Judge allows Kalshi to offer sports event contracts in New Jersey

Kalshi Secures Critical Victory in New Jersey as Federal Court Affirms CFTC’s Exclusive Authority Over Sports-Related Contracts

A pivotal ruling from a U.S. District Court in New Jersey has empowered Kalshi, a prominent prediction market platform, to continue its operations within the state. The court granted Kalshi’s motion for a preliminary injunction, marking the company’s second significant legal victory in recent weeks.

In a detailed 16-page opinion, Judge Edward Kiel affirmed the market’s right to operate in New Jersey, providing a timely boost just weeks after Kalshi successfully challenged the Nevada Gaming Control Board in a separate federal ruling. On April 8, the Nevada court temporarily authorized Kalshi to offer and trade sports event contracts.

This ruling from New Jersey emerged shortly after the U.S. Commodity Futures Trading Commission (CFTC) unexpectedly canceled a highly anticipated forum intended to clarify regulations surrounding prediction markets. Initially set for February, the roundtable’s cancellation leaves questions regarding the regulatory landscape for derivatives on sports securities unanswered.

To date, the CFTC has not announced if a new forum will be scheduled.

Historical Context of the Commodity Exchange Act (CEA)

Enacted in 1936, the Commodity Exchange Act (CEA) was designed to oversee transactions on commodity futures exchanges. For over three decades, the legislation remained static until significant amendments emerged in 1974 with the establishment of the CFTC, aimed at preventing states from imposing conflicting regulations on futures markets. Judge Kiel noted that this concern was integral to the federal framework.

By 2010, the Dodd-Frank Wall Street Reform Act expanded the CFTC’s jurisdiction to encompass the swaps market, a category representing a staggering notional value of around $400 trillion. Under Title VII of Dodd-Frank, a swap is defined as a contract that stipulates payments contingent upon the occurrence or non-occurrence of events with potential financial impacts.

Tarek Mansour, the founder of Kalshi, expressed confidence in the company’s regulatory standing amidst cease-and-desist orders issued by five states: “The CFTC is our regulator. If they direct us to halt operations, we will comply. Until then, we remain operational.”

Currently, while sports event contracts are not explicitly authorized by the CEA, they are also not expressly forbidden—a nuance that fuels ongoing legal debates.

February saw interim CFTC Chair Caroline Pham describe the pending roundtable as a “necessary first step” in crafting a cohesive regulatory framework to promote sustainable prediction markets. She highlighted various challenges, including the interaction of state regulations and federal laws governing sports betting.

Legal Arguments on Preemption

The recent legal developments in the Kalshi case illuminate a burgeoning conflict between federal regulation and state rights in the realm of prediction markets. MGM Resorts CEO Bill Hornbuckle warned that improper actions by commercial sportsbooks could compel federal intervention. In a 51-page brief, New Jersey’s legal team argued unsuccessfully that the CEA does not preempt the New Jersey Sports Wagering Act.

Kalshi contested the concepts of field and conflict preemption under federal law. Notably, a D.C. appellate court previously endorsed Kalshi’s right to offer event contracts related to U.S. presidential elections, asserting that the CEA preempts state law in favor of the CFTC’s exclusive jurisdiction.

On election night, Kalshi’s trading volume exceeded an astounding $500 million, driven in part by significant wagers, including a $1.5 million bet on Donald Trump at a 91% probability for victory. Following Trump’s inauguration, Kalshi sought to self-certify sports event contracts with the CFTC. The platform recorded over $27.5 million in volume for the Super Bowl, demonstrating its strong market engagement.

To achieve success in New Jersey, Kalshi faced a significant legal challenge; New Jersey Attorney General Matthew Platkin declared that preemption cases begin with the premise of state police powers not being superseded without a clear intent from Congress. Platkin argued that Kalshi did not conclusively prove this necessity.

Recent developments: The Casino Association of New Jersey filed an amicus brief in Kalshi v. New Jersey, asserting that Kalshi’s federal preemption arguments are undermined by the precedent set in Murphy v. NCAA and the Wire Act, classifying its contracts as “sports betting by another name.”

Clarifying Sports Event Contracts vs. Swaps

Earlier this month, the Casino Association underscored that Kalshi’s argument regarding field preemption disregards the explicit language of the CEA. The association stated that CFTC jurisdiction is limited to “accounts, agreements, and transactions” involving swaps executed on designated contract markets. They argued that contracts underpinning sports events do not meet the CEA’s criteria for swaps.

Both parties acknowledged that while the CEA applies to Kalshi’s operations, compliance with state law is also mandated. Platkin underscored that a swap pertains strictly to transactions with definitive financial outcomes, contrasting them with Kalshi’s sports-related event contracts, which lack financial stakes dependent on real economic consequences.

Dissecting Exclusive Jurisdiction

Judge Kiel’s comprehensive ruling expounded on the CFTC’s exclusive jurisdiction over certain derivatives traded on regulated markets. He referenced a scholarly 2021 paper co-authored by attorney David Aron, which articulated that the CEA grants the CFTC exclusive jurisdiction over swaps within designated markets.

Kiel’s ruling extensively cited this paper, providing a scholarly basis for his legal reasoning. Prominent gaming attorney Daniel Wallach noted its significant influence on the judgment.

In addressing New Jersey’s arguments of lack of financial consequences from sports events, Kiel asserted the opposite, drawing from Aron’s insights. He concluded, “I am firmly convinced that Kalshi’s sports-related event contracts fall within the CFTC’s exclusive jurisdiction and find New Jersey’s counterarguments unpersuasive.”

Kalshi’s Position: Compliance with Regulations

Sara Slane, head of corporate development at Kalshi and a former executive at the American Gaming Association, expressed her gratitude for the court’s well-reasoned decision, which aligns with Kalshi’s ongoing stance: “We are firmly on the right side of the law.”

As regulatory scrutiny intensifies, at least three other states—Ohio, Illinois, and Maryland—have also issued cease-and-desist orders against Kalshi. Additional investigations are underway in Connecticut, Michigan, and Massachusetts to evaluate unlicensed operations in the prediction market arena.

In March, New Jersey’s regulators directed Kalshi and Robinhood to remove their sports event contracts from the state. While Robinhood complied promptly, Kalshi continues to assert its position, echoing the arguments recently made by Crypto.com against the Maryland Lottery regarding the legality of its event contracts.

As Kalshi navigates the tumultuous waters of regulation and legal compliance, the outcome of this saga promises to shape the future of prediction markets in the U.S., potentially altering the landscape of sports betting and derivatives trading for years to come.