Judge allows Kalshi to offer its sports event contracts in New Jersey

Kalshi notches win in New Jersey from federal court ruling that sports-related events contracts fall within CFTC's exclusive jurisdiction.

A US District Court judge in New Jersey has granted Kalshi’s motion for a preliminary injunction to operate in the state, providing the designated contract market with its second key win in recent weeks.

In his 16-page opinion, Judge Edward Kiel enabled the prediction market to continue operating in the Garden State for the time being. Monday’s ruling came nearly three weeks after Kalshi notched a win in Nevada, where a federal judge granted its motion against the Nevada Gaming Control Board. The 8 April ruling in Nevada allowed Kalshi to continue to offer and trade sports event contracts on a temporary basis.

Kiel’s ruling also transpired several days after the US Commodity Futures Trade Commission cancelled a highly anticipated forum on prediction markets. The CFTC initially scheduled the roundtable in February to provide clarity on a complex regulatory structure for derivatives on sports securities. Without any explanation, however, the federal regulatory agency cancelled the hearing that was to take place this Wednesday.

The CFTC has not indicated if it will schedule a new date for the roundtable.

Brief history on the CEA

The Commodity Exchange Act (CEA) was enacted in 1936 to regulate transactions on commodity futures exchanges. For more than three decades, the legislation remained largely unchanged until 1974, when the federal government created the CFTC. By then, a series of amendments to the CEA were prompted by concerns that the states might regulate futures markets, Kiel wrote in the opinion. Such action would result in conflicting regulatory requirements, he explained.

By 2010, the Dodd-Frank Wall Street Reform Act expanded the CFTC’s regulatory purview into the swaps market, one with a notional value of approximately $400 trillion.

Under Title VII of Dodd-Frank, a swap is defined as any contract that provides for payment “dependent on the occurrence, non-occurrence or the extent of the occurrence of an event associated with a potential financial, economic or commercial consequence”.

At the moment, sports event contracts on prediction markets are not expressly allowed by the CEA. But event contracts on sports are not expressly prohibited by the act either.

In February, CFTC interim chair Caroline Pham wrote that the roundtable was planned to serve as a “necessary first step” to establish a “holistic regulatory framework” for fostering thriving prediction markets. Pham, moreover, listed a bevy of issues for establishing balanced regulations, including state regulatory schemes, preemption doctrines and other federal laws on sports betting.

Arguments on preemption

Recent litigation in the Kalshi case has set the stage for an intense battle of federalism versus states’ rights for regulation of prediction markets. For instance, MGM Resorts CEO Bill Hornbuckle told iGB earlier this month that if commercial sportsbooks do not proceed the proper way it could be the “concrete” for the federal government to enter the gambling space. In a 51-page brief submitted last week, attorneys for New Jersey argued – unsuccessfully – that the CEA does not preempt the New Jersey Sports Wagering Act.

While there are three avenues in which federal law can preempt state law – express preemption, field preemption and conflict preemption – Kalshi only contested the latter two, New Jersey attorney general Matthew Platkin wrote. Last October, Kalshi received a green light from a DC appellate court to offer event contracts on the US presidential election. Kalshi later argued that the CEA preempts state law on event contracts pertaining to the election in favour of CFTC exclusive jurisdiction.

Trading volume on the election topped $500 million on an historic night for Kalshi. Around 10.30pm ET, one user placed a $1.5 million trade on Donald Trump with a 91% probability for victory. Three days after Trump took office, Kalshi filed paperwork with the CFTC for self-certifying sports event contracts. Kalshi’s volume for the Super Bowl eclipsed $27.5 million, with several six-figure contracts on the Eagles.

To prevail in New Jersey, Kalshi needed to clear a high bar, according to Platkin. All preemption cases, he wrote, begin with the premise that the historic police powers of the states were not to be superseded unless that was the “clear and manifest purpose of congress”. Kalshi failed on both accounts, Platkin contended.

Distinction between sports event contracts and swaps

Also this month, the Casino Association of New Jersey, an Atlantic City trade group, filed an amicus brief on behalf of the state. In short, Kalshi’s argument on field preemption ignores the CEA’s text, the association contended. It stated that under Section 2(a)(1)(A) of the CEA, the CFTC has exclusive jurisdiction over “accounts, agreements and transactions” involving swaps that are traded or executed on a designated contract market or swap execution facility.

But the CEA’s plain text makes it clear that sports gaming contracts are not swaps, the association argued. A contract, in its view, qualifies as a swap if it is “dependent on the occurrence of an event with an economic consequence”. For Kalshi contracts on The Masters, the relevant inquiry is on if Rory McIlroy will win the major, not whether CBS will make money from streaming the broadcast, according to the association.

For its part, the New Jersey attorney general’s office agreed. Although New Jersey concedes that the CEA applies to Kalshi’s sports wagers, Kalshi cannot comply with the act while in violation of state law, according to Platkin.

Platkin stated in his brief that a swap is limited to “any agreement, contract, or transaction” that provides for any payment for an occurrence of an event with a financial outcome. He pointed to traditional use cases such as transactions that impact a farmer’s crop yield or changes in corporate asset purchases.

Yet the transactions on the Kalshi exchange concern event contracts related to sports games, which are not associated with a “potential financial, economic, or commercial consequence”, the attorney general contended.

Debate on exclusive jurisdiction

In Monday’s ruling, Kiel went to great lengths to explain the applicability of the CFTC’s “exclusive jurisdiction” over certain derivatives that are traded on regulated markets. Kiel cited a 2021 UNLV Law Journalpaper co-authored by Jones Day attorney David Aron, then an attorney with the CFTC, to explain his reasoning.

Aron and attorney Matt Jones argued in their paper that the CEA provides the CFTC with “exclusive jurisdiction” for swaps traded on designated contract markets.

Kiel cited the paper four times in Monday’s ruling. Daniel Wallach, a prominent gaming attorney, wrote on social media that the law review article heavily factored into Kiel’s ruling.

UNLV Law Review on CFTC “exclusive jurisdiction”

“Depending on how a gambling business is organized and operates, it may fall within one or more of the DCM, SEF, or board of trade definitions. Even if a gambling business does not fall within any of the foregoing defined terms, it still may constitute an exchange or market, which are broader terms than any of
the others. Thus, to the extent that swaps, futures, or options are traded on a DCM, SEF, or any other platform, state law would appear to be preempted by the CFTC’s exclusive jurisdiction.

–Aron and Jones, UNLV Law Review, 2021, P. 64, Vol. 12:1

Kiel disagreed with assertions raised by New Jersey’s attorneys in several instances. Even if express preemption did not apply, the exclusive-jurisdiction language reflects an intent to occupy the field, the judge wrote. Furthermore, the defendant (New Jersey) argued that sporting events are without potential “financial, economic, or commercial consequence”. There, Kiel also disagreed, again citing an argument raised by Aron.

In similar language defining a swap and event contract under the CEA, Kiel wrote that sports bets may meet the requirements of a potential financial occurrence. Besides Kalshi, Robinhood and Crypto.com have been subject to cease-and-desist orders from multiple states on the legality of prediction markets. One application of a sports event contract articulated by Crypto.com surrounds an underlying event, such as the cost of a Super Bowl parade in the municipality of a winning team.

“I am persuaded that Kalshi’s sports-related event contracts fall within the CFTC’s exclusive jurisdiction and am unconvinced by defendants’ arguments to the contrary,” Kiel wrote.

Kalshi response: “Firmly on the right side of the law”

Sara Slane serves as head of corporate development for Kalshi. A former executive at the American Gaming Association, Slane joined Kalshi earlier this spring.

“We are grateful for the court’s attention and well-reasoned position,” Slane wrote on her LinkedIn page. “The decision is consistent with what we have stated from the beginning: Kalshi is firmly on the right side of the law.”

Ohio, Illinois and Maryland have also filed cease-and-desist orders against Kalshi directing the site to discontinue operations in the jurisdictions. At least three others – Connecticut, Michigan and Massachusetts – have initiated investigations into whether unlicensed sports prediction markets are violating state laws.

New Jersey issued a cease-and-desist letter against Kalshi and Robinhood in March ordering the sites to remove sports event contracts statewide. Robinhood immediately responded by pulling the New Jersey contracts the following day.

Meanwhile, Crypto.com has filed suit against the Maryland Lottery for preventing it from offering event contracts referencing sporting events. The site employed the same argument as Kalshi, contending that the CFTC has “exclusive jurisdiction”, according to Wallach.

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