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On August 1, a judge in a Maryland federal district court denied Kalshi’s request for an injunction barring state regulators from taking enforcement actions over the company’s sports event contracts.
The ruling was the first major setback Kalshi has suffered in court against states looking to curb the sports contract offerings. Federal judges in Nevada and New Jersey have previously ruled in favor of Kalshi and prevented state regulators from taking action pending the result of the case.
While rulings in each of the three states are being appealed by the losing side, the new mixed signals from federal courts adds a new layer of ambiguity that a higher court will have to ultimately resolve.
The Bigger Picture
Regulators in at least seven states have taken issue with Kalshi’s offering of prediction markets on the outcomes of sporting events, arguing that the offering constitutes a form of unlawful sports betting and ordering the company to cease these offerings or face enforcement actions.
Kalshi filed suit in three states, Nevada, New Jersey, and Maryland, against regulatory agencies and state law enforcement officials seeking an injunction to block any enforcement action, arguing that its offering is federally regulated by the Commodity Futures Trading Commission (CFTC) and that federal law and regulation preempts state regulators from taking action.
In separate rulings, federal district judges in Nevada and New Jersey sided with Kalshi, which, along with a current and pending leadership at the CFTC that has been permissive of the expansion of prediction markets, has empowered Kalshi and others, such as Robinhood, to push forward with the 50-state offering.
However, the August 1 ruling by Judge Adam B. Abelson is the first significant setback for these efforts.
“Kalshi’s burden with respect to its field preemption claim is to establish that Congress clearly and manifestly intended to strip states of their authority to regulate gambling if the company offering such wagering opportunities has been approved to sponsor a designated contracts market for commodities trading, Abelson wrote. “Kalshi has not established that Congress had such clear and manifest purpose.”
Abelson addressed the other two court rulings, which held that the preemption does apply, citing case law that courts must avoid interpreting the scope of the preempted field too broadly.
Abelson continues to say that he finds it “highly unlikely that Congress would have overridden state gambling laws without at least some indication in the text and legislative history to do so,” and also added that no conflict preemption exists because Kalshi could conceivably comply with both state and federal law by becoming a licensed operator in Maryland.
Why You Should Care
The adverse ruling could slow the efforts of some in the gaming space from looking to quickly enter the prediction markets arena. The risk for a regulated gaming company of being found by a governmental agency of unlawfully offering a gaming product can bear severe consequences, both within that jurisdiction and in others where a company would have to report such an infraction. Companies such as DraftKings and FanDuel have been rumored to be sniffing around an acquisition of a CFTC-regulated exchange or potential partnership deals that could allow them to launch more quickly than they would if they pursued the two-plus year CFTC approval process, but more uncertainty with regards to the legality of the offering at the federal level could raise some yellow flags regarding such a launch, particularly in states where the issue is being actively contested.
What Comes Next?
In a court filing, Kalshi reported that it had received notice from the Maryland Lottery and Gaming Commission that it would not pursue enforcement actions until at least the conclusion of a status conference that is scheduled to be held on August 13 to determine the next steps of Kalshi’s appeal of the ruling. Kalshi filed an appeal to the U.S. Court of Appeals for the Fourth Circuit as well as a request for Abelson to issue an injunction pending appeal that would prevent enforcement.
However, if Maryland regulators do ultimately have the ability to sanction Kalshi, they would be the first state regulator to do so, and it could set off a chain reaction of events. The first being that more of the states that sent cease-and-desist letters, such as Ohio, Arizona, and others could follow with their own enforcement actions, which would almost certainly result in Kalshi quickly filing suit in those states to block such actions. It could also force Kalshi to take steps to limit offerings by state, which it had maintained in previous court filings would be an undue burden to take steps such as geofencing when such an act would not be needed for any of their non-sports offerings.
