “if it is contingent on a game or game-related event” such as “the Kentucky Derby, Super Bowl, or Masters golf tournament.” KalshiEX LLC v Commodity Futures Trading Comm’n, 2024 WL 4802698, at *17 (Appellee’s Br.). But even if Kalshi’s sports contracts involve “gaming,” that would not subject Kalshi to state gaming laws. Rather, it would subject Kalshi to the special rule that allows the CFTC to conduct a public interest review. The CFTC at least so far has allowed Kalshi to offer its sports contracts.”
You can see the entire written order here:
The knock-on effect of an initial ruling from a federal court
Kalshi now has a judge on record agreeing with its arguments pretty unambiguously, at least on an initial review of the lawsuit and briefs submitted so far. Kalshi will be able to point to this order in other court cases.
Nevada will have to make a better argument moving forward if it’s going to win the lawsuit and stop Kalshi from offering sports betting within its borders.
After the early win in Nevada, whether a second federal judge comes to the same conclusion will be the next litmus test. Kalshi brought a similar lawsuit in the District Court in New Jersey, challenging a C&D there.
If a judge in New Jersey finds similarly, we would have meaningful evidence that courts are going to continue to green light what Kalshi is doing.
But we may find out if the quality of the state-level challenge matters. If Kim is right that Nevada did a poor job of making its case, at least so far, New Jersey or other states may find success with better advocacy.
It’s feasible the pushback from a federal court could stop or slow other states that are thinking about issuing cease-and-desist orders to Kalshi. But the potential of losing jurisdiction over sports betting will still be compelling to a variety of states.
That might include states that don’t have “legal” sports betting at all but now do because of prediction markets; no such states have made their voices heard, yet.
Opening more fronts for Kalshi to defend against will be part of the gameplan at the macro level, I would have to imagine.
One other addendum: If you want to see a lawyer who called much of what we saw happen in the Nevada lawsuit, read this Substack.Download
What will the CFTC do?
The judge’s order continues to underline the elephant in the room: We have gotten largely silence from the CFTC. The judge notes that Kalshi’s offering is legal, even though the CFTC hasn’t really said much of anything about sports event contracts publicly. So far, that’s enough for Kalshi’s offering to be legal, in the eyes of the judge.
But that silence feels untenable moving forward. We have a large cohort of states that are taking issue with sports event trading that presumably will grow. We presume we will get more clarity at the upcoming prediction markets roundtable hosted by the CFTC, which TCL understands is scheduled for April 30. The CFTC still has not publicly confirmed this date, to my knowledge, even though we are now less than three weeks away from it.
If the CFTC wants to be in the sports betting business and wants Kalshi et al to be able to pursue it, it feels like the states (and everyone) should hear that from the horse’s mouth. It doesn’t feel like the can can be kicked down the road much further.
Gambling news roundup
This will be pretty abbreviated since I am publishing early for the Kalshi news. More on Kalshi from Steve Ruddock at STTP:
PGCB Issued 18 Cease-And-Desist Letters to Sweepstakes Casinos as More Continue to Pop Up (PlayPA): “Pennsylvania has become the latest state to begin ordering sweepstakes casinos to take their business elsewhere. The Pennsylvania Gaming Control Board (PGCB) revealed in a Gaming Oversight Committee hearing on Monday that it has issued 18 cease-and-desist letters to sweepstakes casinos operating in the state. Most of these are offshore companies, but some are based in the US, and some even conduct business in Pennsylvania.”
Where does Hawaii Gov. Josh Green stand on sports betting? (SBC Americas): “Last week, before the full Senate approved the sports betting proposal, he suggested that the expansion of gambling would have the support of state residents as long as profits were used for community projects.
‘The legislature is being cautious, and that’s smart,’ Green told KHON2. ‘But it was interesting to see. We got a survey or poll of people and about two out of three in our state wanted to do gaming as long as the monies went to an important set of projects, mostly housing…’”
Gaming Stocks Pop On News Of Partial Tariff Delay (Legal Sports Report): “It truly was a great time to buy for gaming stocks. A message on Truth Social at 1:18 p.m. Eastern on Wednesday announced that most tariffs would have a 90-day pause. That left just under three hours for the market to react, which led to many online casino, sports betting and land-based casino companies clawing back at least some of the losses felt since tariffs were announced on April 2.”